Posts Tagged ‘Jesus Huerta de Soto’

Bernanke Moves the Sun-Dried Fish (Fun With Austrian-Style Crusoe Economics)

Sunday, February 22nd, 2009

In this adventure of Robinson Crusoe, the writer is so bitter that he takes it out on innocent characters in his own imagination, meanly depriving Crusoe of tools, supplies and opportunity.

Seven hundredths of a second after Crusoe thinks, “I wonder if I could rescue some supplies from the ship?” it sinks almost instantaneously with a perverse Champagne cork popping sound, into a trench a thousand fathoms deep.

Fish leap and play daily in Crusoe’s sight, but too far off for hand fishing.  The giant dwarf coconuts are five hundred feet tall, but with mini-nuts that take ten minutes each to crack and yield one calorie.  The island’s unique tortoises can outrun him.

Scrounging for enough food to starve over years instead of days is an exhausting grind.  Crusoe can only dream of capital projects.  There appear to be sources for tool making, but always a little too far from food sources to consider risking.

The problem that Crusoe has, as delineated by many Austrian School economists, is that he must have savings in order to produce tools (higher order capital goods).  Without savings of food he has to continue as he is, hand gathering for subsistence.  Crusoe plans, estimates and saves a few scraps.

Then Friday shows up.  The two divide the subsistence chores and start to do a little better.

They work out a detailed plan– by the standards of the island, it’s a massive capital project.  It involves building tools, and tools for building tools, in assembly line fashion.  The savings needed for them to complete their capital project according to their estimate– a thirty day supply of food.

Crusoe has been maintaining a rather ambitious food storage cave. He shows this to Friday.  It contains some pathetic food scraps of surplus over subsistence– the space carefully organized for the bounty that never comes.

Friday, now with considerable excitement about the thirty day plan, examines the potential of the space.  After all this waiting Crusoe is also catching emerging economy fever, and so as difficult as communication is for them anyway, they’re both hasty, and tragically fail to understand each other.

Friday thinks that Crusuoe is showing a food storage cave prepared for Friday to store Friday’s surplus.  Crusoe had only intended to convey that Friday should prepare a similar larder.

The two men dive into the tasks of hand gathering food, sometimes working together, sometimes apart, in accordance with the master plan.  When they work together, Crusue makes sure to leave half the production outside the food storage cave for Friday to move to his own larder.  Friday is a little puzzled by the extra work that Crusoe keeps leaving for him, but doesn’t wish to confront his friend, and so simply moves the food into the same cave later.

When Crusoe’s tally indicates that he has thirty days supply, he asks Friday what help he needs with finishing his supply, and is amazed at Friday’s indication that everything’s finished.  Both men are so elated that the savings plan went better than they’d dared to imagine, that they even expand the tool building plan.  They dive in with a near delirium of hope and ambition.

They’re so excited and work so hard over the following days, that their savings are almost depleted before they realize the error.

The more they look at it, the more sobering the disaster begins to appear.

Without adequate saving to deal with all of the plan’s dependencies, it has turned into a trap.  None of the tools on their assembly line are more than half completed.

A lot of the early production went to make fresh vine lashings.  These lashings need to be in place on the constructed item within a few weeks at most, or they become useless.

A half completed fish weir will wash away without ever endangering a fish.  They become despondent as they look at the same picture everywhere– it looks like some aggressively inattentive kids have been playing– half dug pits, trampled brush, scattered rocks, chopped trees.

How could they have been so foolish?

As a matter of fact it’s pretty easy.  Crusoe and Friday have just engaged in an accidental experiment with fractional reserve banking, absent the banks.  Perhaps (since most central bankers have magic powers), Ben Bernanke was even there, sneaking in to rearrange the supply cave to make it look like the savings were abundant for a little longer so as to protect the illusion of growth.  Regardless, Crusoe and Friday both perceived that the same savings were available for their particular use.  The illusion lasted until they realized their mistake, and then their economy crashed.

As Crusoe and Friday try to re-capture their subsistence methods, there’ll be further depressing damage assessment as they see how much of the low hanging fruit, in some cases literally, they’ve stripped away.  The assumption had been that the completed capital projects would more than make up for any lack of care and husbandry during early stages (something we duplicate in real life bubble economies).  For Crusoe and Friday, it may be a more serious issue than just wasteful projects– the upcoming time of malnourishment may kill them before they can regain their footing.  (From that perspective we can also see that the quicker the crash came to their economic boom, the better off they would have been.)

Of course they note a radical difference in work energy from the period of boundless hope, to that of seemingly bottomless despair.  But noticing it won’t entirely cure it. (Rather similar to the way it’s useless for some idiot financial analyst on TV to decry that consumers are turning their pessimism into a self-fulfilling prophecy by failing to spend and/or borrow.)

Both “Crusoe Economics” and identification of the bubble inducing problem of credit expansion are traditions of Austrian Business Cycle Theory.  I’ve borrowed particularly from economist Jesús Huerta de Soto for the above Crusoe and credit adventure.

But since I’ve personally found a sarcasm engendered catharsis to roll back the bitter tide for perhaps even as much as a full day, it’s at this point, while Crusoe and Friday have their heads in their hands, that a disoriented whale beaches next to them, and before they can recover from their astonishment, a lightening bolt knocks over and flames a dead palm, creating an impromptu barbecue pit.  (In the roots of the flaming palm, the two discover more than their collective weights in plump, wild sweet potatoes, with a scattering of wild herbs.)

Great rejoicing.

A barbecued whale for our sliding economy, however, absent an intervention from an advanced alien culture, would seem to have a problem of scale.  Too many credit bubbles have been layered on top of each other.  There’s nothing Fed Chairman Bernanke can do, with money or fish, to hide the waste anymore.  Credit expansion from fractional reserves– credit money out of “thin air”– must always leave us high and dry (and whaleless) at some point, but as perverse as it may seem, the sooner the better.

By Les Lafave

Abolish The Federal Reserve –

Painful Opportunity

Friday, August 22nd, 2008


The home page of the Fed says, “The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible and stable monetary and financial system.”

So you can’t say bankers don’t have a sense of humor.

However, in a more “normal” cycle, most people wouldn’t see the joke. Usually, the economy’s actors are too busy getting paid off by apparent short term benefits of fractional reserve banking for any mainstream attention to the system’s contradictions and historical failings. That’s one bright spot today in otherwise dark times– a spotlight on the Federal Reserve System while many of its defenders may be feeling ridiculous (and broke).

Economist Jesús Huerta de Soto traces the historical beginnings of fractional reserve banking to exactly that key “buying off” point where government and banks saw opportunity in partnership:

“At first the bankers did this [reduce reserves below 100% on demand deposits] guiltily and in secret, since they were still aware of the wrongful nature of their actions. Only later when they obtained the government privilege of making personal use of their depositors’ money (generally in the form of loans, which at first were often granted to government itself), did they gain permission to openly and legally violate the principle. The legal orchestration of the privilege is clumsy and usually takes the form of a simple administrative provision authorizing only bankers to maintain a reduced reserve ratio. This marks the beginning of a now traditional relationship of complicity and symbiosis between government and banks… by sacrificing traditional legal principles they could take part in an extremely lucrative financial activity…”As in any corrupt system, some of the lucrativeness needs to be shared to establish and maintain a critical mass of support.  Academics in their turn are paid off to think and promote happy, status quo thoughts (or even angry, pseudo anti-establishment status quo thoughts).  No soul searching required, since for any but the most critical thinkers who happen to be thinking about critical pieces, there’s lots of latitude for intellectual self-accommodation.  An economist for example, can say that populist programs are too big, or one is better than another; it’s only when the economist says that the whole system and the rabbit hole it rode in on is absurd that he or she will be largely cast out from opportunities touched by government or banking, (which in a kind of six degrees of Ben Bernanke, is most of them). 

With this support (and as slightly more widely noted and decried), the purchase of complacency with debt continues through the economy, in government programs, contracts, loans, speculative opportunities and tax policies, where (almost) all actors, big and small, at least appear to get their share of something for nothing.  Lately there are some folks saying “Hey, Wall Street and banks are getting special treatment!”  That’s also rather droll.  But a person ready to see that much may be a step or two from seeing that the Federal Reserve was indeed built from special treatment, among other unsavory qualities.

I recently read an article by financial analyst John Rubino at, (Time to Start Honing the Message), which I found inspiring even as it pointed out a problem: critics of money and banking have gotten used to mainstream society ignoring or even scoffing at their message.

It’s not easy to keep going when explanations of your economic worldview only cause people to call you a crackpot. To make matters worse (or at least mixed from a memetic persistency point of view), the three dimensional economic worldview of the “crackpots” quietly makes money, while the one and two dimensional views of the crackpot critics is causing them to be rather entertainingly stunned by events over and over again.

To me, this opportunity is starting to feel irresistible. It’s more melodramatic and more insulting than I’m comfortable with, but I’m finding the metaphor also hard to resist: for the moment, the lights are on and the cockroaches are scurrying. The bugs in fractional reserve banking and fiat currency systems are as nakedly apparent as they ever get. But if the past is a rough guide (as it generally is), then with even a weak recovery, myths of how we got in and out of the extra deep cycle will start to set, if not sufficiently impeded.

Rubino warns that populism will be speaking loudly, and also puts the coming battle he sees in stark terms: a fight to avoid living in a dictatorship.

So in view of the above and for my own modest anti-dictatorial contribution, I intend to be better prepared for dialogue (assuming I haven’t become too geeky to be in any social settings). When someone says, “I can’t put gas in my car anymore”, or “That’s odd, trading in my bank’s stock has been halted at sixty-three cents”, I’ll forgo the smartass comment and attempt a non-patronizing, cheerful (or as appropriate, commiserative), discussion of first principles.

I intend to keep to this plan until my mother (the probable last holdout) starts calling me a crackpot, or my social calendar is permanently buried. (I hope I don’t have to report back for at least a few days.)

By Les Lafave

Banking Reform –