Guo Jingpuwen.
The Essence of Investment: The Monetary System and Economics of the Austrian School
Since Menger and Mises founded the Austrian School, they began to distinguish between money and currency. In their view, the economy is made up of four types of things being constructed, produced, and transformed: goods, commodities, money, and currency.
The difference between goods and commodities is that goods can be used for production and consumption, while goods must be divided into goods, commodities can only be used for transactions, and commodities are measured in ingots, boxes, and bags, and commodities are smelted, unboxed, or subcontracted. The unit of measurement of money, many of which still retain the unit of commodity.
Currency is the opposite of money", the Austrian school emphasizes that the value of currency comes from confidence in the state and the banking system, but does it not depend on confidence?**The value of the exchange of goods has long since waned.
The Austrian school's definition of money is from the perspective of marketability, and they first define the marketability of goods: such goods have high marketability due to large potential market, high degree of homogeneity, and low transaction costs. Menger, in his "Investigations into the Method of the Social Sciences with Special Reference to Economics", states: "Individuals who pursue economic gain will exchange a commodity for a more marketable ......Our predecessors called it geld ('money' in German).
Antal Fekete defined large-scale and small-scale marketability, which he called marketability and hoardability, and large-scale marketability is a good commodity that changes slowly when the bid-ask spread changes when it increases, such as cattle, which is generally liquidSmall-scale marketability is the slow change of the bid-ask spread when the quantity decreases, such as salt, and the general inventory turnover rate is low. Gold and silver are both marketable and hoardable, making them good money. In addition, there is autonomy, intellectual assets are the assets with the highest autonomy, followed by physical **, and then cash that may be limited by ** and banks in times of crisis.
Therefore, the production of money in the eyes of the Austrian school is in the same vein as the development of goods and commodities.
1.Money is a commodity that does not obey the law of diminishing marginal utility.
The two main functions of money are as a medium of exchange and hoarding target for human society. Money, as a medium of exchange, makes it possible to transfer across spaces;Money, which is the target of hoarding, makes it possible to transfer across time.
The demand for commodities for indirect exchange purposes leads to an increase in the value of commodities that deviates from the previous demand in industry", and thus there is an "additional demand for money" for commodities that become money. In the view of economists of the Austrian School, such as Menger, money is a social phenomenon, "the unintentional result of social movements."
Accumulation (Menger uses the German term thesaurieung) wealth is another important role of money, even before the function of the medium of exchange. In his 1909 book Money, he described the effect of accumulation on the medium of exchange as follows: "The special use of a commodity for the accumulation of wealth, and the consequent widespread use of it for the purposes described above, is the most important reason for increasing its marketability, and therefore of its function as a medium of exchange." ”
We must admit that money does not obey the law of diminishing marginal utility. Monetary disobedience to the law of diminishing marginal utility leads to a larger inventory and stock-to-flow ratio, and short-term output fluctuations have little effect on inventories, so hoarding becomes less risky.
William Stanley Jevons summarized 7 characteristics of commodities that can be used as money, in descending order of importance: utility and value, portability, invulnerability, homogeneity, divisibleness, stability of value, and easy identification.
In response to the lack of detailed archaeological evidence of the medium of exchange, Oupai explains that the complex division of labor in modern commodity societies has a greater need for indirect exchange, and commodities are more likely to become medium of exchange, such as cigarettes in prisons, butter and flour in German-speaking areas during the war, and olive oil in post-war Italy.
Credit money makes money more than just a medium of exchange and hoarding, and debitism interprets money as a medium of debt, and money is created by credit expansion. Credit money makes debt the center and focus of economic activity, on the one hand, it is a binding incentive for success and accelerates economic development;But on the other hand, economic activity is also made to serve a variety of constraints rather than real human needs, and people no longer work to live, but to live for work.
The statist theory of the origin of money asserts that the state is the actual origin of money as a standard of debt, and that only the credit endorsement of the state can guarantee the repayment of debts, which can neither explain the emergence of sovereign debt defaults, but also dissolve the instability of bank bills into money.
The nationalization of money came later than the emergence of money, and was based on the violence of the status of compulsory payment for specific goods, and it was the state violent apparatus that guaranteed the legitimacy of taxation and guaranteed the legal status of money through tax payments. This was called "usurpation" by Georg Holzbaumer, who said that the tax basis of currency was imposed on the people by the usurper (Barzahlung Zahlungsmittelversorgung in Milita-Risch Besetzten Gebieten Jena, 1939).
In the hands of Georg Friedrich Knapp, who deeply influenced Keynes, this view was transformed into chartalism, that money does not need value, that its validity is based entirely on state decrees, that money is only a token, metal paper is the carrier, and the physical basis is meaningless.
Although the Austrian faction, led by Menger, was vehemently opposed to Knapp's Charterism, the Austrian School was not part of its metal-like counterpart. In Menger's view, ** should be the regulator of the fineness and weight of the coinage, because the power of the state is trusted by all, and the state has the ability to sanction those who counterfeit money. However, this power has been transformed into the support of the nationalization of counterfeit currency in the majority of **.
In the age of credit money, people in economic activity were thus divided into two types: those who sought money to transfer and store their economic energy, and those who abused the standards of money that had evolved or been created, and who pursued mainly the part of the currency that exceeded the currency.
The problem with the monetary illusion is that if real output does not grow, it will not be possible to achieve more employment and consumption simply because credit and currency growth has led to an increase in statistics and paper wealth, and such a "get rich first" will not lead to a later rich.
2.The essential characteristic of money is indirect exchange.
Trust is the main mechanism in the process of direct exchange and credit;With the advent of money, trust shifted to a medium. The role of satisfying storage needs is based on the medium of exchange. The situation is that today's "money" (currency, including paper money, bank deposits, and credit-derived money) is extremely convenient as a medium of exchange, but very poor as a means of storage because of the accepted expectation of depreciation.
The demand for money is first a medium of exchange, then a savings function and a measure of value, and in turn these demands require money to meet three qualities: marketability, that is, it can be used as a medium of exchange;Convenience exchange, convenience exchange first appeared because of the decline in marketability;Speculative, general commodities create additional demand in the process of acquiring use as a medium of exchange, recognizing these needs and exploiting them to create speculative demand.
Today's money is fiduciary media, which comes from the Latin fiducia, which means trust, and the German word is umlaufsmittel, which means medium of circulation. Rothbard: Mises's definition of money is that money is the general medium of exchange, the exchange of all other goods and services, the final payment of such goods in the market (Rothbard: Austrian definitions of the supply of money), and bank reserves are in fact demand deposits of banks.
Nixon announced the end of the Bretton Woods system in the same language: tomorrow's dollar will be as valuable as today's dollar, and the effect of this measure will be the stability of the dollar. However, today's dollar is clearly not worth as much as it was in Nixon's era.
Scholars of the modern Austrian School have tried to reconstruct what they consider to be reasonable "monetary amount" data in the original framework to observe economic development and inflation.
TMS-2, or True Money Supply, as defined by the Austrian School, includes currency, demand deposits, time deposits, deposits with foreign official institutions, and deposits in the United States, and excludes credit instruments and double counting represented by the money market** (retail money market fund units) compared with the official definitionAt the same time, TMS incorporates current savings disguised as overnight savings deposits (Money Market Deposit Accounts, MMDAS).
Corresponding to the concept of monetary quantity, inflation also needs to be redefined. Henry Hazlitt pointed out that there are 4 definitions of inflation: an increase in money and credit**;The increase in the amount of money exceeds the increase in the volume of goods;**Horizontal**;Any type of economic prosperity.
The Austrian school supports the first definition, that is, inflation is the increase in money and credit**, so the Austrian school sees the central bank's fight against inflation as arsonist and pretending to be a firefighter: the central bank prints money to create inflation, and at the same time regulates it with the aim of limiting other influencing factors**.
Created ShadowStatsJohn Williams (founder of COM) noted that since 1980, there have been more than 20 fundamental changes in the Fed's method of calculating inflation.
The main indicators that focus on deflation (crisis recession) are: velocity of money: average turnover rate of m1 m2;Base currency vs. m2 - base currency;Total credit and annual growth rate;** Ratio to long-term Treasury bond balances.
Around the time of publication (2015), inflationary factors in economic development included: zero interest rate policy, expectation management, quantitative easing, reversal operations, exchange rate wars, and the ECB's eligibility criteria for collateral;Deflationary factors include: deleveraging, banks' reluctance to lend, consumers' lack of ability and willingness to increase debt due to excessive consumption, bar iii restrictions, demand for token holdings (low inflation expectations), productivity improvements, defaults and bailouts, and demographics.
The Austrian school has a neutral view of inflation and deflation, and in their view, since the increase in productivity compensates for the increase in the amount of money, the inflationary process can also remain unchanged. Modern economists apparently hate deflation even more, as Jorg Guido Hulsmann outlines the harms of deflation in The Ethics of Money Production, which can be called the "Seven Deadly Sins" by adding the following point to the author: Empirically deflation is always accompanied by recession;Deflation causes consumers to delay their purchases;The declining ** results in the inability to repay the agreed debt at a higher debt level;Banking Crisis;The failure of financial institutions that act as credit intermediaries;Deflation + wage stickiness leads to unemployment;Liquidity trap, zero interest rates cannot continue to fall, resulting in ineffective stimulus policies.
However, the consequences of blindly fighting deflationary zero interest rates and negative interest rates, and even demonizing deflation, will be reduced savings, social abandonment of frugality, and fatal effects on long-term capital formation.
3.Legal tender.
Fiat money (non-cashable currency) is injected and kept in circulation by compulsory means and is a compulsory currency that exists in the form of a bill issued by a **bank, developed from the receipt of a partially endorsed commodity currency. The Austrian school called this currency "currency", distinguishing it from real money.
Mises distinguishes between commodity money, non-convertible money (fiat money), and credit money. Commodity money is a special commodity that is money;Legal tender refers to the currency composed of things with special legal qualifications;Credit money is the currency in which claims are constituted, and claims can be any claim against a natural or legal person.
The origin of fiat currency is the French currency, which comes from the right to claim houses that were expropriated during the French Revolution, and this right was used to create a pseudo-collateral currency, which eventually evolved into fiat currency. The theoretical basis for the issuance of fiat currency by the state is the right to claim the "wealth of the country".
Mises's argument for denying certificates and warrants as money comes from the assumption of "payment orders". A payment voucher is a promise and document for the provision of a service and represents a claim for a certain remuneration. Payment vouchers are bearer vouchers that can be seen as dividends in kind, such as "50% of the future output of a piece of land". Payment vouchers cannot be used as currency because their returns are uncertain and therefore cannot be used to measure value. Mises thus deduces that no tickets and vouchers issued by any company can be used as currency, thus fundamentally denying credit money, which is a bank's bill.
From commodities to fiat currencies, there are 5 stages, namely, commodities - > original commodity money - > commodity money - > commodity currency vouchers - > original non-cashable currency.
From commodities to commodity money, the main nature has developed from industrial demand plus a little speculation to mainly marketability and convenience of exchange, superimposed with a small amount of industrial demand and speculation, which is a typical metal money.
In the development of commodity money to non-convertible money, convenience has expanded, and gradually marketability has become the main character, while speculation has reappeared. Tokens cannot appear without prior industrial demand, so Bitcoin is not a token, but a primitive non-exchangeable currency, and Bitcoin does not require a credit guarantee from the state, creating a new means of payment by relying on just a little industrial demand.
At a time when non-convertible currencies were emerging from the original non-cashable currencies, the ease of exchange was a major innovation, new markets were emerging and market openness was strengthened.
In the early days of the emergence of non-convertible currency, speculation would recur with the growth of the convenience and marketability of exchange, and bubbles would continue to be created with the charm of pyramid schemes, until the simplification of exchange became a reality, and the marketability was strengthened with the change of people's perceptions.
Non-convertible currencies are granted legal status, either because of the industrial demand of compulsory taxation or because of the role of legal status in simplifying exchange.
From the perspective of the history of monetary development, there are 3 key years: in 1914, the classical gold standard was converted to the ** exchange standard, and in 1933, in 1971, paper money was decoupled from ** and became a pure legal tender.
4.The essence of investment is seen in terms of the structure of production.
First of all, investing is not about making more money (currency). Because currency is not real money, let alone wealth.
In order to understand the nature of investment, the Austrian School returned to the basic model of consumption-investment, or consumption-savings, and used the production structure known as the "Hayek triangle" to illustrate that the essence of investment is to establish a capital structure.
Menger defined goods, and deferred consumption is to produce higher order goods, that is, capital goods. Menger illustrates the causal sequence of investment and consumption by defining goods, the closer to the consumer end, the shorter the time required for production, the farther away from consumption, and the extension of the production structure requires the higher the long-term output of consumer goods, otherwise the gains outweigh the losses, which is the Hayek triangle.
At the bottom of the Hayek Triangle is an industrial chain that extends from consumption to the upstream, including: retail, manufacturing, transportation, mining, and scientific research.
In the Hayek Triangle, a decrease in immediate consumption shifts resources to capital goods, current goods in long-term items become cheaper, and consumption moves to the future, and this change will be reflected in interest ratesThe reduction in current consumption also means that the real cost of labor has increased, and labor-intensive industries will shift to capital-intensive industries, which generally means that production will shift to a longer capital structure.
Spot consumption decreases, savings increase, and capital accumulation increases at the same time as production optimizations may occur, as savings are more likely to go into more promising areas. The decline in spot consumption has led to the extension of the production structure, which has also made it possible to have more complex industrial chains. The reduction of immediate consumption boosts production, thus creating the possibility of future consumption growth, which is sustainable economic growth.
The Austrian school believes that capital is heterogeneous, and the problems related to heterogeneity summarized by Ludwig Lachmann include: capital heterogeneity refers to the heterogeneity of capital in use;Heterogeneity in use means multiple specificity;Multiple specificity means complementarity;Complementarity means the combination of capital;The combination of capital constitutes the elements of the capital structure.
Heterogeneity in use, i.e., the material properties of capital, are not important, but what is important for what subjective purpose it is used for;Specificity is related to the grade of capital goods, and the lower the level of capital goods, the closer to the consumer end, the higher the specificity;Capital goods cannot be converted into consumer goods alone, so complementarity and combination are needed, and the creation of reasonable complementarity and combination of capital goods can produce consumer goods, rather than accumulating homogeneous and large quantities of capital goods.
Capital is a highly complex structure, and the act of establishing a capital structure is called investment. Capital structures cannot be generated automatically, but need human choice and action to construct them, and human beings to anticipate and combine.
Mises sees it as an intertemporal exchange, giving up immediate consumption desires for more satisfaction in the future, and artificially waiting longer to reach a higher goal, i.e., having a lower time preference.
We can deduce that cultures with a high preference for savings and a low preference for time have historically preferred the accumulation of capital, have a longer structure of production, and a more complex social division of labor. Time, along with other resources, is allocated to the production of capital goods, which is known as "roundabout" production, which requires even exponentially increasing the output of the final consumer goods.
Investment is irreversible, homogeneous capital is constantly transformed into heterogeneous and dedicated capital goods, and adjustments to the structure of production are constantly occurring, but they must be paid, and such adjustments require a temporary reduction in immediate consumption. Investment comes from the Latin investire, which is the English clothing, which irreversibly re-assigns the homogeneous, current, and ultimate form of goods, money, to a heterogeneous and structured form to form capital, which is the essence of investment.
The cost of investment: The economic cycle comes from distortions in the structure of production
The Austrian School's analysis of the business cycle was first found in Mises's Theory of Money and Credit, in which he emphasized that the business cycle is not an inherent feature of a market economy, but a product of an interventionist monetary system.
Knut Wicksell proposed the concept of the "natural rate of interest" (Interest and **, 1898): the natural rate of interest is the interest rate formed by the capital market at equilibrium, "a neutral ...... to commodities."The interest rate determined by supply and demand is the same as if money were not used and the entire loan was made in the form of real capital goods".
The natural interest rate depends on the willingness of market participants to save, choosing the balance between spot and forward consumption, that is, time preference. The real interest rate is the first of all types of loans, and it is a financial phenomenon and observation. The Austrian school acknowledges the role of interest rates in regulating production and consumption across periods, but emphasizes that interest rates are affected by supply and demand like others.
High interest rates correspond to a higher preference for time, artificially suppressing interest rates makes it seem more profitable to invest in capital goods rather than consumer goods, suppressing interest rates has the effect of prolonging the structure of production, misleading calculations make projects that would otherwise not be profitable at natural rates look profitable, entrepreneurs misjudge investment prospects, and "business activity is stimulated and prosperity begins" (Human Behavior).
The natural rate of interest indicates the scarcity of real savings, so that artificially low interest rates lead to an abnormal decline in savings and insufficient capital accumulation, while real economic growth comes from capital accumulation, so the Austrian school reasoned that artificially low interest rates could not achieve sustainable economic growth – yet it seems that they completely ignored technical factors.
Nominal interest rates are lower than natural interest rates, leading commercial credit institutions to issue large amounts of loans, and these incremental credits are either used for investments that have no return in the future or for excessive consumption, thus lowering real wages. At this time, the Hayek triangle is no longer an extension of the proximal end when the time preference declines, and the proximal end decreases when the desire for immediate consumption decreases, and the overall end becomes a gentle extension, but the distal end extends to unprofitable investments (such as purely useless scientific research), and at the same time, the proximal end is also rising and expanding, and the production structure will become steeper.
Capital-intensive industries have always benefited from this distortion of the production structure, on the one hand, because they have access to more cheap capital and higher leverage;On the other hand, they have also benefited from the decline in real wages.
In the view of the Austrian School, "prosperity" is nothing more than a monetary phenomenon, a monetary illusion, and depression and recession are structural adjustments to the previous artificial expansion.
1.The Cantilon Effect and the Morsha Theory – Monetary Policy is Non-Neutral.
Hayek had an interesting explanation for the Cantillon effect: expansionary monetary policy is like pouring honey, the effect is always slowly transmitted from the center to the outer circle, and inflation with a regressive effect always has a greater negative impact on the less affluent. An extension of the Austrian School's Cantilon effect is that when money and credit expand beyond the limits of the natural rate of interest, capital goods always precede consumer goods.
Mark Thornton generalizes the Cantillon effect into three further effects that are used to explain Andrew Lawrence's Mosha theory (i.e., the Skyscraper Index): Interest rates affect land and capital**: The attractiveness of real estate always rises as interest rates fall. Interest rates affect the size of the company: the rise in capital goods, especially the rise in capital itself, strengthens the confidence of investment blindness, "this time is different". The development of capital-intensive industries stimulates the development of innovative technologies in an environment of low interest rates, providing objective conditions for the construction of skyscrapers.
However, we should note that the moment when the record skyscraper plan was proposed was when the bubble went to the extreme, but in the era of the Empire State Building, skyscrapers could be built in as little as one year, but now the construction cycle of skyscrapers is beginning to run across the bubble to the extreme to the period after it bursts.
Again and again, skyscrapers become "the greatness and pride of a nation" and then rot.
The most interesting example is the Kingdom Tower in Jeddah, which started construction in 2013 and was originally planned to be completed in 2018, but has been delayed after suffering from low oil prices, until September 2023, when it was announced that it would re-tender for the resumption of work, and it has been suspended for five years. The Kingdom Tower has crossed the cycle.
Hayek's explanation of the Cantilon effect shows that inflation has never been an economic problem, but distribution, a political one. Once money enters "de-storage", it will form a spiral acceleration, people no longer accumulate, but desperately consume and invest, the purchasing power of money continues to decline, everyone scrambles to sell the money in their hands, and hyperinflation comes from this.
War and welfare lead to over-indebtedness because elections overpromise, and the democratic consideration is ultimately converted into inflation that guarantees nominal solvency, balanced by the confiscation of real property of creditors and the overdraft of the wages of future generations. Inflation also prolongs the tension and confrontation in international politics, with the cold war and the hot war prolonging.
Inflation is the price that rulers pay to bribes the people.
Peter Bernholz analyzed 29 inflations since ancient Rome (Bernholz: Monetary Regimes and Inflation, 2006), and his view is that all hyperinflationary events occurred in the paper money era, with budget deficits accounting for ** expenditure.
2.Business Cycle – Four Quadrants and Nine Squares.
Hyperinflation is accompanied by the collapse of the first fiscal and tax revenues;Vicious deflation is accompanied by book value write-offs and balance sheet destruction, not only ***, but also large-scale bankruptcies. For those who lived through the 70s of the 20th century, what is even more frightening is stagflation: in the Keynesian interpretation, the Phillips curve shows that inflation is positively correlated with economic growth (a decrease in unemployment), thus negating the phenomenon of stagflation, which is still rolling in. Monetarism uses Irving Fisher's formula to illustrate that if there is overcapacity in an economy, increasing the amount of money** will have a quantitative effect, stimulating production and thus increasing employmentIf the production capacity is already saturated, increasing the amount of money will only have a ** effect, ** will rise without the unemployment rate falling, and stagflation will begin.
We always see moderate inflation numbers because the official inflation figures don't include the really important components of the economy: and real estate. The official modest inflation figures are also the reason for the rising debt ratios of the stimulus**, banks, businesses, and households, as we are tacitly aware of the real inflation.
Three types of assets to combat inflation:
a.Assets that can keep up with inflation in price increases (including equity in such companies) tend to be in the staples sector, such as oil, power, food, and healthcare companies, among which companies with good balance sheets, growth potential, and reasonable companies are chosenBe careful with mining companies that produce industrial metals, as high unemployment and stagnant production can mean the worst of industrial metals
b.*Because it may regain its monetary status, but there will be times when the demand for survival necessities such as oil, fertilizers, seeds, etc. will exceed **.
c.Inflation-protected bonds and real estate are not the best options. Rental increases from real estate don't necessarily keep up with assets, and it's core inflation that is pegged to not CPI or other indices that contain really big gains, are too volatile before cashing out, and are also too expensive for the average investor (high bid-ask spreads).
3.Financial repression.
Financial repression refers to the distortion of assets by banks through capital controls and regulatory measures, so that financial institutions invest in bonds and relieve the pressure to increase taxes or reduce spending. The Austrian school has always seen financial repression as a variant of confiscation of creditors' assets. Typical financial repression measures include: Pakistan iii and other regulatory rules set the risk weight of a particular ** bond to zero, which is a typical financial repression method. Interest rate instruments: Reversing the operational intervention yield curve, nominal interest rates below the inflation rate, negative interest rates, interest rate caps, etc., are all financial repressions. In addition, there are controls on capital inflows and outflows, a ban on the holding of *** manipulation of pensions to purchase government bonds, special taxes (property tax, gold and silver sales tax, transaction tax, etc.) and direct nationalization.
The essence of economic growth is the reconstruction of the production structure, the more efficient allocation of capital in time and space, and the alleviation of private debt is also due to the demographic structure, and the growth that deviates from the rational allocation of population (including technology), capital, and land elements is an illusion. Financial repression circumvents structural reforms and pushes the problem into the future at a very high cost.
In 2013-2014, the IMF, the Bundesbank, and the German Institute for Economic Research (DIW) proposed a one-time property tax with a mandatory 10% tax on wealth over 250,000 euros. According to Daniel Stelter, a senior partner at the Boston Consulting Group, "owning property ......Those who no longer work, should be taxed, in a way that can be seen as a clean-up after the party, that is, a clean-up of the inheritance of the last 30 years".
To be continued).