Posted by: graemebird | June 15, 2008

Steve Kirchner Is Making The Best Of His Own Failure And Economics Ignorance.

Steve Kirchner has come up with the immensely stupid idea of learning to love the mindless destruction that is financial bubbles and the subsequent recession that follows them. There is not much point trying to argue against him until he makes good with some sort of argument for the affirmative. Actually he is just quoting some businessweek article. But it is an article that reflects his own attitudes all the way down the line. I don’t seek to argue against him so much in this instance.  I just seek to put an example of his anti-economics ignorance up as a warning to the youth and the laity. He may as well have said that pedophilia and nasty wasting diseases were a good thing while he was at it.

Well whats going on here? We see no real argument so where is Kirchners head at?

Its the same reinforcing of failure that Kirchner always takes. His crowds bad monetary and fiscal policies have lead to spiralling debts in this country. Debts and trade deficits that spiral out of control even as we enjoy a resources boom. And Kirchners approach, because he is ignorant and because he works backwards from his preferred conclusion, is to say that these debts are a good thing.  He just dismisses them. Nothing could possibly be wrong with his socialist money beliefs. He wouldn’t know how to bring us into surplus because he is ignorant. So he says that deficits are good.


And the same goes in this situation. Kirchner is a macromancer when it comes to monetary-economics. He’s totally irrational. He doesn’t understand the situation at all. He wouldn’t know how to avoid recessions and bubbles if he had control of all the levers. He’s totally at sea on this matter.  And so when he sees bubbles and recessions he wrongly thinks that these are an outcome of the market. So he just spins it to say that these bubbles and recessions are a good thing.

Mindless idiocy. Bubbles are wasteful and unjust. Recessions are wasteful and painful as well. Its just economic damage. Damage of the sort you might expect from carpet bombing. Its so much a crying shame to see such devastation as what these booms and busts cause. And its a crying shame that people who are supposed to be qualified have such little idea of what they are talking about.

Steve Kirchner claims to be an “Institutional Economist”. These characters fancy themselves as street-wise and the real deal. But an institutional economist can never understand economics. Since he refuses to understand economics ON PRINCIPLE. 

You see its an epistemological failure on their part. The free enterprise propagandizing that these guys get into is really just cover. Its a “more streetwise-than-thou” attempt that never comes off. Pretty fly for a white guy and all that.


JC has put up an interesting point that is at once both one-eye-blind but has a kernel of truth to it.


You see some good probably did come out of the internet tech bubble. And if we have a bubble in LIFE-EXTENSION TECHNOLOGIES then I might even be grateful for it as agriculture and energy production are neglected and millions starve all around the world.

Yeah well you can partially pay that one. Its a lot like that with general rules isn’t it? Like when you say DEMOCRACIES CANNOT WELL HANDLE COUNTER-INSURGENCIES then someone is going to mention the fine work the Australians and British did in Malaya. Well they did do a good job and we can grant the opposition that exception. But it hardly changes the general rule does it.

Supposing that every time the Americans have a bubble they blow out their foreign debt by some trillions of dollars. Well then every bubble they have from then on in better be in a vital and transformational technology. Because thats a glass key that turned too many times will break if it works in the first place.

The problem with Kirchner is that he’s taken the debatable question of the internet tech bubble and made it a general thing. Now we are behind in energy and food. Ought we have an energy and food bubble? What will be the deficiency that this shows up down the track? The problems with energy and food are certainly not unrelated to the previous series of financial bubbles. They are not unrelated to the bad monetary and taxation policies that prevail.  

In fact the free market, which does not entertain bubbles of anything like this sort of magnitude, would allocate greater investment in vital areas. The internet deal is a bit of a one-off. Since on a branding level it is important to be number one on the net. In the physical world, from the branding point of view, you usually have only two strong brands in one area. You may have Hertz and Avis. But you only have one serious Amazon. Since internet branding lends itself to one clear hard-to-assail winner of any branding war.

Without the financial bubble there will be more economizing in less popular areas during the bubble itself and no recession at all. Hence there will be greater investment for longer. But the branding issue may mean that the Americans have grabbed the high ground in this internet area by getting there first with more funds.

We can pay that one but what we cannot do is suggest that this makes bubbles a good thing in the general sense. Because the last time the Americans and Australians blew out their trade deficit for a bubble it was for real estate. And not for the building of spacious high-rise which would have made sense. But instead for the bidding up of our own land prices which was insane.

The key intellectual fault of the macromancer is the implicit belief that new-money-creation actually creates extra investment resources. So its a failure to distinguish between the real and financial economy. But investment resources only come from spending that is redirected into the business or consumers failing to spend all they earn and saving that money instead. Hence new money creation cannot magically create extra investment resources, in fact new money creation will eventually reduce these resources by reducing savings and the reinvestment rate. New money creation cannot create new investment resources, it can only direct people to allocate these resources unwisely. And like any unwise choice once in a while they can pay off retrospectively to some degree. But mostly they are just a terrible waste.



  1. Birdy:

    Steve’s right about the tech crash. there was some good that came out of it as it did accelerate the introduction of the web. look it it from the consumer’s point of view. Where did they lose out?

    they essentially received a whole lot of new goodies to play with. And if Soros lost out, which he did big time by betting at close to the top of the market: well big deal. who gives a shit.

    In other words we just can’t measure the cost of a crash without the benefits also.

  2. Yeah there was some good that comes out of any disaster. But we don’t bring the disaster on in order to get the good that came out of it.

    This approach is like saying that the Catholic Churches various corrupt practices were a good thing because they brought on the Jihadist/Protestant menace, and this lead to the religious war that lead to unspeakable slaughter. But it was all good because we had a greater freedom grow out of it.

    All disasters have silver linings. Kirchner is being irrational since he’s wanting to allow disasters to bring forth the silver lining.

    But we have troubles enough for ourselves and more to go round and hand out if we ever fall short.

  3. Bird:

    The tech crash was not a disaster for the consumer. It was actually very beneficial.

    Cheaper telephony, gadgets galore, great new ways to get entertainment. The best possibly the most enduring benefit is the transmission of information and the great things that come out of it. Look at the availability of information we have now and the potential.

    So who gives a shit that Soros lost out. What we got was new technology.

  4. In what way would this have not gone better without the malinvestment?

    There was no something for nothing here. This is a good technology. There is no evidence to suggest it developed any faster without the bubble. Since its the infrastructure that really counts in this regard.

    Infrastructure requires investment capital. Its pointless using up investment capital in projects that are not generating a high rate of return on assets. Since its the return of assets that generates the investment capital in the new period.

    The magic pudding in all this is to avoid malinvestment or the collapse of business spending that the recession brings. Thats where all the waste is that generates less good investment overall.

  5. Its pointless using up investment capital in projects that are not generating a high rate of return on assets.

    Pointless for whom? Consumer doesn’t give a shit as the technology was introduced at an accelerated pace.

    Point being that not all bubbles are necessarily a bad thing.

  6. It really is all about Macromancy and something for nothing JC. Because its not as if the internet wouldn’t have developed in a situation of growth-deflation. And it is just this growth deflation which enhances the amount of total useful investment spending.

    Supposing the tulip-growing goes ahead in leaps and bounds in a bubble. Well its not as if we would have been short of tulips without the bubble. But we want the whole economy to progress and not to needlessly lose momentum when the bubble ends, or experience bad investment spending while the bubble continues.

    He has no real argument here. I’m more just pointing out WHY he comes up with this stuff. And its always based around failure.

    The policies that he champions fail. And then he rebrands failure as “success.”

  7. But whats happened with the investment capital JC?

    You see you are doing what these guys always do. You are looking at the consumer and business spending in your mind dissappears.

    Spending money on matters that have no rate of return hurts the consumer. In the same way that blowing things up would.

    Supposing that there were no bubble. Then business spending would be directed better and would now be generating more income for the Americans and higher growth rates.

    So yes consumers were hurt. But they weren’t hurt by paying more for the services of Amazon if thats what you mean.

    Here your analysis is one eye blind. Because you are looking at consumer prices at the time and investment in internet businesses and nothing else.

    Now consider whats going on at the moment. No bubble and American exports growing quickly. Perhaps you might say that American consumers aren’t gaining any from this strong non-bubble growth in American export goods.

    Well that would be shortsighted right?

    You are talking the broken window fallacy here. Or something similar.

  8. “Pointless for whom? Consumer doesn’t give a shit as the technology was introduced at an accelerated pace.”

    No they weren’t. Only technologies in a specific area. Capital update in other areas would have been constrained. Hence technology ought not to be thought to have accelerated at all.

    Technological progress is imbedded in capital update. If they got ahead of themselves in this specific area for a short time it means others got behind or they got behind later. When the tech bubble died then technological progress would have been unnaturally slowed. Since all the people who could have pushed technology ahead were now broke.

  9. Not everything under a capitalism not subject to a gold standard and 100% backing is perfect, But the Mediterranan shylock knows which side his bread is buttered on. He can only profit from the existing system.

  10. The present system is geared towards wheelers and dealers and networking types, not patient and prudent industrialists such as those that once graced the halls of the Melbourne Club, Mr Bird.

  11. Right. Its a NO SPECULATORS LEFT BEHIND welfare system. Credit creation is welfare subsidy for existing bigshots and well-placed gamblers. It can only ever pay off for the general public by sheer fluke.

    One can imagine an investment boom in life-extension businesses coming up with eternal youth. But mostly all it does is make the already rich 5 times as rich again.

    The internet thing is at least debatable. I don’t think it made a net gain. But its at least debatable. But look at all the other bubbles. The tulip bubble. Dozens of real estate bubbles. Nearly all nasty and harmful.

  12. bird

    Shut up. of course there a specs left behind. bubbles always leave the dead and the walking wounded. Ask the Babcock shareholders.

  13. Well what s your point then? Are you claiming that the alleged gains from the internet bubble means that we ought think all bubbles and recessions are good things? That appears to be the Kirchner argument.

    What were the great gains made from the Tulip bubble? How about the great gains made from the real estate bubbles in America and Australia? What are the great gains there? No new land reclaimed from the desert and not a great deal in the building of more high-rise. Most of it just involves us getting into more debt at the price of bidding our own real estate prices up. A double loss and the starvation of investment for more productive sources.

    Just admit that Kirchner is wrong. That would be the honest thing to do. For every one bubble that doesn’t look entirely ridiculous there is a dozen that clearly are totally wasteful.

  14. JC:

    i. ” “bubbles always leave the dead and the walking wounded”.”

    They are few in number compared with all the innocent bystanders.

    ii. ” ” The tech crash was not a disaster for the consumer. It was actually very beneficial. Cheaper telephony, gadgets galore, great new ways to get entertainment.” ”

    Not for everyone! Not for everyone! That’s why we have a third-world tin-cans-and-string telecommunications system out here in the bush …. only a stone’s throw from a regional city and the coast! 3Kb/s internet, no-bars mobile, etc. Prior to the tech crash we stood a fighting chance of getting a telecommunications system. Now? Have you fed the carrier-pigeons this evening, Mildred?

  15. What if innovation causes a bubble or a long wave? Are you going to stop it?

  16. Innovation doesn’t cause financial bubbles. Only excessive new money creation would do that. Supposing the excessive new money creation isn’t there. Supposing we have a well-established 100% backed commodity standard. One in which all the transitional problems have been taken care of. Well there simply won’t be that sort of excessive new money creation.

    You see for excessive new money creation to occur under those circumstances the investment boom would have to be in the extraction industries as well. And for an investment boom in the extraction industries to occur in the first place there would normally have to be an increase in the demand for money for holding. Which cannot imply excessive spending.

    To see how there couldn’t be such a bubble we go back to the law of the equalization of average profits/capital investment for each industry within the economy. If there is excessive profits in one industry new capital investment will occur disproportionately in that industry which will lead to reduced prices which will bring profit/capital investment down to the economy-wide average.

    Where do you see exceptions to this rule? Well in family farms, since this is a lifestyle choice, and since these farms typically draw government aid everytime something goes wrong, we don’t see the reduction in labour and capital that the lower than average profit/capital investment levels would imply. We don’t see the reduction in land prices enough to bring the profit/capital investment up high. But its not an extremist thing like with the internet boom where there were monstrous capital valuation and few of the internet firms making any money at all.

    If an industry lends itself to such public enthusiasm under 100% backing we might see that industry expanding faster even in the face of relatively low yields and low profit/capital investment levels. This is fine and a good thing. The public assuming that this is a long-run industry will great long-run prospects. But it won’t get so silly as to be a bubble.

    Which means there will be sustained competition between individual firms within the industry. There will be severe competition with many firms falling by the wayside. What there will not be is an industry-wide bust, and an associated economy-wide recession.

    Individual firms winding up and being bought out is a good thing. It would be a sign of heightened competition in this industry. But industry-wide bustups and economic recessions are extremely wasteful. What they mean is loss of investment momentum.

    You question is dishonest isn’t it. Its very close to wipeable. Since it implies that I’m saying I would end the boom arbitrarily because I don’t like it. But in transition I would be simply making sure GDR and Productive Expenditure are growing glacially. As a sort of mimicry to what a 100% backed standard where all transitional problems had been dealt with.

    Making sure they are growing as slowly as possible but never falling backwards. Under these circumstances sustained investment in the face of low profits could happen for a new innovative industry. What couldn’t happen is a speculative boom in the face of industry-wide negative average profits.

    If the Americans have gained from this boom-bust its only because they’ve grabbed all the pertinent internet brands or something. Which makes this a one-off fluke and not something to try out again. As noted the last boom was a land price boom and could not be more mindless and wasteful.

  17. An implied lie by the traitor Mr Hill. Under 100 % backing there would be no business cycles.

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