Sunday, January 31, 2016

Professor Fekete at The Daily Bell

Professor Fekete: The Rothbardian and Misesian prognostications are rooted in the Quantity Theory of Money (QTM), according to which, if it were correct, we would have inflation instead of deflation following the miraculous proliferation of money, credit and debt.

BM: Two thoughts.  First, there is inflation – using the professor’s own definition (and I will come to this shortly).  Second, the professor seems to be describing only one side of the QTM equation and then attributing this definition to the Austrians associated with Mises and Rothbard. 

Hans Hoppe defines the quantity theory of money: “whenever the quantity of money is increased while the demand for money to be held in cash reserve on hand is unchanged, the purchasing power of money will fall.”

Hoppe has read and studied far more Mises and Rothbard than I have, so I will take his word for this.  In any case, this more complete definition by Hoppe seems reasonable.

Professor Fekete: I recognize only one kind of deflation, namely the deflation of assets.

BM: It is interesting; the professor defines “deflation” in the price of assets.  Would it not follow that he would define “inflation” the same way, in the price of assets?  Yet he does not recognize today’s asset price inflation as inflation – see his quote at the top of my comment.

Using Fekete’s own definitions, Mises and Rothbard are correct, yet the professor chides them for this.

But why is there an expectation of a deflation of assets?  It can only be due to an artificially induced and maintained inflation in assets.  And why would this be?  Might it have something to do with the quantity theory of money and where / how that quantity was deployed?

Professor Fekete: A gold standard cum real bills is the right medicine to the moribund world economy.

BM: Unless it is advocacy for the free market, I get nervous when someone proclaims “the right medicine” for economic ills (aren’t we operating under the “professorial standard” today?) although I find no reason to disagree with “a gold standard cum real bills” as a possibility in a market of freely developed and accepted money and credit instruments.


  1. Hoppe: “whenever the quantity of money is increased while the demand for money to be held in cash reserve on hand is unchanged, the purchasing power of money will fall.”

    I have not read a lot of Hoppe, but presumably he also knows, as Von Mises demonstrated in "The Theory of Money and Credit":


    if the quantity of money is increased, and yet the demand for money to be held in cash reserve increases even _more_, then disinflation, or deflation [i.e. an increase in per unit purchasing power] must result.

    At the other extreme, if the quantity/supply of money is decreased, and yet the demand for that supply decreases even more, then inflation [i.e a loss of per unit purchasing power], must result.

    Simplified conclusion: The purchasing power of any individual unit of currency, at any point in time, is always the end result of the interplay between two factors:

    1] the supply of money.
    2] The demand for that money supply.

    Since only the future supply of money can ever be roughly "guesstimated" [via central bank announcements etc.], while the future demand for that supply is always an unknown which cannot be accurately predicted ahead of time [because that demand is ruled by mass psychology and little else], then it should be fairly easy to conclude that neither inflation, nor deflation can be accurately predicted ahead of time.

    However, this appears to not be the case. Most "Austrians" and hard money advocates etc., as well as 99% of "investment advisors", insist that future inflation, or deflation [or whatever] , _can_ be accurately predicted! [by closely watching money supply figures] :-) .

    And so it goes....

    Regards, onebornfree
    Financial Safety Consulting

  2. I prefer the definition of inflation to be only increases in the stock of money, credit, or other things that increase the real supply of money. That means that we need a different word to describe increasing prices for any reason.

  3. As the division of labor expands and new techniques of production are employed, prices tend to fall. A small increase in the supply of money may not be enough to counter this trend of generally decreasing prices. In the 1920’s, general prices stayed flat in the face of rising productivity even though the Fed was substantially increasing the monetary base. Malinvestment ensued.

  4. BM- apologies in advance if I'm just missing this but I am not seeing the professor's definition of inflation. I see only the deflation definition. I looked at the original article and your comment at Daily Bell and didn't see it there as well. All I see is how he doesn't define it or rather how he thinks Misesians and Rothbardians view the QTM. Thanks for your time and ,hopefully, further explanation.I am very curious to see Herr Professor's definition.

    1. Professor Fekete: "I recognize only one kind of deflation, namely the deflation of assets."

      Is it fair to assume that he would define "inflation" of assets?

  5. OK, so it's an inferred definition. I was just hoping to see his stated definition to see if he was consistent. Sorry I'm a little slow on the uptake. Thanks for pointing it out.

  6. Hi Bionic,

    "Antal Fekete: Deflation is clearly not the same as a falling price level. Technological improvements in production cause a gently falling price level under sound money that is no deflation. Defining deflation as a contraction of the stock of money is plainly wrong. We have a vastly expanding money supply, yet a lot of economists (including myself) hold that we are in the midst of deflation. I prefer the definition of deflation as a pathological slowing in the velocity of money."

    I think this means he considers inflation as an accelerating Velocity of money. I think it is retarded to redefine these terms in order to refute definitions even if his overall theory turns out to be insightful. Has the world run out of neologisms?

    1. It is difficult to square this definition with his use of the term in the DB interview, but I suppose one of his acolytes will enlighten my blindness.

      With Fekete, I am always wondering why - if his theories are so sound (and the only sound theories in Austrian economics, he will tell you) - why such persistent obfuscation?