Austrian Enginomics

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An Interview with Russ Randall, founder of "Austrian Enginomics"... (posted 1-17-2006)

Question: Why start with an economic theory (Austrian) unknown to virtually all of the business and even economic community?

Russ: I discovered the Austrian Economic Theory in 2001.  I knew there was something terribly wrong with our U.S. macro economic policies during the late 90’s.  As an engineer who spent my life studying business efficiencies and productivity I knew the Federal agencies were calculating productivity incorrectly and publicizing misleading data.  Further, they were justifying the insane stock market bubble with the “productivity miracle”.  I knew thousands of businesses were created and hundreds of thousands of employees were enticed into these “new economy” enterprises that were not market justified.  I also knew the dollar was extremely overvalued due to our central bank easy money policies, which enabled and encouraged billions of foreign direct investment into the U.S. stock market that developed into a full-blown Ponzi scheme greater than any in the history of the Republic.  The Austrian Economic Theory had all of the answers.  I read Murray Rothbard’s America’s Great Depression and became overwhelmed at the parallels to today’s conditions.

 

Question:  Why not just accept the Austrian Economic Theory as is?  Why apply an “engineering” view to such a well-established theory?

 

Russ:  I quickly realized the need to separate what I call “real wealth” from “financial wealth”.  This distinction is not the foundation of Austrian Economic Theory.  Since I was focusing upon Austrian Business Cycle Theory (ABCT), the Austrian logic for the cause of Business Cycles was beautiful and fit well with my engineering logic regarding “real wealth” and its creation.  I had to begin with defining “real wealth” as goods that could only be created by work and natural resources.  The short list of “real wealth” is:  Capital, durable, and consumable goods, infrastructure, and skill sets.  All “paper” assets (fiat currency, bonds, notes, etc.) are not “real wealth”. 

 

Another area lacking in Austrian Economic Theory is the numeric dimension or magnitude of macro economic distortions.  Most early Austrian economists wanted to keep the theory in “pure” text logic form.  Once numbers are introduced, they can always be proven wrong.  The debate then reduces to numeric credibility rather than sticking with principles and sound logic.  I believe “enginomics” brings the missing “magnitude” to light in a very unique and credible way.

 

Question:  Was there any other “void” in the ABCT that needed to be filled?

 

Russ:  I realized that the mindset of nearly all economists and the financial community was based upon money, which is the foundation of all of their measures and sense of wealth.  e.g.  An individual, community, or state is “wealthier” if it has more money.  That is certainly true, if the money is backed 100% by a commodity with intrinsic value (e.g. gold, silver, etc.).  That is not necessarily true, of course, under a fiat money system.  In our “fiat currency” economy I had to completely leave the monetary “paradigm” and envisage a “real wealth” paradigm.  You must actually pretend that money, as we know it, does not exist!  Once you think in terms of “real wealth”, then analysis on any contemporary economic issue becomes very simple and clear.

 

I also view labor in a unique way.  I’ve developed eight categories of general activities describing how every waking minute of all adults is allocated in a model.  As policy changes are modeled, you can simulate labor shifts from one “productive” category to a “non-productive” category.  This brings clarity to policies that encourage destructive labor shifts that must eventually and painfully return to balance.

 

Question:  Does that come into play when you refer to the “Real Economy” vs the “Financial Economy”?

 

Russ:  Absolutely.  The “Real Economy” focuses upon “real wealth” and understanding what creates it.  The “Financial Economy” is based upon our fiat currency, which may grow significantly, yet at the same time the “Real Economy” may be suffering a decline.

 

Question:  Predictions of economic (global) doom have now been forecast by several prominent non-establishment economists for some time (months) - too many to list, but many are from the 'Austrian School'. The bubbles and economic imbalances seem to be steadily worsening but the melt-down (hard landing) or even a soft landing has not occurred. The prophets of economic doom have entered the incredibility zone with their repetitive but unfulfilled 'Chicken Little' cries. You have your own dateline for 'crunch time' (Depression). In light of recent events, trends and actions by the Fed, what are the critical factors for determining the timing of a major cataclysm - or the start of a series of smaller cataclysms? Are there any checkpoints (historical) to this timeline or are we in totally uncharted waters?

 

Russ:  My prediction is based upon two key metrics.  1) Aggregate overvaluation of stocks, bonds, and real estate, and  2) Percentage of employees working in “Non-Market Justified” businesses (i.e. losing money, if modeled @ natural interest rate conditions).

 

I calculate the aggregate overvaluation of assets today to be at its highest point in the past one hundred plus years.  The second metric is probably as extreme as the first.  The very simple conclusion is that once the Boomers begin to retire in mass in the 2008-10 time frame, they will also begin to “cash-in on” or “task” the bubbles.  At that point true valuations will become apparent based upon the real output of the companies and assets rather than an illusion of output based upon a bloated pile of paper liquidity.

 

I anticipate a dollar crisis before the 2008-10 economic collapse because there will be far too many obvious traditional indicators publicizing our extreme, unprecedented out-of-balance conditions that will become “beacons of risk” to our foreign trading partners.  The most abhorrent indicator is our current account trade imbalance.  Second is our exponential total credit expansion relative to our GDP expansion.  Both of these metrics are in “uncharted waters” now and getting rapidly worse.  I anticipate foreign investors will push their central banks to reduce their dollar reserve and U.S. Treasury accumulations, which will lead to the crisis.  This may evolve from the Iranian Oil Bourse, or any similar international cause to trigger the dollar exodus.

 

Question:  Which sector of the economies (US, Asian or European) will be the first of the economic dominoes to fall?

 

Russ:  The Asian countries tend to swing rapidly from one extreme to another (esp. China).  Therefore, because China is violating most basic Austrian Economic principles, they may implode first along with other Asian’s in the same boat. That could happen in 2006-7.  I expect the US to suffer, at that time as well.  However, the G-7 plus China government powers will desperately attempt to inflate the problem away, which is the same mechanism they have used for 20 years.  That will hold off the depression for a year or two, but it will further exacerbate the magnitude of the collapse, when it arrives in full force.  The economic collapse will occur around 2008-10, when the Boomers throughout the world begin to retire in mass.

 

Question:  To what extent, if any, is it provable or likely (reasonable) that the Greenspan monetary policies of recent years, leading to the predicted, inevitable debacle, are the result of deliberate policy (driven by political motives and influence) rather than mere stupidity or wishful thinking? In other words, are the Fed governors all idiots, are they na´ve, or are they deliberately colluding to create economic havoc?

 

Russ:  I believe Mr. Greenspan’s motives are largely self-serving to ensure a grand legacy.  I think many compromises and rationalizations to his early economic principle convictions took place year after year.  This piecemeal creeping deterioration in sound principles can happen to even the purest and strongest minds over time.  The White House, Congress, Wall Street, and more recently, Hedge funds are all very powerful “sledge hammers” constantly pounding away in support of short term positive popular stimulants that undermine sound monetary policy.

 

Question:  To what extent are economic policies now linked or driven by geopolitical or ideological objectives of BushCo and the Neocon cabal? Are macro-economic policies driven by geopolitical objectives of the major players?

 

Russ:  I think the Federal Reserve Bank directives enacted by congress in 1913, 1946, and 1978 were fundamentally flawed.  In 1913 the Federal Reserve Bank was created to provide a stable banking system and therefore a stable currency.  In 1946 the "Employment Act" and in 1978 the Humphrey-Hawkins "Full Employment and Balanced Growth Act" tasked the bank with creating "full employment". 

 

The U.S. Bank is asked to manipulate not only the amount of credit, but also the cost of credit as well to ensure the noted “full employment” and a “stable currency”.  One could argue the geopolitical and ideological objectives are synonymous, which unfortunately both support massive central bank intervention in countries worldwide today.  Assuming intervention is a given, then it is important the central banks "remove the punchbowl" as often as they "provide the punchbowl" to keep overall liquidity in balance. 

 

In my view, if a U.S. central bank is to exist at all and maintain true independence from congress and the White House, then the central bank should only function in an administrative or clerical capacity.  If it is empowered to manipulate the cost of credit, it can only accomplish that by massive intervention and subsequent distortion of the free market.

 

Question:  How pervasive is statistical deception and mass-media propaganda to conceal the real objectives and true state of the major economies?

 

Russ:  Extremely pervasive!  Inflation is understated by 2-3%.  Productivity is overstated by 1-3%.  GDP is overstated by 2-3%.  Unemployment is understated by 1-7%.  Part of my “Austrian Enginomic” mission is to contrast what is “real” from the “illusions”.  It seems, if there is any room to inject a favorable bias in key economic indicators, they stretch it to the limit.  It’s as though our own monetary “policemen” are making up their own “laws” as we go along.

 

Question:  You motive behind “Austrian Enginomics” seems to extend beyond economics.  Are you concerned about the long-term integrity of the Republic?

 

Russ:  Absolutely!  I believe principles and values must drive the formation of any government.  Democracy, yet critical, must be a distant third in weight and importance.  We must elect officials to develop and uphold principles such as:  Rule of Law, Property Rights, Individual Freedom, Capitalism, and Free Market.  Economic policies that effectively “gut” American manufacturing and encourage massive bubble formations risk catastrophic endings.  Growing masses of people could soon view capitalism and democracy as a failure.  One can easily envisage a tyrannical loud voice (e.g. Adolf Hitler) taking charge in a floundering chaotic state, which could move us away from our principles of freedom that many of our ancestors died to gain and preserve.

 

Question:  Are you optimistic the Republic will prevail and even come out of the depression a more free society?

 

Russ:  Yes, but more leaders and intellectuals must understand the reasons we’ve gotten into this mess.

 

Question:  What should a “powerless” American citizen do?

 

Russ:  First, recognize you’re not powerless.  You have a voice and elected officials that you “hire” to preserve our Republic.  Organize and act!  Regarding investments just go to the “My Favorite Links” web page on this site.  They know the risks that exist today, and all have excellent strategies to not only preserve your wealth, but to dramatically enhance it!

 

GOOD LUCK….!

Feedback, submissions, ideas... e-mail me at: russ.randall@gmail.com.