Austrian Enginomics

The Basics of “Austrian Enginomics”

Austrian Enginomics begins with the requirement to experience a paradigm metamorphosis.  One must perform a virtual self-lobotomy to remove reference to the US dollar, a fiat currency, as the basis of economic or wealth measurement.  “Enginomic” logic is committed to recognizing, analyzing, and measuring the “real economy” in contrast to the “financial economy”.  For example, the US fiat dollar is not viewed as wealth within the context of Enginomics.  If the quantity of dollars (or data bits in a computer representing dollars) instantly doubled, we would not be any wealthier in aggregate.  We would simply have twice the quantity of fiat currency chasing precisely the same amount of wealth, thus doubling inflation.  At best, fiat currency represents a contract to ACQUIRE wealth.

The enginomic logic is designed to develop and track two significant macro economic “health” indicators.  The two indicators are:

1. Aggregate asset (stocks, bonds, and real estate) overvaluation “bubbles”, and
2. Percentage of labor resources employed in “market unjustified” business enterprises vs. “market justified” enterprises.

Enginomics recognizes the pervasive ongoing valuation distortions and mixed market signals that result from inflationary monetary policies.  A nation or group of nations can muttle through life under a relatively constant inflationary condition continually rewarding some groups at the expense of others and driving some measure of misdirected, unjustified business activity.  However, the system instability associated with extreme conditions within an economic sphere related to the two key Enginomic metrics noted above is an order of magnitude more severe.  When the said conditions are extreme, there is no amount of monetary or interest rate manipulation that will mitigate the extreme out of balance conditions.  At best the monetary machinations will attempt to create yet another illusion to mask the existing illusion.

Many economists believe the current (May 2005) cycle of interest rate tightening will be the cause of the economy eventually “breaking” and sinking into a recession or worse.  Enginomics (and Austrian economic theory) recognizes the root cause of any upcoming economic downturn was the financial bubble creation in the first place; NOT the series of interest rate increases.  The current series of post-root-cause central bank interest rate increases are belated attempts to correct a problem they created in the first place by the extended artificial suppression of interest rates and administration of easy monetary policy operations.

For example, if we are experiencing an extreme bubble in real estate values, then there are only two means of correcting or diffusing the bubble once discovered by the masses.  First is by further debasement of our currency (inflation).  Second is by devaluation.  Of course, a combination of the two is possible.  In either case the property owner will realize the real valuation of his property is much less than originally perceived before the bubble illusion discovery.  Once the bubble is formed , imminent damage is irreversible.  The precursor to the damage is complete.  Curious questions remaining are the timing and abruptness of the correction.  Once the illusion is discovered, the momentum of bubble expansion is typically still worsening, and reaching a blow-off stage.  Informed or contrarian investors will already be in process of an investment strategy reversal betting upon a housing valuation collapse. 

Most economists believe any out-of-balance economic condition can be mitigated by corrective monetary policy.  e.g. Ben Bernanke’s promise of “helicopter money” to combat a persistent deflationary tendency.  Unfortunately, this effort will only prolong and worsen the out-of-balance conditions.

Any investor owning an asset has a traditional logical method of projecting its future buying power.  His belief is that his asset or real estate equity represents the power to acquire a measured real “future stream of goods and services” by thinking in terms of dollars.  If the investor envisages a $100,000 investment today having the buying power of three future Lexus 300 sedans over the next 9 years, and he suddenly learns the $100K is 100% overvalued, thus only having the effective buying power for one and one half Lexus sedans over the same time period, all the money that Ben can print and drop from the sky will not change the reality of a 100% bubble illusion.  More devalued currency will not empower acquisition of a greater future stream of goods and services. There is no such monetary policy that will effectively increase the “real” future stream of goods and services produced by our aggregate business enterprise.

The “Enginomic Story” attempts to help guide the distinct recognition of the “real economy” in contrast to the “financial economy” that monetary and government authorities would like you to believe.  Governments cannot make promises to expand the “real economy”.  Only enabled entrepreneurs and their employees can accomplish such.  Government can only control and directly influence expansion of the “financial economy”, which enables them to stay in power.  Sovereign nations risk loss of identity and destruction, when faith in leadership and money deteriorate.  Unfortunately, asset bubbles and misallocation of resources are very popular in the formative stage, but they become very painful and abrupt in the discovery and correction stages.

Timing of the inevitable “Day of Reckoning” is relatively straightforward.  You may look forward to future articles that present this logic.

I am clearly promoting our return to a commodity based monetary system and preservation of the Republic.  I look forward to your support…!

by Russ Randall (5-13-2005)