03/22/2017 - The Roundtable Insight: Chris Casey on The Austrian School of Economics and Why It May Be Time To Change Our Perspectives

Chris Casey is a trusted advisor to many business owners and companies alike on their pool of investments within their portfolios. With a specialty in the Austrian School of Economics, the far less popular thread of the study especially here in North America, Chris combines a unique viewpoint on traditional economic themes with an expertise on the Austrian way of thinking.

As name would suggest, the Austrian School of Economics did in fact originate in Vienna, Austria. It was powered by what was called the “marginalist” revolution in the 1870’s, which aimed attention at diminishing marginal utility-that an individual’s given choice is made on the margin. With that said, the Austrian school is a body of thought that puts emphasis on the value products as being determined by its utility to the consumer. This is balanced with Keynesian economics which focuses on the importance of dissecting the nature of various aggregate economic variables such as output, employment, interest rates, and inflation.

The Western world is largely exposed to only the Keynesian study of economics, possibly causing narrow perceptions of the principles themselves. With the emphasis of both schools of thought centered around two very different principles, a basic understanding of both is essential to better understand the world around us and how it functions.

 

FRA:     Hi, welcome to FRA’s roundtable insight. Today we have Chris Casey. He combines a degree in economics From the University of Illinois with a specialty in the Austrian School of Economics. He advises clients on their investment portfolios in today’s world of significant economic and financial intervention. He has also written a number of publications on websites including the Ludwig Von Mises Institute, Casey Research, and Laissez-faire Books. He’s a board member of the Economics Development Counsel with the University of Illinois, a policy advisor for Heartland Institute Centre and Finance, Insurance and Real-Estate. Welcome, Chris.

Chris Casey:     Thanks for having me on today.

FRA:     Great! Today we wanted to discuss an approach to investing that uses the principles of the Austrian School of Economics. Chris takes that approach with his clients, and we just wanted to explore in detail how he does that, and how it gives an edge to investing. Chris?

Chris:     Sure. Well, anyone’s portfolio has exposure to two very significant and primary forces; and that is the business cycle, and that recessions could pop any kind of financial bubbles out there whether it’s the stock or bond markets, as well as inflation, although that’s not talked about in today’s circles as often as it should be, it’s certainly a significant threat to anyone’s portfolio as anyone who lived through the 70’s certainly witnessed.

The Austrian school has unique explanations for both of those economic phenomena as well as interest rates. Having a unique economic perspective, truly understanding the way the world works, and being able to interpret the repercussions of various economic actors within the economy whether it’s the federal reserve, other central banks, or the treasury issuing bonds etc. is really key to structuring one’s portfolio to protect yourself from these significant threats that are out there.

FRA:     How do you apply this process…is it sort of like a flow chart-based approach? Do you look for certain characteristics, or do you look at the macro view first from that economics perspective? How do you actually approach that?

Chris:     Well, we’re always trying to interpret what the true effects or repercussions of, for instance, Federal Reserve actions would be on the economy. For instance, while some people may believe that raising rates will stifle inflation, we realize that that’s one of but several tools that federal reserve uses to inject money into the economy, and therefore doesn’t have much significance nor does it happen right away relative to other tools at their disposal. It’s really an interpretation of the actions that are out there and it lends itself well to Contrarian Investing because it’s a great way to truly make money in any market. So in Contrarian Investing, you’re looking at any kind of price levels that are extreme highs or extreme lows and just as importantly, you have to look at a catalyst to bring those extreme price levels to their median or mean average over time. And if you have a catalyst that is out there that’s a true interpretation of how the economy works and you understand it but everyone else believes in something different even though you’re looking at the same data, I think that’s a significant advantage in structuring your portfolios.

FRA:     That’s right the Austrian view places a strong emphasis on how the “interventionary”-type policies are distorting the price of risk, the price of money, interest rates, so that wouldn’t make sense. Do you do this on a daily basis; do you monitor central bank policies, fiscal stimulus policies, government regulations…how do you monitor what’s happening and the potential distortionary effects in the investment environment?

Chris:     Sure, well, we’re looking at same data as everyone else is, it’s not like we have some special insights or we’re necessarily looking at different data, it’s really the interpretation of the data. Let me give you a couple of examples. A lot of people, a lot of mainstream wealth management firms, a lot of media within the finance industry take a lot of stock with what the Federal Reserve believes and does and says, which astounds me because they are the absolute worst predictors of future events of any prognosticator out there. Think about it like this, it’s one thing if you’re wrong about predicting the future, but the Federal Reserve is even wrong about predicting their own actions. I mean, how many people can you say that, or economic actors can you say that, are simply wrong in predicting what they will do in the future. Yet time and time again, they are. If you look at the Federal Reserve, you could look at previous pronouncements, you have Ben Bernanke in January of 2008 saying they don’t see any kind of recession, and famously he did the same with the housing bubble. I don’t know why anyone believes these people on anything that they believe will happen to the economy. It’s not because they have obviously more access to data than we do, it’s simply an interpretation of what’s going on. They simply have an unsound and fundamentally flawed understanding as to what causes recessions. They cannot explain a business cycle. If you cannot explain the root causes as to why something happens, then predicting when something will happen is no different than reading tea leaves. The whole point is that it’s a different interpretation, it’s a different lens on the same data that’s out there.

FRA:     Can you provide some specific examples of investment asset classes and how they are tied into an Austrian school of economics view?

Chris:     Well the one everyone always talks about is of course precious metals, and that’s because they understand the true nature of money and what money represents, what it does not represent, and therefore they understand the dangers of a Fiat currency in today’s world and its ability to create inflation. Let me just reiterate what a Fiat currency is because a lot of people just assume it means paper money, it doesn’t. Fiat means by force. It’s government required use of money, legal tender laws, and the ability to print money that’s unbacked by any kind of commodity. So we’ve obviously had that in full blown mode since 1971, and because of that we’ve experienced significant inflation in the 1970’s. The Federal Reserve has printed a huge amount of money since the 2008 recession, so people think, well why haven’t we had inflation since then? There’s a couple forces at play, it’s not a simple matter of the stock of money goes up and prices go up automatically. There are some deflationary forces to the extent that loans are called in or loans are repaid, there’s time elements, there’s a lag. It’s very possible that the demand for money has gone up, and that’s a key element to the price level equation…what is the demand for money? In times of uncertainty and in times of extreme low growth when people are afraid, the demand for money, I’m sure, goes up, so that’s been keeping a damper on inflation as well.

10 year performance mar17 image

Data Courtesy of Federal Reserve Bank of St. Louis

FRA:     What types of investments would provide yield and preservation of purchasing power?

Chris:     In addition to, obviously precious metals, I think you want to look for any kind of investment or economic activity where you are getting paid in more stable and increasingly valuable foreign currency, but you have your costs in dollars. Let me give you a couple of examples that exist in the real world: in Russia over the last couple of years the Ruble has fallen tremendously relative to the US dollar, but if you look at their commodity producers, if you look at an oil company there, they’re getting paid in international markets in dollars. Meanwhile their costs are lower relative to their revenue. Another example would be in Brazil, we have the same thing happening with producers, their costs have fallen dramatically and yet they’re getting paid on the international market in dollars. And so people should look at that and think about what will happen next in the US, how could they position themselves to benefit from any kind of US inflation. US farmlands are a good example. Much like Brazil, the same thing could happen here, we saw that in the 1970’s when the price level essentially doubled over a ten year period, farmland prices went up about threefold, so they more than kept pace with inflation because the more farmers started exporting, as dollars became cheaper for foreigners to buy, their real sales went up in real terms, their land value went up in real terms. So that’s another way to play inflation, not just a knee-jerk reaction to precious metals but actually looking at other areas where you could benefit between the discrepancies in currencies.

decline vs US dollar image

Data Courtesy of Federal Reserve Bank of St. Louis

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Data Courtesy of Federal Reserve Bank of St. Louis

 

FRA:     What about other investments in agriculture, does that make sense as well in agricultural commodities or companies focused in that sector?

Chris:     If farmers are doing better, if they’re wealthier, if their underlying land values are better, I’m sure that there’s a lot of by-products that they will do very well. We haven’t looked at any in particular, but there are certainly a ton of products that would do quite well on that scenario

FRA:     Given the Austrian School of Economics places a big emphasis on debt, in a negative sense, would it make sense to look at investments where there are business with little or no debt, little or no leverage?

Chris:     I wouldn’t say that the Austrians necessarily view debt per se, negatively, they certainly view the non-repayment of debt negatively because that affects everyone in the economy, and they are strong believers in property rights and contractual obligations. But they do view government debt extremely negatively, for a number of reasons: morally, constitutionally, and just economically. They would advocate a balanced budget and much lower debt levels to the extent where there is no debt overall which we haven’t seen since the time of (pres.) Andrew Jackson.

FRA:     Yeah, exactly. Would it be possible for the government to consider some type of migration plan from a Keynesian based to an Austrian based management of the debt? Is that possible or could that be proposed, perhaps, as an evolutionary?

Chris:     Well I don’t think anyone in government actually subscribes to the Austrian school of economics, which is unfortunate, but out of the thousands of economists, very few of them would even be aware of the school, let alone understand or believe in any of its principles. I just don’t see anyone within the government, in any significant way, migrating economic policies towards an Austrian viewpoint.

FRA:     Do you know of any studies or empirical analysis with regard to using the principles of the Austrian School of economics for investing? Are there any past performance studies that indicate taking this approach has advantages and can provide an edge to investing?

Chris:     I’m not aware of any, and frankly it would be very difficult to conduct those, but more importantly I’m not sure exactly what those results would show meaning I’m not sure how beneficial someone simply believing in Austrian economics would have an advantage over others. I mean, we use it, we believe it is an advantage but just knowing about it doesn’t necessarily do anything, you have to really act on it. It’s not foolproof either. The Austrian Economics will help you identify bubbles and the catalysts to pop those bubbles. It will tell you about the direction and magnitude of markets, perhaps, but it won’t tell you anything about the timing, or at least that’s the trickiest part. In my mind, timing is far less significant when you have those other attributes nailed down because otherwise you’re “picking up nickels in front of a steamroller”. So, I’m not aware of any studies that would be interesting down the road, it’s also a pretty small data set of people who actually believe in this and act on it.

FRA:     Given the level of government intervention of central bank policies that intervene in the economy and in the investment environment on a long term basis, how does one address the challenge of timing, as you just mentioned? Is it a matter of waiting a certain period of time or are there tipping points where the distortions have just become too large and there will be a reversion to the meaning of Contrarian type-based approach? How do you actually look at the timing challenge?

Chris:     I do believe that direction and magnitude are more important. Let me give you an example: 2008 was a horrendous time. You had businesses thinking about where they have their cash, whether or not it’s even safe in a bank, that’s how fearful they were. The unemployment rate literally shot up in 7/8 months to 10% from maybe a high 4(%) in early 2008. You cannot understate the severity of that recession. Now from that, the government and Federal Reserve and treasury did exactly what they should not have done. They should have let these liquidations happen, they should have let the recession run its course but instead they did everything wrong. They printed a lot of money, they ran huge deficits, and all they did was cause dramatic and increased distortions within the economy. So make no mistake, what happened in 2008 was devastating, could be dwarfed by what comes down the pike based on what’s happened, because the distortions are even greater. The longer this has gone on, the greater the distortions are allowed to run their course and the more severe will be the contraction; the beneficial time period where we restore the structure of production to how it should be. So, timing to me just isn’t as important as magnitude and direction.

FRA:     I see, yeah. Given what’s happening in the economy and what’s happening with central bank policies, not only with the central bank of the US, the Federal Reserve, but other central banks around the world, as well as government policies on fiscal stimulus, the potential for increased infrastructure. Given that, and from an Austrian school perspective, where do you see the asset classes preferable to be in over the next 6-12 months, 1-2 year period?

Chris:     Well perhaps more importantly, is to what you should be in, is to what you should NOT be in. I think everyone should start looking at Cryptocurrencies in some form, emerging markets are very tempting based on not only the disparity in values between currencies but based on the disparity in relative values between their markets. Farmland, as I mentioned, I think is attractive. There are certain one-off sectors that have nothing to do with the economy which should do well regardless as to what happens. So for instance, uranium, or cannabis for that matter. But more importantly than these areas that one may want to consider, are areas that you should avoid; certainly anything within the equity markets that’s highly overvalued based on historical norms, I think, people should think about not having it in their portfolio. Certainly any kind of debt instruments are potentially at risk with rising interest rates, so you may want to lighten up on those. So in general, those are some themes to embrace or consider as well as what to avoid.

FRA:    Great, and how can our listeners learn more about your work and your services?

Chris:     More importantly than that, is what we believe in and how we apply Austrian economics. We have a lot of content on our website. I would just encourage people to check out our website which is WindRockWealth.com, and certainly our contact information is on there as well.

FRA:     Excellent! We will be posting this podcast as well as a number of charts and graphs that Chris will be providing on the website. We will also do a write-up abstract-transcript of this interview for anyone who wants to read that, including the charts and graphs. Thank you very much, Chris.

Chris:     Thank you.

windrock image

Abstract written by:  Tatiana Paskovataia <tatiana-p28@hotmail.com>

 

LINK HERE to download the MP3 Podcast

 


04/01/2016 - Chris Casey: “COST-PUSH INFLATION IS ANOTHER KEYNESIAN CONCEPT THE FED BELIEVES IN – They’re Wrong!”

FRA Co-founder Gordon T. Long is joined by Christopher P. Casey in discussing the decrease in oil price and its potential effect on the global economy.

Mr. Casey is the Managing Director of WindRock Wealth Management, a registered investment advisor and wealth management firm that subscribes to the Austrian school of economics. Mr. Casey is a frequent speaker before a number of organizations and conferences, including USA Watchdog, GoldMoney, Freedom Fest, and various bar associations and radio shows, including weekly financial and economic commentary on The Edge of Liberty (WNJC 1360, Philadelphia).  His writings have appeared in a variety of publications and websites including The Ludwig von Mises Institute, Zero Hedge, Family Business, Casey Research, and Laissez Faire Books.  He is a board member of the Economics Development Council with the University of Illinois, a Policy Advisor for The Heartland Institute’s Center on Finance, Insurance, and Real Estate, and a Chartered Financial Analyst charterholder (CFA®)

COST PUSH INFLATION

oil1Cost push inflation is a Keynesian concept that was developed to explain inflation during inflation; if any important commodity’s price rises, all other prices of goods and services rise. As we pay more, the standard of living would go down and inflation would creep in. But this actually puts downward pressure on other goods and services, so in the end the price level itself is largely unchanged.

“The price level is a function of the demand and supply of money itself, not of any individual commodity.”

It used to be that minor shifts in the oil price had profound impact on the economy, but that isn’t the case right now. Oil went from about $25 in 2003 to $140 in 2008, back down to $30 in late 2008, and $140 a couple of years ago. But have we ever seen a price level that rose or decreased according to the oil prices over the last fifteen years? The answer is no. The issue is that the Federal Reserve does believe in cost-push inflation, and they do think that deflation could be caused by lower oil prices.

“The great danger here is that they, in their mistaken belief that low oil prices could put a cap on any inflationary moves they do, as far as printing money, is that they could overshoot and end up causing more inflation than they intend.”

oil2EFFECT OF LOWER OIL PRICES

“Lower oil prices are good for the economy, but not for the reasons people cite on mainstream media.”

There’s a possibility that this could spike interest rates, or mitigate a downfall in interest rates.

STATE OF THE OIL MARKETS

 

Lower energy prices used to be considered good for the economy, since people have more money to spend. But that’s going toward servicing debt; it’s not actually consumption, it’s going toward debt payments. There are also some real dangers that aren’t being discussed by mainstream media.

Oil production has increased about 85% since 2008, but what isn’t mentioned is how oil imports have decreased. It’s down from approximately 12% of total imports to 5% today, not just in Dollar terms but overall volume.

Toil4he price has dropped 60% in the last five years. Oil producing nations are making less Dollars from the US customer. This is a problem because there are limited options for what they can do with those Dollars, so the US’ major trading partners and oil producing countries hold a massive amount of US treasuries. If they reduce their purchase of US treasuries, that could increase interest rates.

“Interest rates would have fallen further, but for the selling or lack of demand from these oil producing countries.”

SAUDIA ARABIA PEG

The Riyadh is pegged to the US Dollar at 3.75 Riyadh to the US Dollar, but their economy is under strain and their deficit is staggering. In any fixed exchange rate, the only way to keep it is through manipulation of the currency market by active buying and selling of Riyadh and US Dollars, but that is only making them go bankrupt faster. This could ultimately affect US interest rates as well.

OIL SUPPLY & DEMAND

oil3With multiple countries putting out as many barrels of oil a day as possible, there’s pressure to keep the oil supply up and maybe keeping oil prices down. But if the world economy falls off significantly, there will be a decrease in demand and then cut backs and lots of capital not invested. Then if demand rises there won’t be much capacity, which makes the market volatile. The banks are holding out in the hopes of a rebound, because they have so much debt outstanding to the oil industry. Eventually this will either create incredible inflation or a banking crisis.

“The banks cannot put up with this kind of strain . . . it’s kind of like being a patient and your doctor, who would be the central bank, is subjecting you to stimulants and depressants whether its quantitative easing or negative interest rates.”

FEDERAL RESERVE’S MISCONCEPTIONS

Regarding the nature of growth, history shows that the key is a high level of savings and decreasing government intervention. Another is the idea of deflation being bad; for example, the US experienced experienced two 30-40 year periods where the price level fell by half, but it was also the greatest period of growth in US history. The Federal Reserve also has misconceptions about inflation’s impact on unemployment, and interest rates, which could cause a banking crisis.

ADVICE FOR INVESTORS

If people believe that the oil market will create a banking crisis in the future, then they need to look at assets outside of the banking system. Gold and silver should absolutely be considered as part of their portfolio since it’s much safer than a number of currencies, as it has alternative value. Farmland is also an excellent inflation hedge and pays a dividend, unlike precious metals.

“A lower oil price, although all things being equal is good, there are some real dangers: there is the danger it could increase interest rates, there is the danger it could increase inflation levels… and there is the danger it could induce a banking system crisis.”

Abstract by: Annie Zhou: a2zhou@ryerson.ca

Video Editing by: Min Jung Kim <minjung.kim@ryerson.ca


01/27/2016 - Investing Techniques In Financial Repression: Profiting When Stock Markets Fall

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With increasing signs of a global recession, stock markets throughout the world have experienced one of the worst annual starts in history.

Many investors fear 2016 will bring another stock market downturn similar to 2000 and 2008. While investors can protect themselves by selling equities or even shorting the stock market, both of these approaches involve potential problems. An options strategy offers a third alternative with the potential for sizeable profits.

WindRock interviews Ed Walczak, Senior Portfolio Manager of the Catalyst Hedged Futures Fund, about the use of an S&P 500 options strategy.

LINK HERE to the podcast

LINK HERE for more information on WindRock


12/03/2015 - Brett Rentmeester Outlines: APPROACHES TO SOLVING YIELD CHASING & HIGH VALUATION RISKS

FRA Co-Founder Gordon T. Long interviews Brett Rentmeester on Austrian economics and the importance of having an entrepreneurial mindset in investment.  Brent Rentmeester is the president of Windrock Wealth Management and has been in the wealth asset management for over 18years. Mr Rentmeester believes the uniqueness of Windrock is its focus on the macroeconomic picture, Austrian economics and what it all means for investment implications as well as an entrepreneurial mindset on how to find investment opportunities.

The Austrian school to him is the “acknowledgement of the influence that central banks have on the business cycle and interest rate and therefore the opportunities left for investment”.

He mentions that the traditional stock, bond portfolio is under a lot of challenge going forward because there is no real and safe income anywhere today. As a result people are becoming speculators and risk takers even when they don’t want to.

Brett believes having an entrepreneur mindset when investing, is the key to addressing the dilemma of income and the future of investment. Secure private lending is lending money to borrowers that is backed by real tangible assets or an income stream. According to him, what makes this a unique category is that it addresses the pockets of lending that is being neglected by the big banks as a result of  the financial banking distress that took place in 2008.

On examples of secure private lending, Brett highlights 3 different categories with his examples. He explains that in auctioned rental properties, the government organizations Fannie Mae and Freddie Mac by law are restricted from buying mortgages on such properties until after 2 years, this results in a niche market for private lenders. “In energy markets more states are moving towards a deregulated market. What this means is that a consumer can buy energy from a variety of energy companies. Now this system is facilitated by third party brokers who go door to door offering this energy from various energy companies. Now because the brokers want the commissions up front and the energy companies can’t provide it, we see people coming in to pay the brokers a discounted fee upfront and then agree to collect the 3year contract provided by the energy companies.

Trade financing

“Global trade happens between different parties but often times it’s financed by big banks, trade receivables. So one party needs to buy goods and a supplier supplies them but someone’s got to finance that transaction and it’s often the third party bank”.

Due to new regulations, banks are required to reserve more capital in such situations, as a result an opportunity is created for private money to finance the transaction between the customer and supplier.

“Rather than taking on more risk you don’t have to today, you just have to be more creative”

– Gordon. T. Long.

Brett echoes this sentiment saying:

“So much of the industry and investors think in a very narrow box of stocks, bonds and maybe hedge funds but there’s a lot of things outside of that, that if you open your mind to the opportunities, are quite interesting to research”.

Abstract written by Chukwuma Uwaga – chuwaga@gmail.com


10/30/2015 - Chris Casey: The Austrian Case for Inflation

Special Guest: Chris Casey – Managing Director, WindRock Wealth Management

 

FRA Co-Founder, Gordon T. Long interviewed Chris Casey of Windrock Wealth Management on the concept of inflation and other applications of Austrian economics to investment theory.  Mr. Casey, an Austrian economist, is a frequent speaker and writer on macroeconomic topics and their related investment implications.

WHAT IS AUSTRIAN ECONOMICS AND WHY DOES IT MATTER?

The Austrian school offers the “most realistic interpretation” of society and economics according to Mr. Casey.  Gordon agrees in noting that “mathematical models are only as good as their assumptions.”  While equations and models may be useful as a construct to frame concepts, any social science cannot be scientifically tested due to the inability to control the countless variables at work.  As such, Mr. Casey prefers the Austrian approach which “looks at basic self-evident axioms as it relates to mankind in nature and then uses deductive reasoning to describe how the real world works.”  According to Mr. Casey, the unique Austrian explanations of inflation and the business cycle (recessions) have direct applications to practical investment ideas.

THE AUSTRIAN EXPLANATION OF RECESSIONS

Most mainstream economists believe recessions are inherent to capitalism since their repeated cycles largely began during the industrial revolution.  The Austrian school recognizes a different causation occurring at the same time: fiat money with or without central banking.  By artificially increasing the money supply through fiat money, interest rate levels are temporarily lowered.  This incents businesses and individuals to make investment decisions they would not otherwise have made: in short, malinvestments.  Recessions to liquidate the inevitably follow monetary mischief.

THE AUSTRIAN EXPLANATION OF INFLATION

The Keynesian school of economics has two theories of inflation which fail to comport with reality and are theoretically faulty.  Their “demand-pull” explanation requires full employment and full capacity in an economy, but Mr. Casey demonstrates that fails to account for a doubling of prices during the 1970’s during economic weakness.

The “cost-push” theory is equally wrong.  By blaming a particular price increase in a commodity such as oil for all price increases, it would have predicted pronounced inflation and deflation over the last 15 years as the oil price gyrated wildly.  In addition, it is theoretically faulty as more money spent on oil means less money is spent on other goods and services – which lowers their prices and renders the overall price level largely unaffected.

“Prices are merely a function of the supply and demand for money” states Mr. Casey.  More supply means dollars are worth less while higher demand lowers prices as people seek to increase cash balances by selling goods and services through lower prices.

WHEN WILL WE EXPERIENCE INFLATION?

Mr. Casey believes that “once we have another downturn, the Fed . . . will step right in.  Once we have that . . . we’ll really start to see the inflation take off.”

What will the Federal Reserve’s next move be?  They have other options besides another round of quantitative easing.  Mr. Casey notes they may stop paying interest on excess reserves held by commercial banks at the Federal Reserve, and they may also lower the reserve requirement which could have a pronounced and immediate impact on increasing the supply of money.

WHAT SHOULD INVESTORS DO?

“Timing is everything, so utilize investments which pay well now, but in an inflation will be a home run.”

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08/31/2015 - Chris Casey Talks Financial Repression & the Myth of Money Velocity

Special Guest: Chris Casey – Managing Director, WindRock Wealth Management

 

CHRIS CASEY DISCUSSES TYPES OF FINANCIAL REPRESSION, THE MYTH OF MONETARY VELOCITY, AND WHAT IT MEANS FOR INVESTORS.

FRA Co-Founder Gordon T. Long interviewed Chris Casey of Windrock Wealth Management on the monetary policy aspects of financial repression.  Mr. Casey, an Austrian economist, is a frequent speaker and writer on macroeconomic topics and their related investment implications.

TYPES OF FINANCIAL REPRESSION

“Financial repression can best be described as government intervention in the financial markets which causes distortions not only within financial markets, but throughout the economy.”

According to Mr. Casey, financial repression can take direct and indirect forms.  The most damaging form of indirect financial repression is the expansion of the money supply decreases interest rates.  The artificially lowered interest rate structure causes widespread malinvestment within an economy.

All of this would perhaps be tolerable if monetary policy actually stimulated the economy, but Mr. Casey states that even Federal Reserve economists have recognized the ineffectiveness of the multiple quantitative easing programs.

THE MYTH OF MONETARY VELOCITY

Mainstream economists believe inflation is currently mitigated by today’s historically low monetary velocity (“the number of times one dollar is spent to buy goods and services per unit of time”), so the money supply can be expanded without the damaging effects of inflation.  Chris Casey takes issue with this as well as the very concept of velocity.

“Velocity has no impact whatsoever, in fact it is a meaningless statistic.”

Worse, the theoretical construct from which the concept of velocity derives, the Fisher Equation of Exchange, is equally faulty.  This equation attempts to explain the price level within an economy, but while it includes the supply of money, it ignores the demand for money which renders it useless.   A useless theory in the wrong hands can create disastrous policy:

“The real danger is that by looking at velocity, by being focused on velocity, mainstream economists have been focusing on a false measure which creates false decisions which is going to have a very real impact on investors.”

WHAT SHOULD INVESTORS DO?

Where may the faulty policy decisions lead the U.S. economy?  Chris Casey believes that “the endgame eventually will be a massive inflationary recession.”  Gordon T. Long then asked Mr. Casey:

“What could you suggest to our listeners that they should be doing or thinking about to protect themselves in this environment?”

After recommending investors consider becoming fairly liquid, Chris Casey addressed how to profit from the coming economic environment:

“Build a portfolio of hard assets.  You want to look at anything from precious metals to certain types of real estate such as rental residential real estate to farmland.  You potentially want to look at foreign currencies to diversify from the U.S. dollar despite the dollar’s strength over the last year.”