John Butler's Blog

Friedrich Hayek was the first Austrian School economist to win the Nobel Memorial Prize in Economic Science. Yet Hayek took issue with the characterization of modern economics as a ‘science’ in the conventional sense. This is because the scientific method requires theories to be falsifiable and repeatable under stable conditions.

In that rare moment, when prices soar, it might be tempting to shoot the messenger—blame the speculator—but this is unfair. Sometimes they take big risks. Sometimes they take huge losses or reap huge rewards.

Created in 2008 by the mysterious ‘Satoshi Nakamoto’, in the past few months bitcoin has gone from a fringe financial technology topic to a mainstream media phenomenon. The debate is now raging as to whether bitcoin is, or is not, a sound form of alternative money.

For those rich in assets, 2013 was a good year. Equity markets, especially in the US, rose substantially. Property markets continued their recovery. Even bonds, which lose value when interest rates rise, did well overall due to spread compression and the generous ‘roll-yield’ associated with steep yield curves.

A quick look at history demonstrates that new Federal Reserve chairmen are invariably confronted with a financial crisis within months of taking up the single most powerful economic policy role in the world. A coincidence perhaps?

In a recent opinion piece published on Reuters, Professor Charles Postel twists himself into extreme pretzel logic attempting to explain that elastic, manipulated paper money favours the ‘have nots’ whereas inelastic, gold-backed money favours the ‘haves’.

The Brazilian Highlands comprise potentially the most productive agricultural region on earth. Rich in soil, sunshine and water, in theory their produce could feed most of the world. The present reality, however, is far different.

Since 1981, every August the great and the good from US and international monetary circles travel to the small but well-known Rocky Mountain resort of Jackson Hole to enlighten one another as to how best to manage or micromanage their respective economies.

The Fed recently triggered a spike in Treasury bond yields with a gentle hint that it might begin to scale back its purchases later this year. Markets appear to have taken the Fed at its word, in so doing providing clear evidence that quantitative easing (QE) has created a large bond bubble.

Back in 2002 Warren Buffet famously proclaimed that derivatives were ‘financial weapons of mass destruction’ (FWMDs). Time has proven this view to be correct. It is difficult to imagine that the US housing and general global credit bubble of 2004-07 could have formed without the widespread use of collateralized debt obligations (CDOs) and various other products of early 21st century financial engineering.