Hazlitt’s Timeless Wisdom

CNBC’s Rick Santelli used his “Santelli Exchange” segment on March 14th to highlight the wisdom of Hazlitt’s Economics in One Lesson written in 1946.

The financial network’s tea party rabble rouser and sparring partner to economist Steve Liesman said, Warren Buffett had talked that morning about reading Timothy Geithner’s new book Stress Test: Reflections on Financial Crisis and the Oracle of Omaha said maybe the government saved the world back in 2008.

Santelli highlighted chapter six from Hazlitt’s great work where he wrote that if government makes loans, that private lenders won’t make, to entities that can’t pay back, economic signals get destroyed, and chaos ensues. Hazlitt also emphasized that all credit is debt.

Another Hazlitt fan, Jim Grant of Grant’s Interest Rate Observer, delivered the Henry Hazlitt Memorial Lecture in Auburn, Alabama less than a week after Santelli’s comments.  Grant said, “I can’t imagine what the world would be like without Economics In One Lesson.”

The  very witty Grant spoke in a humbled tone of being asked to provide the Hazlitt lecture at the Mises Institute, comparing it to a baseball journalist being asked to speak in Cooperstown.   Grant’s hero was one of the few giants in financial journalism where, Grants said, “the pinnacle, is still at sea level.”

At the young age of 22 Hazlitt figured out the future involves too many factors for anyone to predict, not to mention just knowing what the relevant factors are. Grant admitted it took him 40 years in the business to finally realize he couldn’t understand the future.

Unfortunately the folks working at the Eccles Building have not come to this realization. The PhDs believe they can depreciate the currency at the proper rate to cause everyone gainful employment and live happily ever after.

Hazlitt was on the job during a depression that no one ever mentions—the 1920-21 downturn. Christine Romer called the episode, “a bump in the road.” Grant disagrees. While Romer may use analytics to make her case, he mentions the song that came out in 1921, “Ain’t We Got Fun.” After reciting a few lines, Grant told the audience, “They don’t write songs about recessions. It was a depression.”

Prices plunged in 1920-21, but the Fed, having just been created a few years before was “not quite out of short pants.” Lord Keynes had not written The General Theory and there were no Bernankes or Yellens running the central bank. In response to deflation, the Fed raised interest rates.

Grant looked into the camera and asked, “How did we ever recover, Dr. Krugman? I know you’re watching.”

Of course no one has heard of this depression because it was over so quickly and they certainly don’t talk about it at the Fed’s monthly meetings. The government did not enable capitalism’s losers with low rates and bailouts. Before they knew it the economy was back on track. Murray Rothbard said the only way to treat depression is with laissez faire. “This experience would seem to prove Rothbard right,” Grant said.

The financial historian and wordsmith emphasized that it was not just crops and commodities that fell in price, but also stocks. Coca-Cola traded at just 1.7 times earnings and yielded 5 percent. Radio Company of America shares traded at one times earnings. At the time, the tender new Fed was not yet in the securities boosting business as it is today, where “a higher stock market is part of public policy.”

Like Santelli, Grant mentioned 1946 and a couple of Hazlitt columns that “could have been written yesterday.”    “Economic experts see deflation as the problem,” cracked Hazlitt snidely in one piece while titling another, “The Fetish of Low Interest Rates.” He explained that lowering rates by government fiat requires more money (inflation).

Today’s investors don’t realize artificially low rates make stocks artificially high in price as future earnings are capitalized at a lower than natural discount rate to create present values. The Fed’s stomping on rates has distorted this calculus making the market “a house of mirrors.” Valuations would be much different if interest rates were “organic, free-range, and local,” instead of being nurtured in the Fed’s “hothouse.”

While Grant and his audience of hard money true believers look with disdain on the Fed’s distorting rate policy, corporate executives are all for it. Executives for Homebuilder Toll Brothers thanked their banker on a recent earnings call for arranging a loan with a two percent rate. Grant pointed out the company should give credit where credit is due and thank Janet Yellen.

Hazlitt was not a trained economist, but as Lew Rockwell writes, “he was familiar with the work of every important thinker in nearly every field. At an early age, he lacked in formal education but ended in knowing more than most learned men of any age; and he certainly was more principled than most.”

Hazlitt would, by his estimation,  write 10 millions words, mostly about economics. He was surprised when Economics in One Lesson became his signature work. “He wrote it to expose the popular fallacies of its day,” Rockwell explains. “He did not know that those fallacies would be government policy for the duration of the century.”

What Janet Yellen is doing has been done time and time again since John Law’s system created the Mississippi Bubble in 1720. It never ends well. As long as there is an over-reaching government and ever-expanding central bank, Hazlitt will be looked to for guidance and inspiration.  He warned us then. He warns us now.

 

One Response to “Hazlitt’s Timeless Wisdom”

  1. Brilliant piece and thanks Rick for the Austrian perspective redux…you just got to love the timeless wisdom of Hazlitt.

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