06 Jan 2010

NYU’s Divergent Offspring: An Experiment in Austrian vs. Mainstream Economics

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Von Pepe sent me this WSJ survey of economists about the economy in 2010. Michael Feroli of J.P. Morgan Chase predicted: ““We’ll have above-trend growth, low inflation, and the fed on hold through 2010.”

This is interesting because Mike was the only other American in my cohort in NYU’s PhD program. It was Mike who came up with the great line–as we were studying for a math exam in which the Turks and Japanese were sure to beat us–that after the qualifiers at the end of the year, there would be some ethnic cleansing. (I.e. we were goners.)

Well somehow our American can-do attitude got us both through the program. In all seriousness, Mike was/is a really sharp guy, and a big free market economist to boot. It’s just that he was more of a Chicago School free market guy, as opposed to the quaint Austrians with their verbal analysis.

So it will be interesting to see which of our predictions pans out for 2010. In contrast to Mike, I am expecting below-trend growth (in fact I expect what will be called a “double dip” and possibly an outright crash) and surging (price) inflation. I think by “on hold” Mike means that the Fed won’t raise rates. On this point I’m not sure what will happen. I agree that the Fed will continue its interventions, especially through buying assets and throwing them onto its balance sheet. But if, say, 10-year Treasurys are yielding 5+ percent by March, the Fed is going to be hard pressed to keep its interest rate targets the same.

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