22 Nov 2010

Murphy vs. Mish

Financial Economics, Shameless Self-Promotion 12 Comments

At the behest of several readers, today at Mises.org I tackled once again Mish’s credit-deflation paradigm. Here’s a good excerpt:

When Mish wrote the above, the S&P 500 was 935. As the quote above tells us, at this time Mish was predicting that stocks would then fall down to 600 or maybe even 450. Instead, the “sucker rally” kept going, such that exactly one year later, the S&P 500 stood at 1137. To switch to percentages, this means that in early 2009, Mish was calling for stocks to drop anywhere from 35 percent to 52 percent. Instead, stocks steadily rose 22 percent. That’s a phenomenally bad prediction.

I said it twice in the article, and I’ll say it again here: I am not claiming that the deflationists are totally wrong, and that people like Gary North and me–who have been faithful to our heritage as economists, in worrying about new money creation leading to rising prices–have been totally right.

In fact, Paul Krugman and Scott Sumner could understandably claim that they have called things much better than the Mishian inflationistas or deflationistas.

So, my point in writing this Mish piece was to make sure that his fans understand just how much his mantra has been wrong, since early 2009.

12 Responses to “Murphy vs. Mish”

  1. Mike Sandifer says:


    Given your statement about the disinflation predictions by Krugman and Sumner, at what point do you see it necessary to at least revise your Austrian perspectives in significant ways?

    • RG says:

      I’ve found the Austrian perspective consistent with disinflation. I’ve also found it to be consistent with dispriceinflation. I just hope the Austrians are still a bit premature about disbeingthebegginingofhyperinflation.

      • bobmurphy says:

        That was funny enough to make me overlook your anti-religious rants. (I hope I’m not mixing you up with somebody else.)

        • RG says:

          The only rant I can remember was directed at your pal Gene. I’m not quite certain of his divinity.

          • bobmurphy says:

            Hmm maybe that’s what I’m thinking of. Yeah, I’m pretty sure he’s not divine.

    • bobmurphy says:

      I will tell Krugman to his face, during our debate, what would have to happen for me to publicly recant.

      • Mike Sandifer says:

        Maybe you should state your criteria for recant now, so Krugman thinks there’s some hope of actually winning in the eyes of Austrian fans.

  2. AP Lerner says:

    From the essay: “Yet the stock market crashed while total bank credit stagnated and then shot up.”

    Actually, bank credit never shot up. The short burst on the graph you see is a change in accounting rules, forcing banks to bring a lot of credit back on balance sheet. What you see there is small portion of the shadow banking system banking being brought back on balance sheet, and then included in the data set. The destruction of credit has continued interrupted: that was NOT a burst of new credit creation.

    • bobmurphy says:

      Well, fair enough; I have no reason to doubt you on that point. Still, the stock market should not have gone up throughout 2009 per Mish.

      So let me clarify my position: Mish can say, “Well, this is a blip, just you wait, massive deflation is a a-comin’.”

      But what he CAN’T say is, “Everything is proceeding just as I said it would.”

      • GoinFawr says:

        Nice work Mr.Murphy.

  3. Scott says:

    That was a nice essay. Very diplomatic and fair.

    But it seems to me that the center of the argument between deflationists such as Mish, Robert Prechter, and Vox Day and guys like you and Gary North is how you define what money is. The deflationists seem to base their analyses on the idea that debt and money are interchangeable and indistinguishable. If they didn’t believe that, it seems to me that their predictions would suddenly morph into looking pretty much like yours.

    I suspect that as long as that disagreement stands, nobody is going to be converted. But maybe showing that predictions based on this idea are turning out wrong will stand as sufficient evidence to attack the argument indirectly.

    • RG says:

      I’ll go one step further and venture to say they just don’t understand money…or at least money absent fraud.