1/ The roots of the Austrian School can be traced back to its founder Carl Menger, whose 1871 book Principles of Economics provided a new foundation for economic theory and solved the age-old "Paradox of Value".
From Menger's work we can derive 4 pillars of Austrian Investing.
2/ 1: The Subjective Theory of Value recognises that value is not determined by any inherent property of a good, nor by the amount of labor necessary to produce it, but by the importance an acting individual places on it for the achievement of their desired ends.
3/ 2: The Law of Diminishing Marginal Utility recognises that as more units of a homogenous good are acquired, the utility derived from each additional unit declines.
This wide-ranging insight helps explain important economic phenomena such as the historical emergence of money.
4/ 3: Methodological Individualism is the principle that economic phenomena result from the actions of individuals.
Collective magnitudes like “the people” cannot act, & therefore cannot be treated as ultimate causes.
Austrians are cautious in their use of economic aggregates.
5/ 4: Causal Realism entails basing economic explanations on the notion of cause and effect grounded in human action.
Austrians reject posited functional relationships between abstract statistical constructions such as CPI, GDP or unemployment.
6/ These four pillars provide us with a framework for thinking about economics.
Underpinning each is an acknowledgement of a fundamental fact about economic life: that humans act under conditions of scarcity.
When we employ resources there is always the need to make trade-offs.
7/ Scarcity is key to understanding the relationship between consumption, investment and economic growth.
Given that resources are finite at any given time, if we want to increase investment and thereby increase the rate of growth, we need first to reduce present consumption.
8/ "Capital" is another concept important for understanding economic growth.
Unlike Keynesians, Austrians recognise that a nation's capital is a structure made up of distinct goods tailored to specific production stages.
Capital isn't amorphous, nor is it the same as "money".
9/ In a free market, interest rates play an important role in coordinating economic activity.
They help society find the right balance between consumption and investment.
But investors today live in a world where rates are heavily distorted by central bank intervention.
10/ This intervention leads to the periodic booms and busts that are definitive of modern economies.
For investors looking to make sense of this phenomenon, Austrian Business Cycle Theory (ABCT) provides an explanation.
15/ Whilst timings are notoriously hard to predict, understanding the character of cycles is key to protecting investments.
Metrics such as the Misesian Stationarity Index (Tobin's Q) and Rothbard-Salerno True Money Supply can help us gauge where we are in the cycle.
16/ Several prominent investment strategies have been influenced by ABCT.
They include Harry Brown’s “Permanent Portfolio” which balances gold, cash, stocks and bonds to manage risks of the four scenarios for inflation and growth that are brought about by business cycles.
17/ The recent rise of digital currencies like bitcoin has garnered intense interest from Austrians.
There are risks around its development, but Austrian theory suggests that bitcoin's attributes make it well suited to grow in use as a store of value.
There is often an overlooked tax story at the heart of humanity’s defining events.
@DominicFrisby's book Daylight Robbery provides a fascinating account of the ways in which tax has shaped our past, and will change our future.
This 15 tweet thread explains.👇
1/ Civilisations tend to ascend at times of limited government, strong property rights and low taxes.
But governments often have short-term incentives to expand.
Since tax rises tend to be strongly resisted by the population, they are often introduced during times of crisis.
2/ When crises occur, new taxes are presented as temporary, but often become permanent e.g.
>British (1842) and US (1861) incomes taxes, still in place today
>The British window tax of 1696 (not repealed until 1851)
>The 1816 Dallas Tariff which remained until the US Civil War.
In "A Masterclass in Economic Calculation" @michael_saylor talks to @PrestonPysh about inflation and why he expects more companies to put bitcoin on their balance sheet.
This 6 tweet thread summarizes Michael's argument.
1/ CPI is losing relevance as a measure of inflation.
Businesses looking to understand how much purchasing power their cash will lose should track M2 money supply growth, which approximates the cost of capital.
While US CPI inflation rose only 0.2% in 2020, M2 soared by 24%.
2/ One reason for the disparity is that key items in the basket of goods that make up the CPI are subject to strong deflationary pressure.
This is especially true for intangible services such as software and digital entertainment where variable costs per unit are low.
Weimar Germany's hyperinflation provides perhaps the most dramatic example of the destruction that ensues when money dies.
This 16 tweet thread summarizes Adam Fergusson's definitive account, and explores the lessons we can learn from this dark period in German history.
1/ During WWI, European powers suspended the gold convertibility of their currencies, issued bonds and printed new bills, as a means of financing their war efforts.
With varying degrees of severity, each introduced price controls in a misguided attempt to suppress inflation.
2/ German price controls were the most stringently enforced in Europe.
At the same time, international isolation forced the government to rely heavily on inflationary domestic bond issuance for their financing.
Economic ruin served as a contributing factor to Germany's defeat.
In 1997, "The Sovereign Individual" made predictions about the ways in which the internet will radically alter society.
Many of those predictions, including the rise of "cybercash", are playing out before our eyes.
This illustrated thread summarises the book in 12 Tweets.👇
1/ Humans have passed through three societal epochs:
1. Hunter-Gatherer Society 2. Agricultural Society 3. Industrial Society
Now, looming over the horizon, is something entirely new, a fourth age characterised by the rise of the microprocessor: Information Society.
2/ During the industrial era, in order to realise economies of scale, populations clustered around large factories.
Production clustering made it easier for governments to increase taxes on those operating within their territory, allowing the state to grow in size and power.
The manufacture of collectables by pre-historic humans was the first step on the road to creating money.
@NickSzabo4's epic essay "Shelling Out" describes how and why this happened.
This illustrated thread summarises Nick's 12,000 words in 12 Tweets.👇
1/ Most hunter gatherers lived a precarious existence on the brink of starvation.
But we know from archaeological records that they made and collected jewellery.
The fact that early humans devoted their scarce resources to this seemingly frivolous activity merits exploration.
2/ Biologist J. M. Smith drew on game theory to describe the way humans evolve to propagate their genes.
Whilst individual humans might benefit from robbing the weak, cooperative tribes do better overall. Cooperation represents the "Nash Equilibrium" that leads to group survival