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Be Skeptical of Austrian Economists' Warnings of Dollar Doom

NEW YORK (TheStreet) -- The dollar is under pressure, with the Chinese yuan expected to break through 6 to the dollar this year, amid slides of other major currencies.

But there's a growing chorus of voices expecting a much bigger move, even an imminent economic collapse.

The Austrian school of economics holds that there are immutable laws of economics, laws that governments are powerless to overcome in the long term. They reject Keynesian efforts to counteract the business cycle with fiscal policy, and they also reject monetarist efforts to use the money supply against it.

Austrian economist Friedrich Hayek won the 1974 Nobel Prize in Economics for explaining this theory of money.

Austrians insist that any short-term gain from manipulating the markets leads to a long-term collapse, and a growing number are calling for a collapse this year. They see distortions in the availability of credit as the cause of recession, meaning recessions can be salutary, readjusting the supply of credit to what can be sustained by incomes.

In fact, most Austrian economists want the Federal Reserve abolished. Their views were represented in the last two presidential races by Ron Paul.

His son Sen. Rand Paul (R., Ky.) and other conservatives continue to demand an audit of the Federal Reserve.

Absent a dollar tied to silver or gold, the Austrians are predicting that the Fed's manipulation of the money supply will soon be "found out" and that the result will be hyperinflation and destruction of dollar-denominated assets, as early as this year.

Among the loudest of today's Austrians is David Stockman, who headed the Office of Management and Budget under President Reagan. His book, The Great Deformation: The Corruption of Capitalism in America, is a full-throated defense of Austrian theory.

There is, in fact, evidence that central bankers and global traders are diversifying away from the dollar.

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