Can a decrease in savings cause recessions?

[Student]

Sorry, I misremembered your comment. I should have clicked back to the first page to double check.

[Marko]

No problem. I`m finding your politeness quite disarming.

[DD5]

@Student

“Interest” is defined EXPLICITLY as a fee paid for borrowed assets.

If by “borrow” you mean the loans market, i.e., banks, then this is not true according to Austrian economics. The loan market is a relatively small part of the entire time market where the rate of return in the ERE is the interest rate.

[Esuric]

@Tobbog

Suppose we had the gold standard and every major bank held 100% of deposits in reserve.

Now, the only determinant of an economy’s production structure would be real savings. What would happen then, if a majority of savers decided, for whatever reason, to decrease savings by a large portion. Wouldn’t that drive up real interest rates and thereby eliminate many business projects, cause major short-term unemployment, secondary deflation and so on, in short, wouldn’t that cause a typical Austrian Business Cycle?

If the ratio of consumption to savings increases too much in favor of the former, then you will have a recession (Hayek and Austrians are over-consumptionist’s, as opposed to Keynesians and Marxists who are underconsumptionist’s). Business cycles, on the other hand, are caused by a divergence in the market rate of interest relative to the natural rate. Thus, the cause of the recession and the business cycle are not the same. You can never get rid of recessions, but you can, at least theoretically, eliminate the business cycle.

[nirgrahamUK]

just curious, within the context of this thread, are we using the state economists definition of recession (which appeals to GDP figures)?, or are we taking a man on the street view?, or is there a distinctly Austrian conception that is the focus?

[Marko]

When long term projects realise they are in trouble.

[Tobbog]

@Esuric

If the ratio of consumption to savings increases too much in favor of the former, then you will have a recession (Hayek and Austrians are over-consumptionist’s, as opposed to Keynesians and Marxists who are underconsumptionist’s).

So you would consent to the statement that recessions are possible without government intervention?

@Esuric

Thus, the cause of the recession and the business cycle are not the same. You can never get rid of recessions, but you can, at least theoretically, eliminate the business cycle.

What is the exact difference between a recession and a business cycle?

[bearing01]

@Tobbog

What is the exact difference between a recession and a business cycle?

@bearing01

The Austrian business cycle is created by the economy becoming depleted of real wealth due to a central bank’s inflationary money creation policy. Real wealth is depleted because consumers spending counterfeit money (creating loans out of thin air) are securing goods / wealth simultaneously as producers - who earn money by producing goods - try to consume. If producers saved their money and did not spend it, that money would be lent to the debtors instead of a printing press having to create it. Debtors would then consume the goods that the producing savers are deciding to consume in the future (when they are re-created by the debtors).

as per:Economic Recovery Requires Capital Accumulation, Not Government “Stimulus Packages”, by George Reisman

In a nut shell: Low interest rates due to central bank monetary expansion will misallocate capital in the structure of production - misleading producers to get them to invest in more advanced and higher divisions of production, over a longer period of time. The demand for low order (final product) consumer goods remains higher than it should be as per the interest rate signal to producers. Producers therefore misallocate capital in processes to turn out those goods that are in immediate high demand, mistakenly producing them later rather than sooner. The Business Cycle acts to reallocate the structure of production to shorten the production time. Employees hired for high orders of production get laid off and rehired to work in areas of low order production.

A “recession” is a new label politicians use for depression. Only thing is that the term “depression” became a terrible frightening word after FDRoosevelt turned what could have been a normal “depression” (over in a year) into a lost decade due to his socialistic and fascist policies.

But an economy that uses 100% reserve banking or uses commodity money will not suffer the massive misallocation of capital and “recessions” as we have seen since the invention of the Federal Reserve or other central banks. Yes, the free market can have a misallocation, but it’s not severe like that caused by central economic planning of banking cartels using fiat money - as does the Federal Reserve.

On the gold standard there were minor economic adjustments along the way. Entrepreneurs are human and are not perfect forecasters. But usually, in history, when recessions/depressions were severe enough to write about in the history books, they were a result of the bankers inflating the money supply (counterfeiting certificates / claims on stored gold) and this created economic distortion. That or kings would clip or debase the gold coins and the theft to make more coins. Then a deflationary depression was created by a contraction of the money supply - in returning back to the gold standard - while reallocating the economy.