Mises and Hayek predicted the great depression, what is the austrian school predicting about our current crises?
I’m certainly no economist but things aren’t looking good. I’d think that the dollar is damn near ready to completely collapse and so is the rest of our economy. But then again, I’m no economist. It just looks bad from a consumers point of view.
This is a very good question. I think yes, it does. However, for those who know, can the ABCT predict how deep it will go?
We’re in it.
Mises observing the credit expansion in the 20s predicted the bust even during the boom. But today the boom is already over.
Booms are built on credit expansion, where a single dollar is turned into many through fractional reserve banking. The problem with this is that if a single dollar is demanded back from the bank, the bank must demand repayment of several dollars in order to supply it. If they don’t supply the dollar there is a bank run, if they do supply it then credit contracts. This is the business cycle.
The Federal Reserve was created to allow banks to continue to expand credit even during recessions. The popular myth that the Fed “stabilizes” the economy is true in the sense that it seeks to allow the transfer of wealth to continue constantly without fear of market reaction.
The Fed has been pumping dollars into the economy for decades in order to keep the bust from coming. It must expand credit more quickly than it can contract. But its a moving target, the lower the reserve rate the more quickly it will contract.
Our economy is steered by institutions, not the market. To predict the economy, you must predict the institutions.
I’m no economist, but I’d find a depresssion (which is a prolonged recession) extremely unlikely. The only way for that to occur would be for the government to institute disastrous policies in reaction to the recession (which is what was done during the Great Depression). I don’t think that is going to happen; policymakers have learned something over the past 80 years, and they have no incentive to create an economic disaster.
No they haven’t. The Fed is pumping more and more money into the system to shore it up, all the while they are debasing what value the dollar still holds. The government continues to deficit spend and if Hitlery or Osama Obama get into the White House you can expect even more. Then we have the so-called “economic stimulus bill” that Bush is pushing for, which Congress approved, and which is on it’s way. I forget the numbers, something like $185 billion – and where are we getting that money? From the large surpluses we have? Doubt it. Either the Chinese are footing that bill or the Fed is gearing up those printing presses. Either way it stands to further destroy this economy. No, as far as I’m concerned we are screwed. They can call it a recession, depression, bubble or hot dogs. It doesn’t matter. It all equals the destruction of the middle class, desimation of the economy and the dollar and the introduction of the North American Union Amero as our savior!
Stock up on bullets and guns now while you can still buy them. It’s going to be one hell of a ride!
I predict a complete breakdown of the monetary and banking system, which will force a return to barter. Such government as arises after such a disaster won’t learn a damn thing, of course, and will just set up another central banking system and start the whole process all over again.
Nope, don’t want commodity money and 100% reserve banking. Government couldn’t spend like f****** whores if we had that.
Inflation alone - and our inflation is a pitance compared to many other countrys’ - isn’t likely to cause a depression. For one, financial markets are a lot more responsive to changes in the money supply than they used to be. We are just more able to reallocate bad investments more quickly than in the past, and all our markets are just a lot more adjusted to inflation than they were in 1929. We would need policies similar to those passed by FDR and Hoover to cause a prolonged depression. That is, artificially raising wages during a period of deflation, increasing barriers to trade, etc. I don’t think legislators are that stupid.
Well, I for instance can remember atleast some of the candidates to the White House calling for higher environmental and quality standards for imported goods.
Also, it was just a few days ago, when I discussed with a friend whether the fractional banking will go down or not. Actually we were more discussing on how fast it will take place. He is interested in buying gold and was wondering whether to invest with three or five year perspective. One interesting point he mentioned was that supposedly the FED has less gold in it’s vaults than ‘the bosses’ are claiming.
Hi Jon,
I know you tried to do a quick summary of the ABCT, but you should still mention the whole malinvestments phenomenon that occurs as a result of this credit expansion. Bank runs do not cause recessions, they are a result of them, and exacerbate the process. But bank runs are hardly the root of the problem.
“Our economy is steered by institutions, not the market. To predict the economy, you must predict the institutions.” I liked that quote.
To Grant, what we see today is that the Fed has realised that a recession is overdue, and so it has decided to prolong the boom. Its hard to say if we’re in a recession or not since the government fudges a load of statistics, but I’d say we hit it about a month before the Fed panicked and dropped its rates. Although I haven’t checked, maybe the lower rates have had their effect and we’re actually seeing a delay of the recession.
In the end though, the more we delay it, the harder it will hit us, so I don’t think policy makers have learnt anything at all. In fact, from a very cynical point of view, its in the interests of government to create a disaster, and then start a war invoking the broken window fallacy, thus expanding the powers of government even further. As long as they can keep spinning their own mistakes as the results of exogenous factors of market failure, they won’t have much trouble.
Whether other countries are shooting their feet more than the US is open to debate. If US interest rates are among the lowest in the world and US government expenditure and debt are among the highest in the world (relative to the GDP) then it’s hard to imagine how they would have avoided inflating at equal or much higher rates than most of the rest of the world. I think that the only reason all the inflation that the above factors would usually cause has largely been avoided is because up until now this inflation has been exported to other countries, who have locked the problem up in pandora’s boxes for years by keeping US dollar reserves in large quantities. If the US dollar should loose favor among those countries as the currency of choice for reserves then all of the dollars that the US has been printing for many many decades - pretty much their entire current account deficit - will come home to roost and you’ll finally see the very real effects of what has been a very real (although up until now hidden) monetary inflation in the US.
So that’s the most immenent concern - will foreign central banks continue to hold US dollar reserves? The answer so far appears to be no. Some years ago the Australian prime minister called upon APEC members for an “orderly withdrawl from the dollar”, since even at that point it was clear that they all wanted out, but they didn’t want their withdrawl to cause a global economic crisis… something they’ll be hard pressed to avoid quite frankly. The problem is one which is well known to game theorists and cartel operators - everyone who currently has US dollars wants to spend them before they go down in value further. So the Chinese are spending them on oil, banks, trains, planes and anything else they can get their paws on - as are the sovereign wealth funds… which is pumping these dollars back into the international market and pushing up commodity prices. Seriously, does anyone really believe global demand for milk last year went up by enough to justify a 40% price increase? There are pretty much the same number of people on the planet so why all of a sudden did they start to want milk last year? Surely they wanted it the year before as well - it’s not like they sat around starving sniffing their noses at milk and choosing instead to eat grubs and berries. The increase in global prices is a direct result of monetary inflation - and a big driver of that monetary inflation is the fact that people (non Americans mainly) are finally spending all their US dollars - and that becase they no longer believe they will hold their value.
However, even if the US dollar were inflating less than most other currencies (an argument I find very strained), you still want to avoid shooting your feet… it isn’t really relevant whether everyone else is doing it or not and even if inflation weren’t a global problem it still has some nasty consequences. Any level of inflation will have a distortionary effect on the market. So even if foreign central banks continue to hold dollars, the effect will be an overproduction of goods/services in those sectors of the economy that benefit from the freshly printed cash (i.e. ONLY those sectors that see the money first) and an underproduction of goods/services in the other half of the economy (the merchants who see the cash last). This will go on and on. Those producers that benefit from the newfound cash will over invest in their sector of the market with the assumption that the increased growth they’ve seen is fueled by genuine and sustainable increased demand for what it is they are providing. The other sectors of the economy (that are paying for all this free money) cut back on production, due to ever decreasing purchasing power of static or declining revenues. Eventually everyone wakes up and says “Hey, these prices are getting really high” and the Fed says “Time to raise interest rates to get this inflation in check” and then the “subsidies” that were being provided to the first half of the economy (the ones getting all the free cash) are effectively removed from the system. What’s more, the stuff people actually wanted and needed isn’t being produced in sufficient quantities (since the other producers had all cut back on production) and you see a crash - which is not a lack of production facilities but a mismatch between supply and demand. A crash is a massive oversupply of houses when people actually want beef and chicken.
And for news regarding some of the most important players on that front:
http://www.reuters.com/article/ousivMolt/idUSL2515874520080225?pageNumber=1&virtualBrandChannel=0
Time will tell how long these guys can hold out. No doubt they have enormous pressure from the US to maintain the US dollar currency peg - but when inflation is running at 13% and your central bank (the Fed for these guys) is cutting rates, you have to ask some questions about the wisdom of maintaining your current central bank. You can see why Qatar and the UAE are feeling the strain.
Sorry, that should have read “pretty much their entire national debt” and not “pretty much their entire current account deficit”… the national debt being the sum of historic obligations where the current account deficit is merely the shortfall over a specified period.
Low interest rates don’t necissarily mean inflation, I think its better to look at the real deal (monetary growth) than interest rates. I’d agree that currently they do indicate inflation though, since the expectation of price inflation usually pushes nomimal rates up, and the Fed is keeping them low.
But, more to the point, the US doesn’t have it so bad compared to others: http://blog.mises.org/archives/007844.asp
Well, since a large portion of new money is created by commercial banks through fractional reserve banking, and since interest rates have a direct effect on this, I think that in most cases, changes in interest rates can cause monetary supply growth in the form of credit expansion. The other main limit on monetary growth is the minimum reserve ratio. At this point, direct injections by central banks in the form of printing money occur to a far lesser degree than the credit expansion of privately owned commercial banks (fuelled by loans).
In order to be in a recession we need two quarters with a drop in real GDP, we haven’t had one…How could someone predict a depression?
I appreciate what you’re saying but what other countries are doing doesn’t make what the US is doing any better. If Hitler were to say “Look I’ve only killed 6 million Jews - is really quite triffling compared to Stalin who has killed over 20 million Russians!” then that still wouldn’t make the deaths of the 6 million that Hitler killed any less tragic. In that same vein, if your goal is to avoid a recession or a depression then I don’t think it’s a good idea to use a country that has inflated it monetary supply by 53% in the last 12 months as your yardstick.
According to the graph you posted above the US has inflated it’s total money supply by 20% in the last 12 months… this in itself is just a complete guess, since the Fed stopped publishing M3 statistics in March 2006. That alone is quite alarming, given that an ever more important component of the total money supply in recent years has been attributed to M3 (see percentage of total in the graph below):
http://en.wikipedia.org/wiki/Image:Components_of_the_United_States_money_supply.svg
However, even using the very rough 20% figure, putting this into practical terms means the printing press and the banks that feed of these have confiscated roughly 1/6th of all the value held in US dollar savings (including US dollar reserves) in just the last 12 months. This is kind of like a global 16% savings tax which is presently being used to subsidies otherwise unsustainable industries.
Set aside how countries holding US dollar reserves might feel about having lost 16% of the value of the IOUs that they accepted in exchange for products and services. Let’s be optimistic and presume the central banks are all going to hold on to this funny money. So we have another subsidy - so what? Well unlike European farm subsidies, monetary inflation has a severe weakness in that it produces inflation. The only way to avoid the negative consequences of inflation (a necessary bust to the boom) are by creating more inflation - and if you do that long enough eventually you’re will be lucky enough to get hyper inflation (like Zimbabwe and, if they don’t do something about it soon - Russia)… and not even the Fed or the banks like Hyperinflation, since it implies a complete monetary collapse.
So at one point or another, unlike European farm subsidies, even though they’re very reluctant to do so the Fed, the banks and the market in general has to say goodbye to those subsidies and say hello to increased interest rates (the only way the Fed knows how to deal with inflation - even if it is just pushing on string)… monetary contraction and market correction.
The question is not whether we’ll have a recession - a good number of people already believe it’s here. The question is how deep will it go and how long will it last… The sheer quantity of new money that’s been produced globally (not just by the US) has to make one somewhat nervous about the possible scale. Further more, the policy makers at the helm appear to be the kind of people that believe market corrections are evil and must be avoided - which might make an Austrian economist a bit concerned about the likely duration of the correction to come as well.
I think that’s why it’s called a prediction.
I reject this (agreeably widely adhered to) definition and it is not possible to measure GDP, even if the government were honest with the numbers they release. I think that a greater than normal rise in unemployment, with a reduction in real investment, stock market prices (breaking the long term trend) and production should be used. By this definition we are in a recession.