I am just a beginner, have been reading Austrian Economics works since this winter. I think Austrian works are very much helpful for us beginners, because economists like Mises, Hayek and Murray N Rothbard wrote theories in simple and informative language, making Economics quite clear and understandable with irrefutable verbal logic. Nevertheless, I have some questions about international monetary system and the Austrian Trade Cycle Theory, and hope you can help me out. Any help will be appreciated:
(This question is not specifically related to Austrian School Economics)Through reading this article (link: http://www.globalresearch.ca/index.php?context=va&aid=3482) by William Engdahl, I kind of understand how the Dollar System (“Dollar Hegemony”, to quote Ron Paul, or “Dollar Imperialism”, to quote Molotov) works. But here are some words extracted from this article that I am very confused with:
"It works so: A German company, say BMW, gets dollars for its car sales in the USA. It turns the dollars over to the Bundesbank or ECB in exchange for Marks or Euros it can use. "
These words could be applied to China of course, since the currency of our country is not internationalized yet, meaning that our exporters can not sell the accumulated dollars in the Forex in exchange for RMB, which is not in Forex. BUT for the Germans and French, why can’t they just exchange the dollars for their own money (Euro) in the Forex? If they do so does it mean that the ECB would not have to accumulate dollars? (William Engdahl pointed out that ECB accumulate dollars in order to purchase dollar denominated oil, natural gas and other basic commodities, but if the German exporters did not save the dollars into ECB (as mentioned above in the words from the article) but exchange them in Forex in the first place, then ECB wouldnt have any chance to accumulate dollars. )
In the Austrian School Trade Cycle Theory, it is suggested that the artificially low interest rate can create a false signal that the demand rises, thus making more incentives there for the producers to purchase long-term capitals, but actually in the future the consumers will build back their proportion of saving and consumption, making those long term investments appear very much wasteful. However, what I do not understand is that how can the consumers build back their original proportions? If I am consumer with orginal consumption/saving proportion 8:2, then if the rate of interest was much lowered, obviously I would change my proportrion to 9:1, because like in the States, how can anyone save money at such a low interest rate?? Therefore I can’t understand how would I have to change the proportion back provided such a low interest rate.
I am not a native Eng speaker, so some of my words might look confusing. If you guys find something hard to understand (Hopefully nothin), please just ask me and I will change that.
Thank you for reading, any help will be deeply appreciated.
I thought I had replied to this earlier but perhaps it failed to post. I am a novice myself so I just want to preface with that and as such I am going to have to only focus on your 2nd question as the first one I can not provide you with an adequate response.
My understanding of the Mises-Hayek theory is that artificially low interest rates result in the false indication that savings has increased and people’s time-preferences have shifted lower. Meaning their desire for having good’s now as opposed to in the future is less. As a result of this perceived increase in consumer saving and preference for spending later, entrepenuers undertake new production or expansion of business to fullfill this need. Unfortunately when the credit expansion ceases and a retraction occur, there is no actual increase in saving to be used on all these new goods and services, causing these new producers to fail and go bankrupt. This is the bust part of the boom-bust cycle where the boom was obviously during the expansion as a result of increased monetary supply and an artificially forced down interest rate. I hope that answer was of some help.
Then I just want to confirm this: is it that the Rothbardian burst occurs only if the credit expansion is halted? (Either due to inflationary pressure or nature of fractional reserve banking)
This, as the interest rate falls, the profitability of those industries furthest from production increases. Because capital goods are discounted by less due to the decrease in the rate of interest (and especially so the further one goes from production) their prices increase, this sends a signal to investors to invest in these goods (malinvestment), this is facilitated by the influx of new credit (overinvestment) which allows these projects to go on at the same time as the production of consumers goods.
I don’t think you can get a full understanding of dollar imperialism from this article.
For this I would recommend reading:
Chapters 8 and 9 of Rothbard’s The Mystery of Banking, which explain the limits on fractional reserve banking (fiduciary inflation) whithin a free market and how the central bank removes these limits. It also explains how a central can control the inflationary power of private banks and thus coordinate the inflation throughout the industry.
Chapter 10.2.D (pg. 651) of Man, Economy and State, which explains why cartels are inherently unstable, implying the need for an external enforcer.
And finally Hoppe’s Banking, Nation States, and International Politics, which explains how the role the cental bank plays within a country in coordinating inflation, is analogous to the role the US central bank plays in the international arena in coordinating inflation amoung most countries central banks with the US Federal government, in command of overwelming military superiority relative to any other state, acting as enforcer.
Oh sry guys. What I mean by “Rothbardian burst” is that the “bust” after boom in Rothbardian (and Misesian) business cycle theory. What I want to confirm is whether in Rothbardian business cycle thoery the bust can occur if and ONLY if the interest rate go up again.
From my understanding there is no Rothbardian business cycle theory. There is the Mises-Hayek business cycle theory which Murray Rothbard views as being accurate. The theory also does not aim to stipulate criterion upon which a decline or bust, if you want to keep using that term, can happen in. It rather illustrates, amongst a variety of other things, the effects of an external source manipulating the interest rate. There really is no bust. There is just an artificially created and unsustainable boom, that eventually is liqudated. I do not think the theory aims to suggest that without a central bank there would never be any recessionary periods.
This is more or less accurate. It is the Mises - Hayek theory of the business cycle. Rothbard adhered to it and wrote an exposition of it that general serves as an introduction to the theory, and he also wrote America’s Great Depression the first part of which is devoted to explaining the business cycle and addressing rival theories. However, to my knowledge he didn’t make any significant contributions to the theory.
Most of the work on the business cycle was done by Hayek, however, it was originally spelled out by Mises who developed upon the ideas of the English Currency School, adding Austrian capital insights of Bohm Bawerk and considerations regarding the natural rate of interest and departures from it that Wicksell wrote about. Since then Huelsmann, Garrison, Huerta de Soto and others have added to the theory.
And yes, there isn’t really a boom or a bust, the terminology is somewhat incorrect. There is a period of malinvestment and consequently a period in which those investments are liquidated and resources are put back to their most productive use.
In fact what I was asking is that in ABCT, does the recession or depression phase (which I call “bust”) after the artificially created boom occur only if the interest rate rises again (from the artificially lowered level).
And that link confirms my view, with historical proof.
Good metephor in article above concerning Keynsian reaction to recessions “… They are essentially arguing that they can’t seem to get a sun tan because they don’t have enough sunblock on.”
Regarding rise in interest rates causing the ‘burst’, look at today’s shituation with historically low interest rates for your answer.
