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The Specter of Hyperinflation Looms over the Economy

October 29, 2023

The Specter of Hyperinflation Looms over the Economy

money going down hole

The threat of hyperinflation has haunted fiat money economies throughout history. Although past empires crumbled under the weight of unrestrained money printing, modern bankers at the Federal Reserve assure us that today’s financial system is immune to such a fate. Austrian business cycle theory, however, reveals that current economic stimulation may be propelling us toward a crisis of catastrophic proportions: a crack-up boom that marks the dramatic end of this boom-and-bust cycle. When a central bank expands the money supply to reinflate bubbles, it destroys the currency’s purchasing power. This endgame, in which the monetary system crumbles beneath a weak economy, represents the ultimate failure of interventionism. Once the public expects prices to keep rising, hyperinflation becomes a self-fulfilling prophecy.

The Expanding Boom-and-Bust Cycle Ends in a Crack-Up Boom

To comprehend the precarious state of America’s monetary system, we must first review the boom-and-bust cycle as formulated by Ludwig von Mises and the Austrian school. The Austrians observed that the artificial suppression of interest rates by a central bank initiates an unsustainable economic boom by promoting malinvestment. Pushing rates below natural market levels sends a distorted signal to businesses that long-term capital investment is more profitable than the economy can actually support. In the euphoric boom phase, jobs multiply and GDP grows with investment. But the investments lack economic merit, so the house of cards eventually collapses.

With the liquidation of malinvestments, the bust phase emerges: unemployment soars, output contracts, and a recession begins. Since the investments were built on quicksand, they must unwind. Each failed business further curtails consumer spending, rippling the bust through the economy. But rather than letting liquidation and market corrections occur, policymakers add stimulus, setting up a larger bubble and more painful bust down the line.

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America’s Great Depression and Austrian Business Cycle Theory

January 10, 2018

AMERICA’S GREAT DEPRESSION AND AUSTRIAN BUSINESS CYCLE THEORY 

When Murray Rothbard’s America’s Great Depression first appeared in print in 1963, the economics profession was still completely dominated by the Keynesian Revolution that began in the 1930s. Rothbard, instead, employed the “Austrian” approach to money and the business cycle to explain the causes for the Great Depression, and to analyze the misguided and counterproductive policies that were followed in the early 1930s, which, in fact, only intensified and prolonged the economic downturn.

To many of the economists in the early 1960s, Rothbard’s “Austrian” approach seemed out-of-step with the then generally accepted textbook, macroeconomic approach that focused on a highly “aggregate” analysis of economic changes and fluctuations on general output and employment as a whole. There was also the widely held presumption that governments could easily maintain economy-wide growth and stability through the use of a variety of monetary and fiscal policy tools.

Mises, Hayek and the Austrian Theory of Money and the Business Cycle

However, in the early and middle years of the 1930s, the Austrian explanation of the Great Depression was at the forefront of the theoretical and policy debates of the time. Ludwig von Mises (1881-1973), first developed this “Austrian” theory of the causes of inflations and depressions in his book, The Theory of Money and Credit (1912; 2nd revised ed., 1924) and then in his monograph, Monetary Stabilization and Cyclical Policy (1928).

But its international recognition and role in the business cycle debates and controversies in the 1930s were particularly due to Friedrich A. Hayek’s (1899-1992) version of the theory as presented in his works, Prices and Production (1932) Monetary Theory and the Trade Cycle (1933), and Profits, Interest and Investment (1939). A professor of economics at the London School of Economics throughout the 1930s and 1940s, Hayek was, at the time, considered by many to be the main competitor against John Maynard Keynes’s “New Economics” that emerged out of Keynes’s 1936 book, The General Theory of Employment, Interest and Money.

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How money creation threatens hyperinflation

March 30, 2015

How money creation threatens hyperinflation

In order to understand the relationship between money creation and the price level, we first need to get some definitions straight.

To Austrians the terms inflation and deflation refer to money and not prices. There is no doubt that money has experienced unprecedented inflation. In February of 2010 base money was $2.1 trillion. Four years later it was $3.8 trillion. In the same time frame, M1 has increased from $1.7 trillion to $2.9 trillion. M2 has gone from $8.5 trillion to $11.7 trillion. Excess reserves have doubled from $1.2 trillion to $2.4 trillion. (Please keep in mind that prior to 2008 excess reserves seldom were more than a few BILLION dollars, which is effectively zero and represented mostly the aggregate of excess reserve cash in thousands of community bank vaults.)

To Austrians changes to the price level, what the public incorrectly calls inflation and deflation, are the result of changes to the aggregate demand for consumers’ goods and the aggregate supply of consumers’ goods. Think of a simple ratio with the numerator representing demand and the denominator representing supply. Notice that an increase in supply will cause the price level to fall. Aren’t we all happy with this? I am. Or a decrease in demand will cause the price level to fall. There can be many causes of a decrease in demand–a fall in the money supply due to bank failures, a change in subjective time preference to save more, or a rational desire to hold more cash during times of uncertainty. None of these are bad for the economy per se. Whatever the cause, the antidote to a fall in demand is falling prices. The relationship between supply and demand must be re-established.

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Japan Is Writing History As A Prime Boom And Bust Case | Gold Silver Worlds

December 30, 2014

Japan Is Writing History As A Prime Boom And Bust Case | Gold Silver Worlds.

Recently, we wrote a paper about the dynamics behind the boom and bust cycles, based on the view of the Austrian School (the Austrian Business Cycle Theory, or ABCT). The key takeaway was that central banks don’t help in smoothing the amplitude of the cycles, but rather are the cause of cycles.

Business cycles are a direct result of excessive credit flow into the market, facilitated by an intentionally low interest rate set by the government.

The problem with ongoing monetary policies is that the excessive money supply sends the wrong signals to the market, which ultimately leads to misallocation of investments or ‘malinvestments’.

On the one hand, entrepreneurs invest more and increase the depth of the production process. On the other hand, consumers spend more as saving becomes unattractive. When the excess products created through the cheap money-induced investments reach the market, consumers are unable to buy them due to the lack of prior savings. At this point the bust occurs.

It is key to understand that by manipulating interest rates (particularly by lowering them), central banks create bubbles that end in busts.

Japan is an excellent case study depicting the scenario discussed by the Austrian Business Cycle Theory (ABCT). In this article, we will examine the course of the economic and monetary situation in Japan from the ABCT’s point of view.

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