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The Era of Boom and Bust Isn’t Over

January 31, 2020

The Era of Boom and Bust Isn’t Over

At the 2020 World Economic Forum in Davos, Bob Prince, co-chief investment officer at Bridgewater Associates, attracted attention when he suggested in a news interview that the boom and bust cycle as we have come to know it in the last decades may have ended. This viewpoint may well have been encouraged by the fact that the latest economic upswing (“boom”) has been going for around a decade and that an end is not in sight as suggested by incoming macro- and microeconomic data.

But would that not reject the key insight of the Austrian business cycle theory (ABCT), which says that a boom, brought about by artificially lowered market interest rates and injections of new credit and money produced “out of thin air,” must eventually end in a bust? In what follows, I will remind us of the key message of the ABCT and outline the “special conditions” which must be taken into account if the ABCT is applied to real-world developments. Against this backdrop, we can then form a view about how the next crisis might look.

What the ABCT Says

The ABCT is actually a “theory of crisis,” and it explains the broader consequences if and when central banks, in close cooperation with commercial banks, increase the amount of money in the economy through credit expansion—that is, an increase in bank lending that is not backed by real savings. The increase in the circulation of credit supply initially lowers the market interest rate below its “natural level,” or, “the originary interest rate level,” to use the Austrian school’s term.

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BOOM! Fossil Fuel Combustion and the Mother of All Economic Busts

July 30, 2019

BOOM! Fossil Fuel Combustion and the Mother of All Economic Busts

Photograph Source: Eric Kounce TexasRaiser – Public Domain

William Catton focussed on what follows a boom in the human population. He spelled out the scenario in his 1980 book, Overshoot: The Ecological Basis of Revolutionary Change. As one reviewer put it, “Catton believed that industrial civilization had sown the seeds of its own demise and that humanity’s seeming dominance of the biosphere is only a prelude to decline.”

Catton hasn’t been alone. Many others have warned or at least implied an inevitable human population bust. But that inevitability is no longer likely to hit solely from overshoot alone, and not in some far-distant future. Instead, with the added pressure from our booming combustion of fossil fuels, a human population bust could plausibly be kicked into gear sometime “by” — a.k.a. before — 2050, or within the next 30 years.

This could be the mother of all economic busts.

The human population boom has been the bedrock of economic boom in sector after sector. It’s been the bedrock foundation of a profit boom for the fossil fuel combustion industries that now put it at risk. In the US alone, the booming human population has been the wellspring for surging numbers of visitors to the likes of Yellowstone National Park, city managers bent on promoting growth, the basis of soaring demand for logging to supply housing for a growing human herd.

Booms thus enjoy considerable public approval and political popularity. Over and over again, the long-ongoing human population boom has afforded the political elites and local boosters an opportunity to boast of a booming economy, sometimes raising local and even national concerns that they tout growth at any cost.

Bust, on the other hand, is a dirty four-letter word.

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How the Fed Wrecks the Economy Over and Over Again

July 3, 2019

How the Fed Wrecks the Economy Over and Over Again

When people talk about the economy, they generally focus on government policies such as taxation and regulation. For instance, Republicans credit President Trump’s tax cuts for the seemingly booming economy and surging stock markets. Meanwhile, Democrats blame “deregulation” for the 2008 financial crisis. While government policies do have an impact on the direction of the economy, this analysis completely ignores the biggest player on the stage – the Federal Reserve.

You simply cannot grasp the economic big-picture without understanding how Federal Reserve monetary policy drives the boom-bust cycle. The effects of all other government policies work within the Fed’s monetary framework. Money-printing and interest rate manipulations fuel booms and the inevitable attempt to return to “normalcy” precipitates busts.

In simplest terms, easy money blows up bubbles. Bubbles pop and set off a crisis. Rinse. Wash. Repeat.

In practice, when the economy slows or enters into a recession, central banks like the Federal Reserve drive interest rates down and launch quantitative easing (QE) programs to “stimulate” the economy.

Low interest rates encourage borrowing and spending. The flood of cheap money suddenly available allows consumers to consume more – thus the stimulus. It also incentivizes corporations and government entities to borrow and spend. Coupled with quantitative easing, the central bank can pump billions of dollars of new money into the economy through this loose monetary policy.

In effect, QE is a fancy term for printing lots of money. The Fed doesn’t literally have a printing press in the basement of the Eccles Building running off dollar bills, but it generates the same practical effect. The Federal Reserve digitally creates money out of thin air and uses the new dollars to buy securities and government bonds, thereby putting “cash” directly into circulation. QE not only boosts the amount of money in the economy; it also has a secondary function.

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Give Us Another Oil Boom

April 10, 2017

GIVE US ANOTHER OIL BOOM 

Dear Lord, Y’all give us another oil boom…

If there is one sector of the US economy where an Austrian-style Boom-and-Bust bust has taken place, it is the onshore oil industry – though, by extension, other primary resource industries, such as metals and mining and farming have also suffered in the ongoing aftermath of the general commodity bust.

The good news is that the Austrian prescription for how to deal with a such a calamity has also been followed. The weak have ceded control to the strong – whether by bankruptcy, equity dilution, or co-option and takeover. Prices have been allowed to fall; payrolls – alas, for the unfortunate souls involved – have been cut; the more marginal projects have been put in abeyance, while an unrelenting search for greater efficiency has gone so as to reduce the level of the all-important cut-off between profit and loss.

As a result – and even if we do have to offer a caveat that much of what is afoot is also taking place under the baleful influence of over-easy monetary conditions – the industry has not only found a base, but has even begun to expand once more with no bail-outs, TARPs, or other assistance from a government apparatus (which, if anything has been intensely antagonistic to the industry on ideological grounds), saving only the putative enactment of last autumn’s OPEC agreement to limit output elsewhere.

To put this into context, we could perhaps start with a Moody’s report from the middle of last year which summed matters up by declaring that the oil bust was fully comparable with that vast destruction of value which took place during the first great Tech-Telecom mania at the turn of the century.

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Donald Trump Is Right – Here Are 100 Reasons Why We Need To Audit The Federal Reserve

February 24, 2016

Donald Trump Is Right – Here Are 100 Reasons Why We Need To Audit The Federal Reserve

Donald Trump - Photo by Marc NozellWhen one of our major politicians gets something exactly right, we should applaud them for it.  In this case, Donald Trump’s call to audit the Federal Reserve is dead on correct.  Most Americans don’t realize this, but the Federal Reserve has far more power over the economy than anyone else does – including Barack Obama.  Financial markets all over the planet gyrate wildly at the smallest comment from Fed officials, and virtually every boom and bust cycle over the past 100 years can be traced directly back to specific decisions made by the Federal Reserve.  We get all excited about what various presidential candidates say that they “will do for the economy”, but in the end it is the Fed that is holding all of the cards.  The funny thing is that the Federal Reserve is not even part of the federal government.  It is an independent private central bank that was designed by very powerful Wall Street interests a little over 100 years ago.  It is at the heart of the debt-based financial system which is eating away at America like cancer, and it has no direct accountability to the American people whatsoever.

The Fed has been around for so long that most people assume that we need it.

But the truth is that we don’t actually need the Federal Reserve.  In fact, the greatest period of economic growth in United States history happened during the decades before the Federal Reserve was created.

A little over 100 years ago, very powerful forces on Wall Street successfully pushed for the creation of an immensely powerful central bank, and since that time the value of the U.S. dollar has fallen by about 98 percent and our national debt has gotten more than 5000 times larger.

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Olduvai II: Exodus
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