{"id":14421,"date":"2015-11-14T16:12:55","date_gmt":"2015-11-14T21:12:55","guid":{"rendered":"http:\/\/olduvai.ca\/?p=14421"},"modified":"2015-11-14T16:12:55","modified_gmt":"2015-11-14T21:12:55","slug":"the-bubble-finance-cycle-what-our-keynesian-school-marm-doesnt-get-part-2","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=14421","title":{"rendered":"The Bubble Finance Cycle: What Our Keynesian School Marm Doesn\u2019t Get, Part 2"},"content":{"rendered":"

The Bubble Finance Cycle: What Our Keynesian School Marm Doesn\u2019t Get, Part 2<\/a><\/h3>\n

In Part 1 of The Bubble Finance Cycle\u00a0we demonstrated that a main street based wage and price spiral\u00a0always proceeded recessions during the era of Lite Touch monetary policy (1951 to 1985). That happened because the Fed was perennially \u201cbehind the curve\u201d and was therefore forced to hit the monetary brakes hard in order to rein in an overheated economy.<\/p>\n

So doing, it drained reserves from the banking system, causing an abrupt interruption of household and business credit formation. The resulting\u00a0sharp drop in business CapEx, household durables and especially mortgage-based\u00a0spending on new housing construction\u00a0caused a brief\u00a0recessionary setback in aggregate economic activity.<\/p>\n

To be sure,\u00a0that discontinuity and the related unemployment and loss of output\u00a0was wholly\u00a0unnecessary and by no means a natural outcome on the free market.<\/p>\n

Under a regime of free market interest rates, in fact, the pricing mechanism for credit would have operated far more smoothly and\u00a0continuously, meaning that credit-fueled booms would be nipped in the bud. Flexible, continuously adjusting money market rates and yield curves would choke off unsustainable borrowing and\u00a0induce an uptake in\u00a0private savings due to higher rewards for the deferral of\u00a0 current period spending.<\/p>\n

Accordingly, the recessions of the Lite Touch monetary era were mainly a \u201cpayback\u201d phenomenon that reflected the displacement of economic activity in time caused by monetary intervention. That is, the artificial \u201cstop and go\u201d economy lamented by proponents of\u00a0sound money\u00a0was a function of central bank intrusion in the pricing of money and the\u00a0ebb and\u00a0flow\u00a0of credit.<\/p>\n

During bank credit fueled\u00a0inflationary booms, businesses tended to over-invest in fixed assets and inventory and to\u00a0over-hire in anticipation that the good times would just keep rolling along. But when the central bank was forced to correct for its\u00a0too heavy foot on the monetary accelerator (i.e. the\u00a0provision of fiat credit\u00a0reserves to the banking system) and\u00a0slam on the\u00a0credit expansion brakes, businesses dutifully went about reeling-in the prior\u00a0excesses.<\/p>\n

…click on the above link to read the rest of the article…<\/p>\n","protected":false},"excerpt":{"rendered":"

The Bubble Finance Cycle: What Our Keynesian School Marm Doesn\u2019t Get, Part 2 In Part 1 of The Bubble Finance Cycle\u00a0we demonstrated that a main street based wage and price spiral\u00a0always proceeded recessions during the era of Lite Touch monetary policy (1951 to 1985). That happened because the Fed was perennially \u201cbehind the curve\u201d and […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[2230,10586,3598,175,2120,195,303,305,534],"class_list":["post-14421","post","type-post","status-publish","format-standard","hentry","category-economics","tag-bank-reserves","tag-bubble-finance","tag-contra-corner","tag-credit","tag-david-stockman","tag-debt","tag-fed","tag-federal-reserve","tag-monetary-policy"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/14421","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=14421"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/14421\/revisions"}],"predecessor-version":[{"id":14422,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/14421\/revisions\/14422"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=14421"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=14421"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=14421"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}