Business Cycle

In the midst of the "great recession" that began in earnest in 2008, there was no end to the talk about stimulus, yet hardly any talk about what caused the recession in the first place. The answer involves looking not at the downturn itself but at the structure of the preceding boom. Here is where the economic balance is tipped and production gets distorted. Rather than look at the recession as the disaster, we are better off looking at it as a period of healing following a false sense of prosperity generated by the boom times.

So what causes these economic booms—periods in which productivity expands in some sectors far beyond what the economic fundamentals seem to justify? Here we can draw on the Austrian theory of the business cycle, which was first sketched by Ludwig von Mises in the early days of central banking. He wrote that the central bank posed a serious danger due to its ability to manipulate the interest rate. Because artificially low rates cause an expansion of the money supply, these invented rates are central to understanding what causes booms. Mises wrote in 1923: "The first condition of any monetary reform is to halt the printing presses."[1]

The importance of a market-set interest rate is explained; policy parallels are drawn between pre & Depression era tactics, Japan in the 90's, and America today; the false confidence of Keynesianism is exposed as the culprit.

If blame is to be placed for the mess we're in, don't just pick on George Bush and Barack Obama. Blame Lord Keynes and all his followers who rejected the Austrian theory of the business cycle. It is bad theory that is the root of the problem, the belief that central banks can turn stones into bread.

Simply put: if we want to cure the bust, don't create the boom. Economic growth must be based on rea falctors, not phony stimulus provided by the central banks.