Business Cycle Primer
by Llewellyn H. Rockwell Jr.Tags: business cycle theory
Llewellyn H. Rockwell Jr. Business Cycle Primer. Mises Daily: February 08 2001.
Quotes: "... Business cycle theories are legion and they come and go. But the only explanation that has stood the test of time was first advanced in 1912, in Ludwig von Mises’s masterwork, The Theory of Money and Credit. Elaborations on the theory, by Mises and his student Hayek in the 1930s, culminated in the Austrian theory of the trade cycle.
The theory begins by observing the profound effect that interest rates have on investment decisions. Left to the market, interest rates are determined by the supply of credit (a mirror of the savings rate) and the willingness to takes risks in the market (a mirror of the return on capital). What throws this out of whack is manipulation by the central bank.
When the Fed feeds artificial credit into the economy by lowering interest rates, it spurs investments in projects that don’t eventually pan out. In this economic boom, the high-tech and dot com manias resulted from a decade of sustained money growth via lower interest rates. When the Fed stepped on the brakes to prevent prices from rising, it prompted a sell-off, and hence a downturn.
What’s tricky to understand is what can’t be seen. Just because prices aren’t going up doesn’t mean the money supply is in check. Just because people in some sectors are getting rich doesn’t mean that the prosperity is on solid ground. Just because the stock market is going up doesn’t mean that the architecture of investment (to use Jim Grant’s phrase) is in good working order. ..."