Towards the end of Chapter 5, he writes about the stock market bubble of 1928-1929:
The stock market had been the most buoyant of all the markets—this in conformity with the theory that the boom generates particular overexpansion in the capital goods industries. For the stock market is the market in the prices of titles to capital.
I have some thoughts about that line. After all, the capital goods industries that ABCT predicts will be malinvested in are those that actually make stuff. My picture was of malinvesting in mining, or infrasturcture, or factories that make machine parts, things like that. You know, higher up on the ladder of production. And the malinvesters are entrepeneurs trying to expand their business.
My image of the folks buying stocks was of ignorant people thinking a stock is a sure thing, people like waitresses and movie stars and housewives. And they were buying those stocks to speculate, not to use as a means of investing in heavy industry per se and starting new projects.
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Also, another thing I learned from that chapter. That Friedman and Schwartz were totally correct that tightening of the money supply started off the Great Depression. So factually they have it right. AE differs only in the underlying big picture. As one of the respected Austrians wrote, their problem was confusing corellation with causation.
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It's easy to refute an argument if you first misrepresent it. William Keizer
you're right, the malinvestment was in mining, infrastructure and factories. he's saying stocks are the prices of the titles to these excess capital goods created by cheap credit. these companies overexpanded, and their values artificially ballooned. at least, that's how i interpret what he's saying.
thanks, anarcken.