The Austrian Business Cycle Theory states that entrepreneurs are not able to distinguish between money that comes from genuine savings and money created through credit expansion by the Fed. But surely the Fed keeps track of how much money they loan into existence.. If entrepreneurs know this, shouldn't they be able to adjust the interest rate appropriately and not be fooled into malinvestments?
I know there are holes in this argument, but I'm having trouble putting together a cohesive counter-argument in my head..
CaptainMurphy:If entrepreneurs know this, shouldn't they be able to adjust the interest rate appropriately and not be fooled into malinvestments?
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CaptainMurphy:The Austrian Business Cycle Theory states that entrepreneurs are not able to distinguish between money that comes from genuine savings and money created through credit expansion by the Fed. But surely the Fed keeps track of how much money they loan into existence.. If entrepreneurs know this, shouldn't they be able to adjust the interest rate appropriately and not be fooled into malinvestments?
Smiling Dave:There was a business cycle, and malinvestments, but a bit different from how Mises mapped it out, I believe. Hard to say that a dot.com stock or a house is a high order capital investment.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Smiling Dave:I was forced to conclude that what really counts is easy money, meaning money created by credit expansion by the Fed. It's very existence will creat a boom, as people look for a place to spend it.
Esuric:Don't look at it as "money which comes from real savings" and "money which is created by credit expansion;" the key is that profitable investment requires real savings (actual resources). Expanding the money supply, and therefore lowering the rate(s) of interest makes it seem like society has more resources then it actually does, which causes the malinvestments.
Also, the FED does not control the money supply; it merely controls one component of the money supply (the monetary base). It doesn't loan money to the public; commercial banks do, which increases the supply of money (constrained by the demand for money). So entrepreneurs cannot know what the "real" equilibrium interest rate is because they don't know the real supply of savings (also, they don't know the demand for investment). Essentially, you need markets for accurate pricing (unavoidable conclusion).
cret:"The Austrian Business Cycle Theory states that entrepreneurs are not able to distinguish between money that comes from genuine savings and money created through credit expansion by the Fed...." would it really matter where the dollars come from??? does money even come from the fed????
CaptainMurphy: Smiling Dave:I was forced to conclude that what really counts is easy money, meaning money created by credit expansion by the Fed. It's very existence will creat a boom, as people look for a place to spend it. I agree that the credit expansion will inevitably lead to the new money being snatched up and utilized, but shouldn't entrepreneurs be able to realize that investing this money in long-term projects would be a mistake? Is it simply a matter of not enough people being familiar with the ABCT?
Smiling Dave:My own personal non-official answer to this is that easy money, even low interest loans kind of easy money, makes people really reckless and stupid. Add to that banks, who play with house money and are insured by govt in case they fail, and we don't need those wily ole entrepeneurs to create the boom.
But I've seen other answers, like "In the short term there IS a lot of money to be made, and its a gamble, maybe the Fed will keep rates low till I finish building my factory."
Also "Hey all my competitors are taking the money, so I'll lose if I don't take it."
if i was really energetic I'd dig up the links and emails about this frequently asked question.