To summarize the economic conditions of the past eight years: The Austrian explanation of the business cycle has triumphed, the boom has gone to bust, the free market is trying to correct the malinvestments, and the government is intervening to prevent that process from occurring (deficit spending, money printing). This brings us to November, 2009. Question: What is the next phase that would be anticipated by Austrian theory? I'm not looking for predictions, I'm looking for a general description of the next phase to expected in the economy. Is it the crack up boom and the destruction of the U.S. fiat system? If not, what else could we expect?
To summarize the economic conditions of the past eight years: The Austrian explanation of the business cycle has triumphed, the boom has gone to bust, the free market is trying to correct the malinvestments, and the government is intervening to prevent that process from occurring (deficit spending, money printing). This brings us to November, 2009.
Question: What is the next phase that would be anticipated by Austrian theory? I'm not looking for predictions, I'm looking for a general description of the next phase to expected in the economy. Is it the crack up boom and the destruction of the U.S. fiat system? If not, what else could we expect?
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
I expect the EU and US GDP data to literally boom over the next year: the US will be over 3% and the EU as a whole will probably be above 2%. Figures may be even higher than this: I even joked why not 10%? All of this will be accompanied by rising unemployment figures, weak consumers' demand, anemic saving rates and a marked increase in deficit spending even by those countries like Germany that always made a point to at least to run a pretense of a balanced budget. Stocks and derivatives will continue their run, at least until February: Wall Street and her sisters never knew there was a crisis out there. In short the difference between the real world economy and the paper economy will increase, we'll have theoretical deflation while consumers price will continue to increase (particularly in the foodstuff department, there's a silent crisis nobody's talking about). I do not expect oil to reach the extremes of last year, unless there's war in the Gulf or the US and the UK pass more legislation aimed at favoring speculation. In short 2010 won't be pretty for ordinary people while finance ministers will pat themselves on the back for the great job done.
What will happen next then? Personally I believe it won't last long. According to analysts either social tension will erupt in the US and Europe or Japan will default its debt and grind to an halt. Personally I believe neither. It will be a long slide into nothingness: no revolution, no economical crisis, no nothing.
chloe732:Question: What is the next phase that would be anticipated by Austrian theory? I'm not looking for predictions, I'm looking for a general description of the next phase to expected in the economy. Is it the crack up boom and the destruction of the U.S. fiat system? If not, what else could we expect?
Who knows, the government is not interested in free-market solutions. But there's probably two things that could happen: the FED has created a bubble in the treasury markets, and as soon as they stop buying back debt in order to finance spending, demand will collapse and interest rates will soar, causing a dramatic deflationary correction (35% GDP drop per quarter). The government, though, will try to avoid this at all costs and will probably continue to print money ad infinitum; they may even try negative interest rates ala Mankiw/Sweden. This would lead to hyper-stagflation, and who knows what else.
"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."
Esuric - If the scenario unfolds as you describe, then the crack up boom is inevitable, isn't it? First, a panic in treasuries, then yields rise, Fed buys treasuries to "stabilize" yields, more malinvestment results, more distortion to the structure of production, higher unemployment, more deficit spending, more pressure on treasuries, more Fed buying of treasuries. So, would social unrest would be the next major phase?
I am generally of the opinion that the expansionary money supply will continue to create a veneer of economic growth (statistically speaking, of course). I'm not sure by how much, though. If you look at the revision of GDP figures for the third quarter (reduced from 3.5% to 2.8% growth), the majority of the spending was directly contributed to by the government's deficit spending. Personal consumption expenditure was largely in the automobile sector (1.45 points to the 2.8% figure), which represents the cash for clunkers program. I'm not sure how spending will look like during the Christmas season. But, I don't think that fourth quarter GDP figures will be very different from third quarters. I think that it will be generally positive and around 2% or 3%. I think, though, that come 2010 there will be a decline in GDP (which will represent a fake "double-dip", unless the money supply contracts, at which points there will be a real decline in output).
But, I think it's fair to predict that there will be a substantial period of stagnation. At the end of that period, there will be the real "double-dip", as the distortions created by monetary expansion begin to play out.
Esuric: ...they may even try negative interest rates ala Mankiw/Sweden.
...they may even try negative interest rates ala Mankiw/Sweden.
They are already doing that. Adjusted for inflation, some of the interest rates the Fed has on reserves loaned to banks are negative. They are effectively paying banks to hold onto their reserves, which doesn't make a lot of sense.
The Austrian Business Cycle is a name that doesn't really fit. It is not purely cyclical...
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Jonathan M. F. Catalán:They are already doing that. Adjusted for inflation, some of the interest rates the Fed has on reserves loaned to banks are negative. They are effectively paying banks to hold onto their reserves, which doesn't make a lot of sense.
Negative interest rates mean the banks pay the FED for reserves.
Esuric: Negative interest rates mean the banks pay the FED for reserves.
What? That doesn't make any sense. Positive interest rates are when banks pay the Fed for reserves (that's why they borrow more when interest rates are low).
http://www.answers.com/topic/negative-interest-rate:
A rate below zero, whereby the lender, actually or technically, pays interest to the borrower. In 2002, for example, the Federal Funds Rate was lower than the rate of inflation, resulting in a Real Interest Rate that was, technically, negative.
Greg Mankiw explains:
So why shouldn’t the Fed just keep cutting interest rates? Why not lower the target interest rate to, say, negative 3 percent?
At that interest rate, you could borrow and spend $100 and repay $97 next year. This opportunity would surely generate more borrowing and aggregate demand.
The bank makes $3 in this case. In this case, we're talking about the discount rate, which is the rate at which the Federal Reserve lends to banks. If there is a negative interest rate, the Federal Reserve is paying banks to borrow money.
Deficit spending will lead to more debt purchases financed by Federal Reserve credit (inflation), until mass inflation becomes obvious and the foreign governments backstopping the dollar's decline decide they can no longer wait to pull the plug.
The Fed will then have one of two choices. They can save the government by buying all the debt and launching hyperinflation, or they can follow the (much more powerful) foreign governments and save the banks by allowing a catastrophic increase in interest rates that will cause an Argentina-like collapse in all levels of government.
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Would a centrally planned, thus, managed move from the dollar being used as currency in the U.S. - moved to - another currency such as a world currency prevent the collapse? And is such a managed move possible? (which speaks nothing of the move of control, starting the whole fiat game all over again, etc...)
wilderness: Would a centrally planned, thus, managed move from the dollar being used as currency in the U.S. - moved to - another currency such as a world currency prevent the collapse? And is such a managed move possible? (which speaks nothing of the move of control, starting the whole fiat game all over again, etc...)
This is a topic I've been researching for the past couple of weeks. It started when I finished reading Stiglitz' 2006 book on globalization, where he suggests the adoption of Keynes' bancor idea (what Stiglitz says in the book is slightly different from what Keynes actually said, as I would later find out, but more or less they're similar). I don't think it's realistic that the U.S. Government would surrender its "sovereignty" in monetary policy, even assuming a collapse of the U.S. Dollar. On the other hand, there might be a push for a global central bank which would create its own money (similar to the IMF and the SDR, only with more actual power). I have been trying to deduce the effects of this on global capital markets, although admittedly I have a long way to go (I'm taking this as my first attempt to come to an economic deduction on my own, although I'm sure Hayek or someone else already covered this).
I know one of the major propositions is that trade surpluses be eliminated. Keynes pretty much believed that all trade deficits were debt. As a result, nations which imported more than they exported were surely becoming poorer. I don't think he took into consideration that microeconomically speaking no trader would accept anything at a "deficit". A monetary deficit is not synonymous with a utility deficit. In any case, money tends to come back through the capital markets (for example, Chinese investors buy U.S. securities with their U.S. Dollars; unfortunately, most of these securities are government securities, so they are just fueling poor spending), so whether or not there is a deficit is eventually irrelevant. In any case, what Keynes suggested was that all trade go through a "global clearing union". A trader would have to convert his national currency to the global currency, suggested to be the "bancor", and the trade would be accounted for at this global clearing union. Surpluses or deficits would be held as accounts there, and countries with a surplus would be forced to spend these surpluses on buying foreign goods. Countries with left over surpluses would effectively have their surpluses confiscated.
The value of the bancor would be pegged to different international commodities and currencies. The idea was to have countries depreciate or appreciate their currency as needed.
This is the point where I am less read up on (yea, obviously my knowledge on Keynes' international stabilization proposal is pretty limited). I found an article by Keynes on his idea (although, published before Bretton Woods, which goes to show that he was playing around with this theory for quite a while), but I haven't read it yet.
Jonathan M. F. Catalán: The value of the bancor would be pegged to different international commodities and currencies. The idea was to have countries depreciate or appreciate their currency as needed.
They are trying to do this now or are at least talking about it. The mention of bancor is in UN documents referring to Keynes. Noted here. You may have seen that already. Also there is a current basket that has been trying to regulate SDR's. I think these are are real-time experiments. These are proto-types for an expansion of what they would like to do. Their intent outlined in UN documents sourced in the link and various newspaper sources such as this, which I think is what you are saying - let me know:
"Although a number of countries, including China and Russia, have suggested replacing the dollar as the world's reserve currency, the UNCTAD report is the first time a major multinational institution has posited such a suggestion.
In essence, the report calls for a new Bretton Woods-style system of managed international exchange rates, meaning central banks would be forced to intervene and either support or push down their currencies depending on how the rest of the world economy is behaving.
The proposals would also imply that surplus nations such as China and Germany should stimulate their economies further in order to cut their own imbalances, rather than, as in the present system, deficit nations such as the UK and US having to take the main burden of readjustment."
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Also could you give me your interpretation of that quote especially of the last paragraph? I think that's exactly what you were talking about in your post.
Jonathan M. F. Catalán: This is the point where I am less read up on (yea, obviously my knowledge on Keynes' international stabilization proposal is pretty limited). I found an article by Keynes on his idea (although, published before Bretton Woods, which goes to show that he was playing around with this theory for quite a while), but I haven't read it yet.
Keynes was working on it before Bretton Woods as he brought the proposal to Bretton Woods, which therefore it would have been his final proposal. I think you may be pointing this out as well.
Quote from one of the above links:
"A step that would go much further than the introduction of a substitution account would be to enable a new “Global Reserve Bank” or a reformed IMF to issue an “artificial” reserve currency, such as the “bancor” suggested by Keynes in his Bretton Woods proposals for an International Clearing Union."
thanks for responding.
Kakugo: In short the difference between the real world economy and the paper economy will increase, we'll have theoretical deflation while consumers price will continue to increase (particularly in the foodstuff department, there's a silent crisis nobody's talking about)... In short 2010 won't be pretty for ordinary people while finance ministers will pat themselves on the back for the great job done.
In short the difference between the real world economy and the paper economy will increase, we'll have theoretical deflation while consumers price will continue to increase (particularly in the foodstuff department, there's a silent crisis nobody's talking about)... In short 2010 won't be pretty for ordinary people while finance ministers will pat themselves on the back for the great job done.
Using Austrian theory as a guide, trying to eliminate opinions and ideology, I believe your assessment is on track. I like your anticipation of a boom in GDP (allowing the central planners to pat themselves on the back while getting re-elected in 2010) combined with disastrous effects in the real economy. 10% GDP? Why not! More deficit spending, more GDP! They will tell us that "employment is a lagging indicator". They'll say without the intervention, things would be much worse.
Kakugo: What will happen next then? Personally I believe it won't last long. According to analysts either social tension will erupt in the US and Europe or Japan will default its debt and grind to an halt. Personally I believe neither. It will be a long slide into nothingness: no revolution, no economical crisis, no nothing.
This is interesting. I would anticipate the following sequence over the next four years: Increased intervention -->malinvestment-->increased unemployment-->social unrest-->marshal law-->tyranny--> BIG WAR! (read nukes)-->end of sovereignty-->world government. (Maybe I should write a novel along these lines before it's too late.)
What do you mean by the "long slide into nothingness...no nothing"?