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Why The Recurring Economic Crises?
Authored by Murray Rothbard via The Mises Institute,
A selection from Chapter 42 of Economic Controversies.
Why, then, does the business cycle recur? Why does the next boom-and-bust cycle always begin? To answer that, we have to understand the motivations of the banks and the government. The commercial banks live and profit by expanding credit and by creating a new money supply; so they are naturally inclined to do so, “to monetize credit,” if they can. The government also wishes to inflate, both to expand its own revenue (either by printing money or so that the banking system can finance government deficits) and to subsidize favored economic and political groups through a boom and cheap credit. So we know why the initial boom began. The government and the banks had to retreat when disaster threatened and the crisis point had arrived. But as gold flows into the country, the condition of the banks becomes sounder. And when the banks have pretty well recovered, they are then in the confident position to resume their natural tendency of inflating the supply of money and credit. And so the next boom proceeds on its way, sowing the seeds for the next inevitable bust.
Thus, the Ricardian theory also explained the continuing recurrence of the business cycle. But two things it did not explain.
First, and most important, it did not explain the massive cluster of error that businessmen are suddenly seen to have made when the crisis hits and bust follows boom. For businessmen are trained to be successful forecasters, and it is not like them to make a sudden cluster of grave error that forces them to experience widespread and severe losses.
Second, another important feature of every business cycle has been the fact that both booms and busts have been much more severe in the “capital goods industries” (the industries making machines, equipment, plant or industrial raw materials) than in consumer goods industries. And the Ricardian theory had no way of explaining this feature of the cycle.
The Austrian, or Misesian, theory of the business cycle built on the Ricardian analysis and developed its own “monetary overinvestment” or, more strictly, “monetary malinvestment” theory of the business cycle. The Austrian theory was able to explain not only the phenomena explicated by the Ricardians, but also the cluster of error and the greater intensity of capital goods’ cycles. And, as we shall see, it is the only one that can comprehend the modern phenomenon of stagflation.
Mises begins as did the Ricardians: government and its central bank stimulate bank credit expansion by purchasing assets and thereby increasing bank reserves. The banks proceed to expand credit and hence the nation’s money supply in the form of checking deposits (private bank notes having virtually disappeared). As with the Ricardians, Mises sees that this expansion of bank money drives up prices and causes inflation.
But, as Mises pointed out, the Ricardians understated the unfortunate consequences of bank credit inflation. For something even more sinister is at work. Bank credit expansion not only raises prices, it also artificially lowers the rate of interest, and thereby sends misleading signals to businessmen, causing them to make unsound and uneconomic investments.
For, on the free and unhampered market, the interest rate on loans is determined solely by the “time preferences” of all the individuals that make up the market economy. For the essence of any loan is that a “present good” (money which can be used at present) is being exchanged for a “future good” (an IOU which can be used at some point in the future). Since people always prefer having money right now to the present prospect of getting the same amount of money at some point in the future, present goods always command a premium over future goods in the market. That premium, or “agio,” is the interest rate, and its height will vary according to the degree to which people prefer the present to the future, i.e., the degree of their time preferences.
People’s time preferences also determine the extent to which people will save and invest for future use, as compared to how much they will consume now. If people’s time preferences should fall, i.e., if their degree of preference for present over future declines, then people will tend to consume less now and save and invest more; at the same time, and for the same reason, the rate of interest, the rate of time-discount, will also fall. Economic growth comes about largely as the result of falling rates of time preference, which bring about an increase in the proportion of saving and investment to consumption, as well as a falling rate of interest.
But what happens when the rate of interest falls not because of voluntary lower time preferences and higher savings on the part of the public, but from government interference that promotes the expansion of bank credit and bank money? For the new checkbook money created in the course of bank loans to business will come onto the market as a supplier of loans, and will therefore, at least initially, lower the rate of interest. What happens, in other words, when the rate of interest falls artificially, due to intervention, rather than naturally, from changes in the valuations and preferences of the consuming public?
What happens is trouble. For businessmen, seeing the rate of interest fall, will react as they always must to such a change of market signals: they will invest more in capital goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable, now seem profitable because of the fall in the interest charge. In short, businessmen react as they would have if savings had genuinely increased: they move to invest those supposed savings. They expand their investment in durable equipment, in capital goods, in industrial raw material, and in construction, as compared with their direct production of consumer goods.
Thus, businesses happily borrow the newly expanded bank money that is coming to them at cheaper rates; they use the money to invest in capital goods, and eventually this money gets paid out in higher wages to workers in the capital goods industries. The increased business demand bids up labor costs, but businesses think they will be able to pay these higher costs because they have been fooled by the government-and-bank intervention in the loan market and by its vitally important tampering with the interest-rate signal of the marketplace—the signal that determines how many resources will be devoted to the production of capital goods and how many to consumer goods.
Problems surface when the workers begin to spend the new bank money that they have received in the form of higher wages. For the time preferences of the public have not really gotten lower; the public doesn’t want to save more than it has. So the workers set about to consume most of their new income, in short, to reestablish their old consumer/saving proportions. This means that they now redirect spending in the economy back to the consumer goods industries, and that they don’t save and invest enough to buy the newly produced machines, capital equipment, industrial raw materials, etc. This lack of enough saving-and-investment to buy all the new capital goods at expected and existing prices reveals itself as a sudden, sharp depression in the capital goods industries. For once the consumers reestablish their desired consumption/investment proportions, it is thus revealed that business had invested too much in capital goods (hence the term “monetary overinvestment theory”), and had also underinvested in consumer goods. Business had been seduced by the governmental tampering and artificial lowering of the rate of interest, and acted as if more savings were available to invest than were really there. As soon as the new bank money filtered through the system and the consumers reestablish their old time-preference proportions, it became clear that there were not enough savings to buy all the producers’ goods, and that business had misinvested the limited savings available (“monetary malinvestment theory”). Business had overinvested in capital goods and underinvested in consumer goods.
The inflationary boom thus leads to distortions of the pricing and production system. Prices of labor, raw materials, and machines in the capital goods industries are bid up too high during the boom to be profitable once the consumers are able to reassert their old consumption/ investment preferences. The “depression” is thus seen— even more than in the Ricardian theory—as the necessary and healthy period in which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes those proportions between consumption and investment that are truly desired by the consumers. The depression is the painful but necessary process by which the free market rids itself of the excesses and errors of the boom and reestablishes the market economy in its function of efficient service to the mass of consumers. Since the prices of factors of production (land, labor, machines, raw materials) have been bid too high in the capital goods industries during the boom, this means that these prices must be allowed to fall in the recession until proper market proportions of prices and production are restored.
Put another way, the inflationary boom will not only increase prices in general, it will also distort relative prices, will distort relations of one type of price to another. In brief, inflationary credit expansion will raise all prices; but prices and wages in the capital goods industries will go up faster than the prices of consumer goods industries. In short, the boom will be more intense in the capital goods than in the consumer goods industries. On the other hand, the essence of the depression adjustment period will be to lower prices and wages in the capital goods industries relative to consumer goods, in order to induce resources to move back from the swollen capital goods to the deprived consumer goods industries. All prices will fall because of the contraction of bank credit, but prices and wages in capital goods will fall more sharply than in consumer goods. In short, both the boom and the bust will be more intense in the capital than in the consumer goods industries. Hence, we have explained the greater intensity of business cycles in the former type of industry.
There seems to be a flaw in the theory, however; for, since workers receive the increased money in the form of higher wages fairly rapidly, and then begin to reassert their desired consumer/investment proportions, how is it that booms go on for years without facing retribution: without having their unsound investments revealed or their errors caused by bank tampering with market signals made evident? In short, why does it take so long for the depression adjustment process to begin its work? The answer is that the booms would indeed be very short lived (say, a few months) if the bank credit expansion and the subsequent pushing of interest rates below the free-market level were just a one-shot affair. But the crucial point is that the credit expansion is not one shot. It proceeds on and on, never giving the consumers the chance to reestablish their preferred proportions of consumption and saving, never allowing the rise in cost in the capital goods industries to catch up to the inflationary rise in prices. Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance by repeated and accelerating doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop or sharply slow down, either because the banks are getting shaky or because the public is getting restive at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, the piper must be paid, and the inevitable readjustments must liquidate the unsound overinvestments of the boom and redirect the economy more toward consumer goods production. And, of course, the longer the boom is kept going, the greater the malinvestments that must be liquidated, and the more harrowing the readjustments that must be made.
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"Why The Recurring Economic Crises?"
Plunder. Hide the effects of the plunder. Plunder some more. Hide the effects of plunder. Plunder even more...
Zion is a scheme, not an ethnicity.
Hey Mises. The banks that do this shit are privately owned. It's like saying "let's get rid of all of the police because the mob bought some of them off." Mob says "cool."
The Mob Rules > Black Sabbath.
It was Rothb...oh never mind.
You would think those "paragons of virtue" (the regulators, the bureaucrats, those...public servants) would have put a stop to it by now.
It's only been going for thousands of years ;-)
It's tough being the devils advocate nmewn.
Keep stacking.
I was at the $store earlier, with my mother.
She was looking at those [single pak] Salmon filets.
I said Meh! She BELTED OUT!
"That would be good for your survival gear."
I about shit myself, and so did the girl rounding the aisle corner.( my face was 3 shades red)
Maybe Z/H is rubbing off on my old geezer Mother?
The old-timers know something is terribly wrong because they have been dealing with it for decades, and they can feel it accelerating. When their 401Ks, SS checks, and bank accounts vanish they are going to go completely apeshit.
It is always a pleasure to talk with a lucid person who survived the Depression. What they did to survive is very revealing and probably incomprehensible to the Facebook crowd today. Frankly, I am challenged to imagine it.
Miffed
The Depression generation does not have normalcy bias because they lived through a serious outlier. Everyone here posting on the internet has normalcy bias. Have you ever been hungry where you didn't know if you would survive another day? Me neither.
Of course there are plenty of people in the world who are hungry right now, but we can safely blame them for their poverty because they are not industrious enough. Everyone here knows that poor people are only poor because they chose it.
Your point is well taken. When I did a three week juice fast I basked in my accomplishment, however I could have eaten any time of my choosing so the victory was hollow. A participation trophy awarded to me.
When the Cedar Fire ( largest fire in Cali ever recorded) started a few miles from my home, I was prodded out of my complacency a bit more. We did not have power for 3 weeks. This had more impact. After 10 days we managed to procure a generator but we used it to run the freezers and light a few lights. Gas was being rationed at the time so had to be used sparingly. Normalcy bias was shaken. But, in three weeks, my education was over and we returned to modern life. Nothing like the protracted adventure of the Depression. I have no wish to experience the real deal.
Miffed
" Have you ever been hungry where you didn't know if you would survive another day? Me neither. "
HOW SMUG & STUPID YOU ARE.
YES, I HAVE GONE HUNGRY.
HOMELESS AND HUNGRY RIGHT HERE IN THE US OF A.
-& THROUGH NO FAULT OF MY OWN.
THE US HAS A VERY SERIOUS PROBLEM WITH CRIMINALITY.
MUCH OF IT IN THE GOVERNMENT.
GO FUCK YOURSELF YOU SMUG DOUCHE-BAG.
He was being sarcastic. This guy has more compassion than most of us on this site
Sometimes the poor are poor because of the choices they make.
Like having 7 kids, dropping out of school, etc.
Seems like the trick is to not consider a monolith that which is not.
In a word, it went like this:
Absolutely NOTHING went to waste...
It's all about votes . People are numbers, cradle to grave.
Welcome to the matrix. :-D
Yes, my parents (R) and in laws (D) are all early to mid 70's and have been on to all of this for a lot longer than I have been. They worry a bit about their children but mostly about their grand children. I was late to wake up having been holding tight to the underbelly of the corporate beast suckling away.
lol...#XCD ;-)
Besmell the putrid stench of a serial Debbie Downvoter. Lo, witness the cowardice, listen for a witty rebuke which never cometh. Show thyself, evil one!!!!
They never do. Anonymous cowardice seems to be the trend today and stating ones case in the visible area of war too terrifying.
I could add an expletive but I have been informed that is not proper for a lady.
Miffed;-)
Here's another moron who doesn't understand what the real Rand meant by plunder.
Central banks are privately owned in name only to maintain a false appearance. They are sanctioned by government as accomplices to cover deficits by debauching the value of money.
You are a fucking idiot and a shill. The Central Banks own government, not vice-versa. What the fuck does "central banks are privately owned in name only" mean? They are privately owned. Period. Anyone who questions that has an agenda. Probably explains the ZH friendly icon. Cunt.
When you single out "private", I question your agenda. We already know politicians are for sale to the highest bidders whether they private, public or national. Money buys power and influence. Period!
When I single out private I am referring to the Federal Reserve Bank. Defend away, cunt.
And just as a PS to an idiot who doesn't see it: why would you forgive the money that buys power because power is for sale? Wouldn't the obvious solution be to condemn bribery?
I said at the beginning. The Federal Reserve is private in name only. It's a government sanctioned monopoly, sanctioned by the Federal Reserve Act of 1913. It doesn't compete for consumer business in any sense of the word of having to compete against other banks.
Of course I condemn bribery. The whole political system is corrupt to the core. There is no solution. It has to collapse under its own weight.
"The Federal Reserve is private in name only. It's a government sanctioned monopoly, sanctioned by the Federal Reserve Act of 1913. It doesn't compete for consumer business in any sense of the word of having to compete against other banks."
Maybe you're not the cunt I thought you were, and you are just an idiot.
Question: Does the King need to compete with his Lords.
" Does the King need to compete with his Lords."
I'm sure you've heard of the Magna Carta. That was over taxes. Kings had to finance their wars with taxes. Central banking solved the problem of tax revolts. The idea of creating money from debt is a way to tax the public without them knowing. It's been going on for 300 years since the founding of the Bank of England. And the sheep still haven't figured out the scam.
Maybe you're not the cunt I thought you were, and you are just an idiot.
How about "dumb blonde." That's much nicer. Nice talking to you. Next time, I'd love to know what you have against Rand.
"How about 'dumb blonde.' That's much nicer. Nice talking to you."
Okay, fat old guy with the cute girl icon.
I dont think you've understood what Spirit is saying. It is a collusion between public power and private vested interests. Those private interests depend on Govt coersion and regulation for their privilege and power. Every time a 'bleeding heart' asks for more regulation it plays into the hands of the monopolists. Its Govt that sanctions and supports the power of the (private) Fed, which in turn supports the Govt. The private ripoff merchants depend on the power of the big brother state to keep their privileges. Hence the further you drive into socialism the more powerful the elites become. The more powerful the Govt then the more powerful the elites that control and work in it.
Spiritof42- I agree with Rand, the "Fed" is a private corporation. It absolutely should not be in control of our currency.
Back up bitch. The graves speak for themselves. This caper is being pulled off with bullet, extortion and infiltration.
It's a zero sum game. For every winner, there is a loser.
For every winner, there are 10,000,000 losers.
This man is clueless.
Zero sum occurs when wealth is confiscated as in taxes. In free exchange, it's win-win for buyer and seller. People don't exchange of their free will with the intent to lose.
Spirit of 42:
Getting in a tit for tat with LTER is a complete waste of time. He/she/it is an angry, self-loathing, very troubled individual.
And I'm guessing he is not writing from Ireland so I give him no pass on the use of cunt even if you were unfazed by it.
LTER: dude, time to grow up and quit the temper tantrums that lack any sort of critical thought or factual support.
Mmmm...cotton candy, and some heroin. Wow, look at that junky go!
This has gone beyond economic theory; with no law - theory and politics mean nothing.
"What happens is trouble" is the part that you get right. You are still missing he whole point of the story.
price discovery mechanism is never broken. prices are not distorted; you are simple not able to account for it. commonly known economic theories have a flaw.
ZH, do not worry ... few more posts. this was a good try nevertheless
http://just-a-thought-from-thinair.blogspot.com/
If I can add to the above. It wasn't until I immersed myself in Austrian Theory did I understand business cycles. Business cycles are a natural phenomena in market economies; it is impossible to eliminate them. Calculation is key to understanding cycles. As the boom phase of a cycle ages, miscalculations accumulate until they reach a breakpoint. The bust phase is a cleansing process. In an unhampered economy, cycles would be confined to market sectors and dispersed thoughout the economy in different phases.
What central banking did was sychronize all the sectors into one massive boom bust cycle with greater peaks and valleys. Considering that all but three countries in world have central banks trying to coordinate with each other, this promises to be the mother of all economic busts. I wouldn't count on any form of fiat currency surviving this one.
This is a collapse of government, not a free market collapse. If you have marketable skills and your wealth stored in tangible goods, you'll do fine. If you are depending on government to keep you afloat, you're a walking dead man.
yes
"This is a collapse of government, not a free market collapse. If you have marketable skills and your wealth stored in tangible goods, you'll do fine. If you are depending on government to keep you afloat, you're a walking dead man."
There is no free market, or spoon. And have you noticed that the surest path to wealth (marketable skills) lately has been being a banker? This libertarian advice is getting a bit old.
...have you noticed that the surest path to wealth (marketable skills) lately has been being a banker? ...
Replace "banker" with "politician"
Business cycles are a natural phenomena in market economies; it is impossible to eliminate them.
It is trivial to eliminate them ... but requires forceful elimination of the international bankers and capitalists who cause them. They purposely cause them to serve their farming operation. They are starting the biggest harvest in the history of the world right now.
Any properly managed MOE will have "no" business cycle. Money is always freely created by traders making delivery promises. It is destroyed by traders delivering on those promises. Defaults are immediately mitigated by interest collections. Supply and demand for money is always in perfect balance ... it's the nature of a trade.
The governing relation is: INFLATION = DEFAULT - INTEREST = zero
Everything you have been formally taught is to get you to buy into the ridiculous concepts of growth being necessary; of positive inflation being necessary; of the time value of money being anything but one.
Capitalists have inserted themselves in this process to gain control of it and to siphon from it.
It is absolutely ridiculous to think someone must first save before someone else can make a trading promise!
The whole thing is real simple. The complicated part is all the "economics" B.S piled on top to confuse and obfuscate:
1.Banks create money and give it to people to build stuff.
2.Banks destroy all that money in debt deflation.
3.People they gave that money to give the stuff they built back to the bank or the guy who gets the next round of newly created bank money.
Central bank's job is to instiutionalize the whole thing and make sure the banks stay in charge of the cycle.
"Economics (more precisely the mainstream economic paradigm) is a mixed bag or a pluralism of inconsistent beliefs which pretends to be science. Economic education is a "9,000 pound lobotomy" of critical thinking and replaced with theology set out in standard textbooks.
Regulators are the last to question accepted beliefs. When I presented empirical evidence to the contrary, suppression and relegation were the rewards for "rocking the boat"."
http://www.asepp.com/financial-system-collapse/
Three points:
1. Government, that is to say, the system of government employed currently actually evolved out of the feudal system type of control (or, did it evolve?). By the time of Moses Maimonedes and Saladin this current day model of Totalitarianism was well established in the mainstream minds of the wannabees. Economics as led by the likes of Marx and Engels developed this totalitarian model to higher leves of the deviant arts. Notwithstanding, the failure of the proto-Human to develop the cognitive sciences that allowed for the necessary societal comprehension of proto-Human behaviours or "economics", this disabilitiy was developed to fraudulently represent incompetence and ignorance as competence aka "FRAUD". Hence the whole damned thingy has become nothing but Recursive scamming (looting) or a devolved feudal authority - a crime scene.
http://verbewarp.blogspot.com.au/2011/01/dumping-garbage.html
But the early Banks full understood precisely how proto-Humanity worked under the feudal system of those Kings and Queens. The Kings dominate their serfs and made war. The Bankers loaned the Kings the necessary to make war, BECAUSE the Kings were the most vunerable to the Bankers - due to being the lowest Risk. The Banks could always get their necessary back if debts remain unpaid by lending to the enemy, giving the Bankers, double returns and triple indeminity. Banko!
Today the Banker has become King whereas the kings of yore - the politician, merely the cost of doing business; banking business. this cost by the Policy of franchised Recursive Scamming aka "democracy".
http://verbewarp.blogspot.com.au/2011/02/recursive-game-is-policy.html
2. "Economics" today is nought but a politicalized faith-based Cult with its Dogma and Rites, Rituals, etc., attuned to support the King (the Banker). It consists of in excess of ~30 crazed priest led Sects of varying level of barbaric insanities; such is the nature and physics of the organizations known as the Collective.
3. "Economics", is not a science; merely ill-founded opinion (read: an insanity) for the consumption of the "true-believer" faithful dullard and the gullible public consumer. Or, in the recent words of that infamous EU Central Banker, "LIES".
And the Banker is doing just fine thank you, for He is King and His Word is Law.
So what has changed?
http://verbewarp.blogspot.com.au/
Ho Hum
This story is essentially correct if certain conditions were met which they are not. First off wages went lower and not higher "... they use the money to invest in capital goods, and eventually this money gets paid out in higher wages to workers in the capital goods industries." Secondly the printed up money largely didn't end up in the real economy but only went to a particular group of casino investors which inflated high art and made very expensive houses even more expensive while in the real economy after some inflation deflation took over.
The printed up money was not used in the real economy like in China were they actually build things (so Americans stop laughing about empty cities because they are real) but was used to prop up the stock market and to buy up US treasuries to keep interest rates artificially low. Companies used the low interest rates to buyback their stocks which doesn't contribute anything to the the real economy. So all in all QE turns out to be nothing more than a paper tiger ready to implode in this form.
This would be completely different if QE money was put into the real economy setting up projects building roads and bridges (like in China). But this seems to be very difficult to understand for all those dusty room PhD's mesmerized by faulty assumptions not to mention theories. Just look around you and see and learn beyond your dusty room theories.
And here the punchline: FED's monetary policy has nothing to do with Keynes so stop calling this policy Keynsian because it is not!
Why - o/o/c/ - what would Keynes be doing?
Is it 'neo-Keynesian'?
I'm asking. I'm too ignorant to have any theory... I just read a couple columns and blogs and for the life of me, I don't understand why so many people are so locked into this system of debt money.
A system where if people work hard and try to save what they actually can manage to save, it's 'bad' because people aren't spending enough is something I reject.
People shouldn't work half the year for government and the other half to pay banks interest on money the banks created out of thin air.
You just want to take guys like Paul Krugman and bitch slap them until they admit they take for granted the primary position of large banks.
It's debt slavery.
And it must be destroyed.
There are serial economic crises because the credit which comprises the 'economy' is junk. Governments can inflate but it only ceates bubbles which serially burst.
At some point the bubble that is the credit of the government will also burst. Due to the nature of money however, that being, you can't get enough of it - leading to irrational behaviour - the timing of the burst is impossible to predict.
Writing an article about the system that assumes the problems it currently faces are cyclical makes as much sense as writing about politicians and assuming they are honest. The financial system is the problem. Money is invented into existance (illegal), then accounted for as being an asset (dishonest). Interest is then attached to it and the public expected to pay (debt slavery). The structure is a ponzi (illegal) that was always going to collapse, the only question was when. The answer is when all the public wealth has been stolen by the private bankers running this scam and that point is fast approaching.
Are you a self motivated hard working serf and you want to be in charge of a nations debt? Print $500B -$2000B weekly easy. Join my old money team. All scam all bull... www.theFED.com/screweveryone
...as soon as credit expansion stops, the piper must be paid, and the inevitable readjustments must liquidate the unsound overinvestments of the boom and redirect the economy.
More Mises Monk nonsense!!!
Traders create money by making delivery promises and getting them certified. These certificates then circulate as the most universally valued object of every simple barter trade. When they deliver on their trading promises, the certificates are returned as promised and destroyed. If they don't deliver (i.e. they default), an equal amount of certificates are recovered through interest collections and destroyed. This guarantees zero inflation all the time, everywhere.
Everyone who has ever bought a house or a car with monthly payments is intimately familiar with this process. It is "the buyer" who creates the money. It is "the buyer" who returns and destroys it. Money allows simple barter exchange over time and space ... that is its purpose.
In a properly managed Medium of Exchange (MOE) process, this is done freely ... without enticed expansion or restriction from a capitalist or communist or any other kind of "ist".
The ability to expand and constrict credit is a capitalist contrivance and heist of free market trade. It keeps traders who would otherwise make really prudent trading decisions and promises from doing so. It causes them to act almost irrationally.
It's the capitalists' farming operation. Capitalists like to call it the business cycle ... and they've now invented the term "commodity cycle" to go with it.
These Mises Monks are every bit as annoying and dangerous as the Keynesian Conspirators and the Marxists Controllers.
http://www.barrons.com/articles/quantitative-easing-redux-1440826605
Quantitative Easing Redux?
Fed officials always try to disconnect the bank’s actions from stock-market gyrations, but history doesn’t support that indifference.
By Vito J. Racanelli
August 29, 2015
If a “rate hike” is Wall Street’s obsession this year, the effective opposite, “quantitative easing,” gets much less mention after three mammoth rounds of central-bank asset buying, or quantitative easing, in the past few years. But what’s that we hear? Another thing the Fed’s Dudley said last Wednesday was, “I’m a long way from quantitative easing. The U.S. economy is performing quite well.”
Fed officials always try to disconnect the bank’s actions from stock-market gyrations, but history doesn’t support that indifference. “It will take less than a 20% decline in U.S. stock prices for the Fed to begin discussing a new round of quantitative easing,” says Darren Pollock, a portfolio manager with Cheviot Value Management.
On several occasions in recent years, a Fed official has stepped in with easing statements following market routs. The Fed knows it can’t let the stock market fall without backpedaling on its tough monetary talk, Pollock says. It must try to keep stock prices from plummeting and pulling down consumer confidence, which could affect the economy.
Stocks recovered big-time last week, but remain vulnerable. Should the market fall some more, Pollock says, “It may force the Fed to do a U-turn and speak of a willingness to provide more stimulus—like QE.”
The Fed won’t let all the effort and money invested in propping up the economy since 2008 go to waste. It won’t stand at the plate and strike out looking. The Yellen put lives.
Bankers don't understand their product, debt.
“What is wrong with lending more money into the Chinese stock market?” Chinese banker before last month
“What is wrong with lending more money into real estate?” Chinese banker last year
"What is wrong with lending more money to Greece?" European banker pre-2010
"What is wrong with a NINA (no income no asset) mortgage?" US banker pre-2008
“What is wrong with lending more money into real estate?” US banker pre-2008
"What is wrong with lending more money into real estate?" Irish banker pre-2008
"What is wrong with lending more money into real estate?" Spanish banker pre-2008
"What is wrong with lending more money into real estate?" Japanese banker pre-1989
"What is wrong with lending more money into real estate?" UK banker pre-1989
“What is wrong with lending more money into the US stock market?” US banker pre-1929
We need to teach bankers the lost art of prudent lending and the importance of fundamentals, eg. ratio of mortgage size to income; ratio of national debt to GDP and age old metrics for valuing companies based on performance.
I resist the concept of "malinvestment" considering that even in the worst case, you actually get some physical output from pure "conceptual" money (created out of nothing, by people that doesn't have to work or save to do it)... yes, even ghost cities are "something" while money is actually "nothing".
People in the financial "Industry" will someday realize that shuffling paper around doesn't create real wealth, they only stick like parasites to the people that really do.
Creating wealth involves transforming something physical into a more desirable form... even pure intellectual work only creates wealth when serves this purpose.
Busts are the whole point of this game, this is the phase where TPTB exchanges their toilet paper for physical things.
"The time to buy is when there's blood in the streets." -Baron Rothschild