If you want to delve in detail into the theory, there are two books by Rothbard on-line at Mises.org, “Man, Economy, and State”, and “America’s Great Depression”. Gene Callahan has a more popularized treatment of this topic in “Economics for Real People”, not on-line but available through the bookseller of your choice. An essay by Reisman exlores some of these topics: http://mises.org/daily/1014. There is an interesting, somewhat revisionist essay by Hulsmann at http://mises.org/journals/qjae/pdf/qjae1_4_1.pdf

Are zou suggesting that China is headed for a fall? If so, does this have anz implications for the US? the price of oil? I would love your insight on these matters.

What is the difference between money and credit?

“Capital goods”, the “capital stock” while invoking tangible images are nonetheless subjective things. Money is the most commonly traded thing that is subjectively valued. A story, for the purpose of economic elucidation, is as real as an apple. Menger’s principle of subjective valuation must be realized in terms of not just preference, but also wealth, value, and production.

Is what is commonly referred to as money today (even by Austrians) anything of the sort? All the worldwide government currencies are dwarfed by credit (e.g M1 vs. M3). The currently most commonly used medium of exchange today is credit. As long as someone subjectively values that credit it’s as real as gold. Gold has value for the exact same reason that credit has value — subjective valuation by an individual actor(s).

Government monetary policy or no government monetary policy, credit has been drastically expanded in the last century, globally, at a much more accelerated pace than even government currency. Unlimited monetary and credit expansion is not some mythical power that only the government possesses, and in fact government credit and monetary expansion can be and has been dwarfed by private sector creations of them it appears to me (unless someone would like to argue that unsolicited offers of credit cards and the like are government creations, that the private issuance of a “credit of government/private [subjectively valued] currency” would not be even theoretically possible on the free market).

What is and why does credit exist? Advanced economic exchange, which most likely occurs very early even in societies which would not commonly be regarded as “advanced economies”, involves exchanging goods between different periods of time, now and later, such as burying meat in icy snow. Interest rates evolve from this type of exchange. I would argue the first interest rate that exists is zero. This is the case whereby one saves something now to consume it himself in the future. Thus storing wheat in time of feast to be consumed in time of famine is done in the expectation that not more wheat will exist/be received in the future but that the saved wheat that exists now will exist later when it’s more needed (its value is greater).

Of course, trading that saved wheat now for more wheat later from another individual benefits the saver more then “hoarding” (the borrower benefits also, or else the transaction would never occur). Thus, *interest rates imply trade between individuals*, trade with transfer of goods between periods of time. However, negative real interest rates are a theoretical possibility as well. For instance, with rapidly expanding technology such that views are that a much greater abundance will exist in the future a party may agree to receive less of that good in the future. Why would this be so? This occurs when the expected future “value” is less then its perceived current value. It can be seen as a synthetic short. A good example of this has been silicon semiconductors. So even in the face of inflation of the “money” supply, the price (as measured by a commonly subjectively valued thing called money) of semiconductors may decline in the future.

The Austrian Business Cycle is essentially an idea that holds that “cycles” of credit expansion and contraction lead to periods of boom and bust. While not necessarily “wrong” it misses much. Demand can be independent of supply such that ceteris paribus it weakens in the future. This could cause a “bust” independent of any change in the supply of credit. Austrian Business Cycle theory does not distinguish this. Predictions regarding future “busts”, to be epistemologically correct, must not a priori ascribe an increase or decrease in supply as the sole cause of future price change, even of “general business conditions”. ABC attempts to take this into account by using a ceteris paribus of “overall business conditions” holding demand unchanged. That’s all and well for theory but its assumption in practical analysis is similar to a perfect knowledge assumption.

Common economic errors that are perpetuated by even the likes of Rothbard are associating wealth with GDP, and various other government statistical measures of “economic well-being”. GDP is hardly a measure of wealth. It concerns only a minority of exchange and ascribes an objective measurement for wealth, which is essentially subjective, as ceteris paribus the man with a pretty wife is better off than the man with an ugly wife, and subjectively so.

Wealth, in a world of private property, is primarily created through trade. All parties to all exchange increase their subjective valuations from trade, become wealthier. This is true still when something bought for a monetary unit measured price is later sold for a lower monetary unit measured price. Loss is limited even in the face of value decline from the non-constant rotation of economic forces. All components of “society” become wealthier when trade occurs. This is true even of a Robinson Crusoe who must at the minimum trade his labor to harvest nature’s bounty. The reason why government “interference” in the free market is “wasteful” is because it is the antithesis of trade: theft. Too many watered-down phrases and conceptions of socialist government tyranny have infected the thought process of a clear analysis of human action, phrases that cloak violent *action* and lead to comfortableness with false ultimate givens.

The term “business cycle” at a minimum gives a false impression of statistical regularity and likely more egregiously supposes a causal relationship that isn’t necessarily so. This stems from a fundamental misunderstanding, in my opinion, of money by the Austrian School, and economics in general. Just because the government uses force to declare the paper it issues “money” does not necessarily mean that fiat money should be taken as an ultimate given of “money” supply. The threat of the use of force to steal is implied in the existence of government currency; it’s declaration as legal tender. However, the market still functions and still values that paper and its inherent threat as “money”. It’s nonetheless a subjective valuation. And as such, money is subject to the same economic forces as the prices of the goods it measures.

Government establishment of a gold standard would not be fundamentally different than the current fiat money system. It would still be using the threat of force to ascribe arbitrary objective value to something being called “money”. Money, even fiat money, is only one specific good in the set of all goods. Using that specific subjectively valued good as an angle upon which to view economic exchange completely disregards the other n-1 angles upon which to view the same economic exchange over the same period of time.

So while using Austrian business cycle theory may be more sophisticated then placing a random bet on a roulette wheel it is still just a variant of that random roulette wheel bet when it comes to its practical application regarding “boom” and “bust” “cycles” in the real world. This is primarily so due to a fundamental misunderstanding of money in economics generally. Mises and Rothbard took too much as a given diametrically opposed concepts of fiat money and a market based commodity version medium of exchange. They are both still subjectively valued by the market. The key difference is fiat money’s declaration of legal tender has nothing to with trade and everything to do with the inefficiency of sociliast centrally planned theft. As such much confusion was intertwined with “monetary” economic theory, and the Austrian School did not escape that confusion either.