James Grant, writing in the New York Times, gives the briefest possible explanation:
ECONOMISTS cannot reliably forecast recessions. Nor can they detect for certain when a recession is in progress. Only after the fact do the official cyclical timekeepers identify the beginning and ending dates of a slump.
Though deficient in the powers of foresight and observation, economists do believe they know how to treat an economy on the brink of recession, as this one seems to be. They administer what non-economists know as the “hair of the dog that bit you.â€
But booms not only precede busts, they also cause them. Bargain-basement interest rates are a potent stimulant. Borrowing more than they might at higher rates, people stretch. Businesses stock up on labor, machinery and buildings. Consumers buy cars and houses — houses, especially, these past five years. The G.D.P. takes flight.
Then unwelcome facts intrude. Easy money, it seems, was an illusion. Society was not so rich as it seemed. The prosperous future for which people had collectively prepared is slow to arrive. The inflation rate picks up. Supposedly creditworthy consumers and businesses turn out to be risky. They were creditworthy only so long as lenders were willing to advance them more and more funds at those ever-so-affordable low rates.
Now what to do? Why, slash interest rates to coax forth still more lending and borrowing. It’s the customary curative, seemingly as humane as it is politic.
And if recessions served no useful purpose, it might be. But recessions do. On Wall Street, they speak of “corrections.†What corrections correct are errors in judgment. So do recessions.
They allow the sorting out of boomtime error. They permit — indeed, force — the repricing of inflated assets. In a downturn, previously overpriced businesses, houses and buildings are made affordable again.
Naturally, people hate these painful, salutary interludes. Nobody likes insecurity, bankruptcy and joblessness. So the Fed keeps slashing interest rates. And this balm does mitigate the suffering. Homeowners and businesses refinance their debts. Fewer houses are thrown on an overstocked market.
Observe, however, that the great preceding illusion is undispelled. Prices have not come down as they should have. Neither has indebtedness. The architecture of the economy remains as it was. Land, labor and capital are still structured for an imagined glittering future.
Presently, a new upcycle does begin, but it’s slow off the mark. The world’s top economy seems curiously sluggish. And the economists and politicians ask, “What happened to America’s dynamic economy?†The answer: It’s wrapped in the coils of debt.
— James Grant, the editor of Grant’s Interest Rate Observer.
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Yancey, I think what rtr does not understand about example is that investments with high returns are limited in number and in the amount of funds they can absorb. The early, alert investors get to take part in those investments. Before the interest rate is artificially lowered, only the investments with the worst prospects are still available. But no one invests in them because they are poor prospects at the current interest rate. When the bank artificially lowers the interest rate, the poor prospects suddenly appear to be good prospects, even though that’s an illusion caused by the artificially low interest rates. As a result, people invest in projects that appear to be sound when they’re not. The artificially low interest rate acts as smoke obscuring the vision of the investor. The smoke clears only after the passage of time and the realities of the marketplace prevent the plans of the investment from completing those plans and the business fails.
Of course, rtr wants to insist that there are no bad investments, just random shifts in subjective value that cause plans to fail. He’s really just quibbling over small differences in definitions. Malinvestment, bad investment, failed investments, whatever term you use, they mean investments that didn’t turn out as planned. No one is arguing that investors intentionally make bad investments, only that sometimes investors are mistaken and that artificially lower interest rates increase the number and magnitude of the mistakes.
fundamentalist: “But economics does concern non-psychological reasons for preferences, such as a change in the supply of gold.”
What’s going to cause changes in the supply of gold? Action. Hoarding. Dumping. Counterfeiting. Multiplying. Same causes as the changes in supply for all other goods.
fundamentalist: “Yes there are: changes in the money supply cause them. To deny that systematic business cycles exist is to deny reality.”
What causes changes in the money supply? Action. There are no a priori business cycles. Your alleged “business cycles” are the exact same typical changes in supply and demand for any good.
fundamentalist: “You could exchange gold for something else because you needed the other thing and you had plenty of gold.”
With every post, you contradict more and more basic economic principles. “Needed”??? Action is observed. Suddenly you want something else which you didn’t want before. That changes your subjective valuation for the other thing. Your changing subjective valuation for the other thing changes your subjective valuation for the gold you hold if you trade that gold for the other thing. Something else is suddenly worth more then something you already have. That which is received is valued MORE than that which is given away in exchange.
fundamentalist: “If you never traded gold for anything else, especially food, your value of gold would be increasing, not staying the same, because at some point you would value gold more than life, since you would starve without trading for food.”
Your personal value of gold might be increasing or decreasing or remaining steady. But when you trade it away for something else, you value that something else more than you value the amount of gold you trade away. The process of going from not starving to starving is a change in subjective valuation. This is exactly why subjective valuations are in a constant state of flux, and not unchanging constant. The changing most urgent desires are satisfied first before the changing lesser urgent desires.
fundamentalist: “The subjective value of money changes primarily with the change in the supply.”
“Primarily”. Except every once in a while there have been recorded events of massive “earthquake” changes in subjective value of money (even though the effect doesn’t occur until a marginal straw breaks the camel’s back), such as when a 9.9 on the Richter scale fiat currency collapse occurs, or when a 5.4 on the Richter scale credit bubble pops. Economic changes are caused by human action. Earthquakes are not caused by human action. Earthquakes are cyclical. Human action is not cyclical, but constantly aiming at a state of lesser dissatisfaction from a state of greater dissatisfaction. If human actions were cyclical there wouldn’t be economic growth. That’s why labeling action resulting in “business cycles” is anthropomorphic. But *forcing* fiat money while wrecking a gold standard is like building a San Andreas fault into the subjective valuation of money.
fundamentalist: “You’re changing the subject. We were talking about the valuation of money, not metaphysics. A change in the supply of apples does not affect the monetary price of any other commodity, except possibly close substitutes for apples.”
Take a more visible example, since you cannot see the principles at the margin. If the supply of oil DOUBLES, the prices for many many many goods will change. Principle demonstrated. Any change in any supply effects ALL other prices. QED. Shipping is cheaper. The value of goods in further away places can be traded with less transaction cost. Technology has similar effects. An economy with one more apple is wealthier than an economy with one less apple.
I said before to picture an “invisible chain of dominoes”. You can picture the entire economy architecture accurately this way. Now picture one side of the domino painted red, and the other side of the domino painted black. Trade of particular goods between particular people is one way, that is there is not an infinite back and forth exchange of the same things. Once that exchange is done, it’s done. It’s not going to occur in reverse order between those same two persons. Particular dominoes are added and subtracted all the time. But if you were to imagine holding all action ceteris paribus constant, and just allow the effect of one trade action to reverberate, it will effect all the other connected dominoes. It effects the energy direction of the market, it effects the prices because the same marginal goods which have just been traded instantaneously effects the energy direction of the entire economic system. The same exact goods are valued MORE after trade. This by definition changes the wealth of the economy, this by definition changes the prices of the economy. If something new is produced and traded that changes all the old possible combinations of trade which could have occurred before that new element was added.
fundamentalist: “rtr, I’m curious. How does your economics differ from standard neo-classical (Keynes/monetarist) economics?”
My demonstrations and theorems are all derived from basic economic principles, none of which are in contradiction with fundamental “Austrian” economics. The *only* difference is my “Pure Theory of Trade” is in conflict with all economic schools “monetary theory”. But their objections are weak sauce compared to the demonstrative power of strict greater than and less than signs derived from trade action. What’s different for “Austrians” is the ABCT is in contradiction to the fundamental principles of action. I’m not aware of neoclassical economics maintaining a position that there is no such thing as a “business cycle”. They thought it was natural, and “guns and butter stimulus” could help the economy during “business cycle downturns”. My demonstrations are radically different, but they are derived from sound basic Austrian principles. You see me referencing “action” all the time. My methodology is purely Austrian. The implications of trade just haven’t been explored to the full extent in relation to other economic theory.
The “business cycle” emanates from just the fairy tale abstraction of the “life cycle” of a particular corporation: birth, growth expansion, maturity, decline, death. But action continues unabated as preferences change and supplies change.
Yancey Ward: “It is the lowering of the natural rate of interest that makes it more likely that an entrepreneur will calculate that option C is a profitable venture, a venture that then depends on the maintenance of that artificially low rate of interest.”
And it is simultaneously less likely that that particular venture can be undertaken because the supply of savings will be withdrawn given an artificially low interest rate.
Yancey Ward: “If the rate of interest then rises (which the central bank is alwasys forced to do at some point), that investment in C is now a loser- it was a malinvestment that was directly caused by the artificially lowered rate of interest.”
No it’s not, assuming the venture locked in the artificially lower interest rates. The venture is only undertaken if the venture acquires the capital necessary to be undertaken. Once it’s undertaken, the venture is locked in at the artificially low interest rates. Your ASSUMED future interest rate rise is IMMATERIAL to that particular venture. That particular venture is already done. Higher interest rates don’t matter to that particular venture since it already got is funding at lower interest rates. It’s no different than if the person who undertook that venture instead of undertaking that venture just arbitrage profit scalped the artificially low interest rate and retired to an island. It came at the expense of particular individuals who sold savings “low”.
Just like if you have a fixed interest rate mortgage, higher interest rates don’t raise your monthly payment. If a business venture borrowed funds at an adjustable rate, that’s a function of a distinct “faulty” business decision and not the interest rate.
fundamentalist: “Before the interest rate is artificially lowered, only the investments with the worst prospects are still available. ”
We agree completely here.
fundamentalist: “But no one invests in them because they are poor prospects at the current interest rate.”
OR, there are no surplus savings left over for them to be undertaken. Calling them “poor” prospects is an artificial assumption. They are just not as marginally high prospects as the other funded ventures. Savings aren’t unlimited. Additional funding for “marginally lower prospects” would have to come at the expense of funding for “marginally higher prospects”.
This is another blatant source of faulty monetary theory error that the “Pure Theory of Trade” shines a light on. A monetary theory conception paints the interest rate as an unlimited fire hydrant spewing out unlimited savings water, just at different force rates.
Umm, do you not see the glaring error in all that you say? The investment was conducted with a particular profit in mind given current interest rates. Government distortions alter the interest rate such that it does not reflect the real factors of the economy, i.e. actual saving and borrowing. Yes, normal investments can result in losses or lower-than-expected profits, but this distortion more or less guarantees that certain normally unprofitable investments will take place. Do you deny that government meddling in the monetary market can result in such effects by messing up the signals given by the interest rate, i.e. a price of sorts?
Okay, let’s see if I can get this straight: The market interest rate is the balance of supply and demand for money–how much money people are willing to save or invest instead of spending now, and how much people/businesses are willing to borrow. The Fed generally likes to lower the rate to “prime the pump”, so they are stimulating increased demand for money by the borrowers. But there are no more, and at lower rates, most likely fewer saver/investors, and thus, less money to loan out. So it’s a first-come, first-serve situation, those who borrow first get the money for their plans, and the remaining would-be borrowers cannot borrow for their plans.
First-come, first-serve tells us nothing about the quality or risk of the plans of the borrowers, but surely some of those plans will be riskier, i.e. more marginal than others. At higher interest rates, those plans would not be enacted upon, and are only engaged due to the lower rates.
At the same time, later would-be borrowers are forced to forgo their plans, some of which may be more sound/less marginal than some of the plans that are enacted upon.
Thus, it is clear that the end results of these plans are different than the results that would occur under market interest rates. Furthermore, if more marginal plans are being enacted upon at the expense of less marginal plans, then resources are being diverted so that more urgent needs and desires are unfulfilled (shortages), while less urgent needs are fulfilled (surpluses), and the market economy has to adjust to these new circumstances.
This diversion and readjustment is the boom/bust cycle caused by interference in the natural market rates. It is true that without interference, businesses could still overestimate or underestimate the success of their plans, and shortages/surpluses could still occur. However, those shortages/surpluses and the successive readjustments wouldn’t be as large or dramatic.
Compounding the problem, of course, is the fact that the Fed doesn’t do a one-time or temporary adjustment to the interest rates, but instead, continually controls and adjusts the interest rates. Thus, a continual mis-allocation of resources and a continual adjustment to such mis-allocations occur. This fact may explain why large boom/bust cycles don’t occur under the Fed repeatedly, but only when they (or other government agents) make big mistakes instead of continual small ones.
Even so, we would still be better off and safer without the interference and with natural market interest rates–less misallocation and less financial risk would occur.
To personally profit from this, though, one needs a thorough understanding of the markets involved AND the expected actions and consequences of government intervention. Only then can one make better-educated-guesses and do better than random chance. Merely understanding the problem involved is only the first step.
Inquisitor: “Umm, do you not see the glaring error in all that you say? The investment was conducted with a particular profit in mind given current interest rates.”
And either that investment gets those current interest rates thereby actually realizing the expected profit, or the venture doesn’t get those savings from those interest rates and never gets the chance to undertake the venture.
Inquisitor: “Do you deny that government meddling in the monetary market can result in such effects by messing up the signals given by the interest rate, i.e. a price of sorts?”
That’s the question to ask. It’s no different than price controls on any other good. The government artificially fixing the interest rate is going to skew the savings market, not the investment market. There will be less savings and therefore less investment, causing harm to the economy. Are any mal-trades going to occur if the government artificially fixes the price of other goods? Of course not.
Michael A. Clem: “First-come, first-serve tells us nothing about the quality or risk of the plans of the borrowers, but surely some of those plans will be riskier, i.e. more marginal than others. At higher interest rates, those plans would not be enacted upon, and are only engaged due to the lower rates.”
They would also be enacted upon if real savings were higher, if the supply of savings increases, regardless of the risk descriptions. I suppose the more investments undertaken, the more a chance more of them will be riskier and not work out as planned. If you keep throwing a dart at a dartboard, the chances of completely missing the dartboard go up the more throws you make. But nobody is going to decry the use of increased real savings.
I’ll concede, to move the argument along, that there’s a chance that marginally less worthwhile investments will *replace* marginally more worthwhile investments. Of course, if someone picks off arbitrage profits by underpaying savers they can celebrate however they want to. It doesn’t make “malinvestment” a foregone necessary conclusion. You then have to demonstrate how in a free market, absent any government interference, this condition will not hold:
fundamentalist: “Before the interest rate is artificially lowered, only the investments with the worst prospects are still available. ”
rtr: “We agree completely here.”
I’ll concede, to move the argument along, that there’s a chance that marginally less worthwhile investments will *replace* marginally more worthwhile investments
That’s the point. The lower interest rates affect the savings, which in turn affects the plans, causing misallocation of resources. That’s the “malinvestment”. Investors can only invest in what exists, not in what might have existed without the government interference.
Don’t forget to ackknowledge what a dumb a$$ you IZ.
Presently, a new upcycle does begin, but it’s slow off the mark. The world’s top economy seems curiously sluggish. And the economists and politicians ask, “What happened to America’s dynamic economy?†The answer: It’s wrapped in the coils of debt.
— James Grant, the editor of Grant’s Interest Rate Observer,
Hey, take a …
rtr > U.
Congratulations on U DUMB /AZZ ‘WARD. You’re *almost* as smsart as Fred Thompsan. “That’s the “malinvestment”.”, because you and the are D-U-M-B, sorry, learn some something besides getting off on my middle finger.
Look at the pussies run away. Maybe “Inqusitor” can lap it all up. The Brady Bitch Theme Song. Yeah, I think, dey be talking to U. P.S. Get phucked Bitch. (Yawn). Fuck out of my face. Pretend you can make an intllectual connection. Happy B1thc ?Slapped Day. /b-y-e wtf du u want? gtfo. Happy first day of Kindergarten, u dumb fuk.
Oh shit, ban the genius. Which in turn, remind you of lesser intellect, to STFU. {Run Away}. /bye
_|_ middle finger 4 U, middle finger 4 U. So nice to have U displayed. Boo-hoo. Be scared. Be dumb.
That’s the dumb ass oblviousness. Exercise Ur censorship functions. Yeah, really, you’re in thesame League as me, intellectually. Ludwig von Mises said you are “STUPID” too, but thanks for the donations.
Insult me. I demonstrate, but you still feel you must record your feelings. Again. Pathetic parrot heads. Discuss amongst Urself. Don’t you /punks not /dare /bow B/4 Me.
Fucking hackers saying shit on behalf of my middle finger …
You know. I know. STFU, and ackknowledge. Fucking moron airheads.
Boo-hhoo, we can’t handle the shizzle, we’z scurred.
Perhaps you should have a convention on “policy”. “Commntds”? You wish. Pretend you ar e Princess Dianna or something. Ummm do you not see what a moron you are?
Next time you ban me …
I was wondering how long it’d take to get to this…
Maybe “Inqusitor” can lap it all up. The Brady Bitch Theme Song. Yeah, I think, dey be talking to U. P.S. Get phucked Bitch. (Yawn). Fuck out of my face. Pretend you can make an intllectual connection. Happy B1thc ?Slapped Day. /b-y-e wtf du u want? gtfo. Happy first day of Kindergarten, u dumb fuk.
if only the govt could have kept you south of the border
Government distortions alter the interest rate such that it does not reflect the real factors of the economy, i.e. actual saving and borrowing.”
does the govt keep stats on savings levels, money invested in 401ks etc??
could they be very inaccurate?
If the ABCT is sound theory, why is it so hard to convince and demonstrate that its accurate?
is there an instance, an actual instance, historical or or current — where the govt or money issuing body brought aobut various credit expansions (banking reserve regs, central bank emergency measures, etc) misleading (many) individuals into thinking the money was worth more than it was??
leading to a discernable malinvestment(s)?
data and anecdotal evidence??
rr tracks to nowhere traced to crazy hush-hushed banknoting?
boom/ghost towns formed by a quick change in reserve requirement law that duped many people in the dollars strength?
“Reality always IS a barter economy. Exactly, there is no business cycle. It’s a myth. Trade only (ALWAYS) occurs because that which is received is valued more than that which is given away in exchange.”
is there an instance in reality that describes action where barter takes place indirectly?….desire shoes, shoemaker doesnt want eggs, which i have,…shoemaker scrathes head and thinks beer would be nice,
a n egg -beer-shoe-beer barter chain takes, two days…a money purchase/exchange take a few hours.
so some good/thing serves as a transferrence?
what is that action called? a purchase??? is purchase different than barter?
if money makes a cycle different than egg to -beerman — eggman with beer gives beer to shoeman — shoeman gives shoe to eggman — shoeman has beer eggman with money gets shoes/shoeman with money gets beer.
…does moneys exchange cycle (proceed) in a way different than barter goods exchange?
extrapolated across a nation (via govt/credit banks) have money cycles operated in a way that concealed/distorted its value where beer for shoes wouldnt have?
the austrian moniker isnt so important.
“discretionary and fiscal policies are the genesis of societies needs and desires, ”
soft drink tax?
http://www.independent.org/newsroom/article.asp?id=87
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