No Silver in the Silver Lining
Many economists since Mises have noted that every time the Fed manipulates interest rates it creates bubbles of malinvestment. In addition to reallocating scarce resources in inefficient ventures, one of the problems with artificially lowering interest rates is that, ultimately, someone has to pay for these subsidies.
As with every freebie provided by the government, some faceless individuals will ultimately share this unjust burden. And over the course of the Fed's more-than-90-year existence, individuals with dollar-denominated assets have borne the brunt of this devaluation as the dollar is worth about 5% of its original 1913 value
FULL ARTICLE
Comments (5)
I find the Austrian Business Cycle Theory quite compelling, even though sometimes I wonder why have money-induced mainstream theories of the business cycle (i.e. inspired by the ABC) been dismissed for so long. Can someone point some recent, non-partisan and technical reference that actually supports this theory of the business cycle? Or some work that presents extensive evidence that business cycles are caused by monetary policy. To the best of my knowledge, no macroeconomist really buys the ABC Theory. Are these guys terribly wrong? If that is the case, why can't Austrian economists actually show them the truth?
Published: February 28, 2008 9:15 PM
There are a lot of resources on the ABCT at the Mises forums in the reading list on praxeology.
Published: February 28, 2008 9:58 PM
Read Money, Bank Credit, and Economic cycles as referenced in the article. You can find it here:
http://mises.org/books/desoto.pdf
If after reading this you still think mainstream economic thought is right about business cycles, you're either in denial or a little bit slow.
Published: February 29, 2008 12:18 AM
Jeremy: I haven't read the entire 1000-page document, but from the first section I would say that the author is presenting a false dichotomy. True, if a financial institution enters into a contract to repay a specific amount of money either on demand or on a specific date, and cannot repay as they agreed, then they have committed fraud. However, no bank I am aware of actually enters into such a contract. There are other possibilities besides a pure "deposit" or "loan" contract.
A real-world account is more like a split between the author's "deposits" and "loans", where a certain amount of the balance is available on-demand and the rest is placed in a recurring loan. The former portion constitutes the reserve and the term for the loan is equal to the maximum withdrawal delay specified in the account agreement. One could argue that the bank's customers do not understand this arrangement (I would disagree), but they did agree to it, and the bank's management of the funds in accordance with the contract is not fraudulent.
Given that a fractional-reserve system can be equated to a mix of loan and deposit accounts as described above, if fractional-reserve banking does lead to business cycles then so would full-reserve deposits combined with no-reserve loans.
Published: February 29, 2008 1:19 PM
Um... how would they lend out no-reserve loans without any reserves whatsoever?
Or, what exactly would the loans be based on? I don't understand what you mean.
Okay - individual depositors may agree implicitly to the terms of their deposit - you're right about this, but guess what? There is no other choice in our current system.
What I mean is if you instead choose to hold onto your money, it's value is eroded (or part of its value is constantly being stolen) by the actions of banks everywhere... not by their own actions. By nature, this is fraudulent - others money is being stolen. The only choice afforded such people is to keep their money in another form (stocks, commodities, etc), but these are not a stable store of value in today's world / monetary system - ie, there is no other equal alternative available.
But if this were the only issue at stake (banks and those receiving the loans benefiting at the expense of others), it wouldn't be a huge deal. The fact that the expansion of the money supply creates business cycles is of huge importance.
Please finish the book if you are able - he makes some strong assumptions at the beginning, but ends up addressing pretty much any objection you could have by the end.
Published: March 25, 2008 9:31 PM