Austrian Business Cycle Theory

Shake my fist, knock on wood
I've got it bad, and I've got it good
--Robert Palmer

While observing the newly created Federal Reserve beginning its first real inflation following WWI, Mises began a series of essays to explain the repercussions of central bank intervention into the money and credit markets. Those essays continued thru the 20s boom and 30s bust.

His work, subsequently packaged into a book called The Causes of the Economic Crisis, presciently forecast the Great Depression. It provides the framework for what is commonly referred to as Austrian Business Cycle Theory.

It's simple, really. Holding interest rates below market induces an artificial boom. People take more risk than they otherwise would. At some point, it becomes apparent that many projects undertaken with artificially cheap funds will not pay off, which sets in motion a deflationary bust.

This is why it is likely that those folks who have recently jumped on 'the economy is recovering' bandwagon will likely be disappointed. We keep adding more waves of spending and debt creation to a system that has already been distorted by past waves of spending and debt. Market forces want to clear the system, but no one wants to feel the pain.

Any further upside that is realized here is like the additional fix for the addict. Temporary reprieve from an escalating pathology.

Sooner, rather than later, we will be back in the same predicament--only with more distance between us and bottom.

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