Let me begin with a very short explanation of what the Austrian business cycle states:
Austrian business school states that when a central bank increases the money supply, it does not increase the money supply to all economic actors at the same time. The sectors of the economy that experience receipt of the newly created money first will experience a boom period. If the central bank, stop supplying money to the boom sector, this sector will experience a bust. During the bust period there will be increasing unemployment as the boom sector no longer can support the previous amount of employment funded by central bank money supply expansion, and the workers must find jobs outside the bust area.
That is it, in a very simplified fashion. There is nothing more to the theory. There is nothing about prolonged unemployment. There is nothing about a central bank "running out of bullets." Unless an economy has entered the crack-up phase where the currency is completely destroyed, a central bank can always supply more funds to the "boom sector." Beginning and end of story.
To be sure, there are many reasons an economy can see a decline in employment, but outside of the transition period during a bust phase (which in itself should probably clear in less than 6 months) the unemployment will have nothing to do with central bank money manipulations.
An increase in those not employed can occur because of an increase in minimum wage laws, payment of "unemployment insurance" to those out of work, highly government-subsidized financing for college attendance versus work, those retiring, etc.
But here are some of the things I am seeing in the comments at EPJ:
RW, based on your own statistics cited in numerous articles, is it beginning to look like maybe Krugman and the Keynesians are right after all? Employment is growing, tax receipts are growing, the stock market isn't tanking, etc. And while it may crash in a heap one day, it doesn't look like it will be anytime soon. It could keep going on for many decades.No, what I am discussing is not Keynesian theory nor that of Krugman (Remember, Krugman wrote a book End This Depression Now!, when I argued we were already out of the Great Recession.). The current situation is pure Austrian theory as far as the stats are concerned. It is exactly what you would expect when the Fed is pumping money as aggressively as they generally are now.
As for the length of time the boom period can go on, Austrian theory does not address a length other than to say, it will end when the Fed stops printing money (or is less aggressive in its money printing) for whatever reason, or the crack-up is reached.
Another commenter writes:
Employment in the prime-age population is way down, tax receipts really don't matter (they looked great during the Tech Bubble too), and the stock market is only about 5-6 years into expansion (and it shows serious signs of cracking right now). The idea that this expansion will last decades is laughable (and more or less unprecedented). The fed was too nervous even to raise rates by 0.25% in September, for fear of ruining the "expansion".
If you don't take your eyes off the stock market, everything is rosy.
First, employment in the prime age population is not way down:
Second, there is absolutely nothing in Austrian theory that suggests that employment will be way down outside of the period of adjustment following the boom. That's exactly what the chart above shows. If there is less employment far beyond the initial bust, the factors are outside of the boom-bust cycle. I have listed some of the reasons this can occur, above. Anyone hinting that the Fed "can't get the economy going," i.e., has failed to reignited the boom sectors, doesn't really understand Austrian business cycle theory and is not looking at the data..
As far as tax revenue, that has nothing to do, necessarily, with the boom-bust cycle.
If the stock market is "showing signs of cracking" (doubtful) that only means the Fed needs to pump more money into the sector, if it wants the boom to continue. That's it. To imply they can't suggests confusion about Austrian theory. Who says the expansion can't go on for decades? The Fed tends to stop printing aggressively when price inflation hits about 5% to 10%, but there is nothing in theory that says they have to. Further, there is no theoretical argument that says productivity can't climb rapidly for an extended period, keeping price inflation tame, and thus allowing a prolonged period of Fed money printing (Though in practice that has not been the case.) If the Fed continues to accelerate money printing for an extremely long period, the crack-up, i.e., hyper-inflation, will occur, but there is no set period of time by which this must occur.
The commenter than writes:"The Fed was too nervous..." Who says the Fed knows anything about business-cycle theory? As I made clear in The Fed Flunks: My Speech at the New York Federal Reserve Bank, they don't.
"If you don't take your eyes off the stock market, everything is rosy." Well, according to Austrian theory, it is the capital goods sector that is at the heart of the boom phase, and the stock market is a big part of the capital goods sector, so that is exactly where you should be looking.
Another commenter writes:
Low interest rates work temporarily, until they don't. When sufficient consumer demand doesn't materialize 5-10 years into capital investment, i.e when malinvested capital doesn't garner the return it's artificially low cost signals it will, then businesses and jobs collapse. When revenue is so low even payments on principle can't be made, 0% interest rates do not continue to stimulate..
We have total confusion here, First it is not "low interest rates." It is the amount of money being pumped into the capital goods sector. This can still occur at "high interest rates" if the price inflation rate is high. Second, it has nothing to do with "consumer demand not materializing in 5-10 years into capital investment." The bust phase is actually the switch from a distorted capital favored structure to more of a consumption structure, when a central bank stops printing money into the capital goods sector. In other words, the bust phase is spending moving into the consumer sector.
It doesn't matter what the level of interest rates are on an absolute level;the Fed can still pump money into the capital goods sector. It's about the interest rate level relative to where rates would be without Fed intervention. (And we have never been at zero rate on the key Fed funds rate. Indeed, the Fund's rate has most recently doubled, climbing from 0.07% to 0.14%) If money is going into the capital goods sector, regardless of the interest rate, it will cause prices to be bid up in the capital sector.
I can't imagine Schiff being wrong about how the Fed is trapped on rate hikes, and that is much more likely to expect QE4.
Labour participation is down, most "new" jobs are part time, temporary, and in low wage industries. Yellen has said over and over that she will raise rates when the labor market improves, but it is a disaster.
Furthermore the economy is addicted to credit and CPI is low. Production is trending down too. Raising interest rates will lead to massive layoffs.As I have already pointed out, Quantitative Easing is a scam term invented by Ben Bernanke. It is simply another way to print money. Indeed, it is a subset of the Fed's greater ability to purchase assets via open market operations. The Fed can explode the money supply without ever doing another QE, Indeed, as I am reporting in the EPJ Daily Alert, the Fed is now rapidly accelerating money supply growth, This is being done without any QE. Anyone obsessed with QE is just buying into Bernanke shuck and jive.
As I have pointed out above, employment changes, including labor participation.can change for many reasons. There is simply zero reason for unemployment to be high outside of a very brief period (6 months?) when there is a shift from the boom phase to the bust phase. Any greater than normal changes in employment beyond that period suggests other factors other than Fed manipulations of the boom-bust cycle.
And, there appear to be very good explanations that show the decline in the participation rate has nothing to do with central bank money manipulations.
Another commenter writes:
By your closing statement, am I to think Ron Paul isn't an Austrian? Last Friday, in the Liberty Report, he sees the participation rate as a significant indicator of a recession ... not a boom. https://www.youtube.com/watch?v=tq6mW_5Qebk
First, I never said the falling participation rate was a part of the boom phase. It, I believe, is currently occurring outside of the boom-bust cycle. If you see the Fed accelerating money printing (which they are) and the price of capital goods, such as stock prices and real estate. are generally climbing, then according to Austrian business cycle theory, that is a boom phase. Here is the link once again to the seemingly legitimate explanations as to why the participation rate is falling and it has nothing to do with the boom-bust cycle.
I haven't listened to the YouTube that the commenter provides a link to, but if Dr. Paul is stating that the current drop off in the participation rate is a signal we are in a new recession, I do not believe he is accurately applying Austrian Theory. The current economic environment doesn't fit the facts of a recession in terms of what Austrian theory describes, if you look at the climbing capital goods prices and accelerating money growth. The alternative Fed explanations for the fall in the participation rate seem to be quite reasonable explanations.
One further note, during an earlier post, many accused me of making a hidden attack on Peter Schiff by not naming him. As this commenter points out by bringing up Dr. Paul, those trying to force feed the idea that the Fed can't create a new boom period or that they are responsible for all changes in unemployment, goes beyond Peter.
And, there are others beyond Peter and Dr. Paul. Indeed, one current litmus test to see who may be improperly applying Austrian theory is to see who is blaming the Fed for the current decline in the participaton rate. In my view, they are ignoring the fundamentals of Austrian theory when they do so----and even more denying the basic principle that markets clear. Unless there are specific factors causing a decline in the participation rate, and once again there are, you are not going to see a decline in the participation rate for anything but a short period at the start of the bust phase, as workers seek out jobs in the newly structured economy. This does not take years after the bust. If the participation rate is falling years after the bust it is for reasons other than the bust, and the Fed has nothing to do with it. Markets clear.
Also see: The Business Cycle and the Current State of the Economy (Part 2)