Saturday, April 9, 2016

BOOM Thank You Janet Yellen

Salesforce Tower construction is well underway in San Francisco, when completed it will be the tallest building west of the Mississippi River.

When you have a central bank manipulating the money supply, these types of projects only get launched in the manipulated boom phase.

The building is scheduled to be completed in 2018.

I have recently become aware that some students  of Austrian school economics currently hold the view that the bust phase of the business cycle occurs because  businessmen miscalculate how much material is available to complete projects and that the bust phase occurs when material runs out to complete projects. (The view probably exists because of the subsistence fund argument that Mises used early on in developing Austrian school business cycle theory. An argument that he seemed to move away from in later writings on ABCT [see: Braun:The Subsistence Fund in Ludwig von Mises's Explanation of the Business Cycle in Theory of Money and Fiduciary Media. It was an argument that was never used by Hayek or Rothbard)

I consider this "shortage of materials" theory as an inaccurate understanding of ABCT. As long as the Fed keeps pumping out significant amounts of new money through the banking sector, Salesforce Tower will be completed. It will never bump up against a "shortage of materials" to complete the project.

As to whether the building will be fully leased out after its completion, that's a different question and will depend upon where we are in the business cycle at that time.

A friend reminds me that after the World Trade Center buildings were completed in New York City (a government Port Authority project), they had so much trouble leasing out space during the down period of the business cycle that they gave free loft space to artists so that the building wouldn't have the feel of being empty.



  1. Depends on when the next downturn hits. We have had tower projects sit vacant and uncompleted for years after 2007-2008. As for Mises stating that insufficient material existing, as Roger Garrison discusses in his explanations, I would consider that indirectly accurate. More money exists than goods and services available. It is this disequilibrium that drives the purchase and price of goods and services up and thus beyond otherwise, so you truly do not have sufficient goods and services available at the prices planned for.

    1. Yeah, great theory except for the fact that prices of capital goods and services collapse during a bust, not the other way around---so directly it flies in the face of reality.

    2. Yes. But that drop in capital goods prices is a result of the drop in demand. So, once sufficient projects are abandoned as part of the market correction, that brings the prices down.

    3. Projects are abandoned at collapsing prices below the original planned prices, and this is because prices are too high? This is your theory?

    4. Prices are driven up during the inflationary boom phase. Malinvestment ensues. More projects appeared to be profitable thus extending the time horizon. Cease expansion or increase in rates bursts this bubble exposing the malinvestment. Firms react by abandoning no longer profitable ventures bringing a drop in demand. But, by the time prices drop the .gov has intervened sufficiently to stall recovery.