Friday, June 3, 2016

Even More Confusion About the Business Cycle

Several comments left at my post, Typical Confusion About the Nature of the Business Cycle, indicate there remains confusion about the business cycle.

Let's take a look.

One commenter writes:
I think most "Austrian-lites", as you have referred to them, are seeing things a bit differently from you, Robert, because you are viewing this as just another ordinary business cycle boom. In other words, they are seeing an economic end-game ahead and you are not. What if we never see a meaningful decline in housing prices, housing sales, or consumer spending because the Fed's easy money policy never ceases to any significant extent? Are you going to continue saying we are in a Fed induced boom phase if the median price of a home in San Francisco reaches $50 million? There comes a point where the boom is actually nothing more than the seeds of the crack-up-boom. When a country is experiencing hyperinflation, is it in a boom simply because the price of capital goods and consumer spending is rising, or is it in recession? It's semantics. 
Greenspan held the Fed funds rates at 1% for one year before raising it to 5.25% and managed to inflate a housing bubble so big that it almost destroyed the economy in a deflationary collapse. We now have held the Fed funds rate under 1% for over seven years, and a bunch of QE on top of it. The Fed cannot afford another bust phase. They may continue to raise the Fed funds rate, but not enough to actually be considered a tight monetary policy. They are always looking for a way to avoid the bust phase, and that means raising rates slow enough to keep asset prices elevated. This is why many see an end game here. What are they going to do; allow the bust phase to play out this time? If that is your position, then I think you may have been in San Francisco way too long.

1. What evidence does this commenter have that an economic end game is imminent?  There are serious problems in the economy as there were before the 2008 financial crisis. but the pre-2008 period did not lead to an "end game."

I do  not deny that the economy is very unstable but there is no indication we need to head out into the New York City subway system anytime soon with signs that say "The End is Near."

Data must be monitored  but there is just no shred of evidence that a major collapse will happen in the near future. The evidence can change, but as of now there is no set of signals warning us that an "end game" collapse is about to occur in the next 6 months or year.


2. If we don't see a meaningful decline in housing prices that just means the boom is on and the capital-consumption ratio  is continuing to be distorted. I have never ruled out an eventual crack-up boom, that is, hyper-inflation, but that is nowhere near and further as Murray Rothbard has pointed out the banksters don't want hyper-inflation either. That is why they brought Paul Volcker in as Fed chairman after G. William Miller was really letting things get out of hand.

Volcker slammed on the brakes on the money printing and slayed the price inflation of that period. There is nothing to signal that the banksters won't bring in a Volcker again when things get out of control.

Indeed, the history of business cycles has been  much more often about booms and busts rather than about crack booms.


3. A boom phase in the capital goods sector is about rising capital goods, read Austrian School Business Cycle Theory. To be sure there can be a period of stagflation when prices are climbing and the economy is in recession but these are not semantic games. They are descriptions of very specific events in the economy that if not understood can result in extremely bad investment and business decisions.

When the commenter writes:
We now have held the Fed funds rate under 1% for over seven years, and a bunch of QE on top of it. 
He is buying into Ben Bernanke shuck and jive, as I have explained many times in the EPJ Daily Alert,  quantitative easing is nothing other than a subset of Fed open market operations. It has been around since the beginning of the Fed. Thinking QE is something new and special reflects an inability to see beyond Bernanke's smoke creation machine.

The commenter than does the Austrian-lite  two step. He writes:
 The Fed cannot afford another bust phase. They may continue to raise the Fed funds rate, but not enough to actually be considered a tight monetary policy.

The original claim of the Austrian-lite crowd was that the economy was already in recession, not that a bust phase was coming in the future, The further claim was that the December 2015 Fed rate hike was "just for show" and would have to be reversed because the economy "wouldn't be able to take" the hike.

Since the rate hike has not been reversed and another rate hike is likely to occur before the end of the year, the new dance step comes in.


Another commenter adds to the confusion:
 I'm concerned about the real economy on Main Street. What about the 15,000 people losing their jobs in Sports Authority goes bankrupt? What about the lost jobs in the oil patch? What about the unsustainable debt keeping Main Street afloat being student loans and auto loans?
Taking anecdotal evidence of a specific business closing down says nothing about the overall economy. There are always changes in businesses otherwise buggy whip manufacturers would still be running strong.

A specific business can close for many reasons, bad management, changes in consumer preferences, etc.

Sports Authority happens to be in a sector, the retail sector, that is getting slammed by internet sales. A recession is about an overall down turning economy.

Commenter David T. gets it when he refers to my remarks:
He is not saying it is sustainable, just that right now we are in the boom phase. Nobody cares about sports authority because 15,000 jobs is tiny and most of them will find employment elsewhere. Sports authority lost out to competitors like Walmart, Target, Amazon, etc

The oil sector is even more of a sector specific problem caused by an explosion in production.

I don't see how student loans are keeping mainstream afloat. It is keeping the government-education sector afloat but it has nothing to do with Main Street, Climbing auto loans are just a part of the Federal Reserve boom.

The commenter goes on:
If you do want to cover the risk assets of the Rich and Famous, please write about the inventory of luxury real estate piling up in New York and Miami. Is that sustainable? If so, for how long? How about the earnings prospects for Tiffany's, Nordstrom, or Sotheby's?
My point is I think you're missing the forest for the trees in focusing on high-end risk assets as your judge of how the economy has been doing. Even now, some of these high-end risk assets are deteriorating and you're not seeing it

There is some confusion here about the so-called "pile up" in the luxury real estate market. What is really happening is that the market for super luxury real estate has exploded  and thus there is more product being produced for that market creating a greater inventory for the larger number of clientele.

The down phase occurs when the inventory piles up because there are no buyers and production of the luxury homes has stopped, that is not the case now.

The commenter asks:
Is that sustainable? If so, for how long?
Well, that is the point. It continues until the Fed dramatically slows or stops its money printing.  I am not saying that it will never end just that the Austrian-lites who claimed the Fed could never raise rates and that the Fed could never ever create a boom phase again were just wrong.

And at the post, Gallup U.S. Good Jobs Rate Keeps Climbing, we have this comment:
During the same time period, the BLS labor force participation rate went from about 65 to under 63, which is a generational low not seen since about 1978 and far from the highs seen in the 67 range around the year 2000.
Could you please reconcile the two methodologies for us? The BLS data is clearly recessionary.
I have discussed the labor participation rate number many times. It is not "clearly recessionary." It has nothing to do with recessions.



  1. If anyone wants to call me a fiction peddling Cassandra bear, I'm OK with that. I believe the real economy it's a lot worse off than you would have us believe and we are sliding into recession or possibly in recession already. Maybe pointing out the terrible BLS data today will be dismissed as irrelevant noise. It's all part of the larger deteriorating picture.

    My perspective is that there's a whole lot more data out there than money supply and it's not looking good.

    1. Your face isn't looking good.

    2. Thank you for your logical and reasoned contribution to the dialog.

  2. On another note, just passed JM Keynes Dr. Smh.

  3. 1. I am theoretically taking the "boom can go on for many years with enough funny money injections" position. And isn't the limit on those injections not so much price inflation but price inflation in goods and services that the public won't tolerate? The public loves high stock and housing prices, for example.

    2. Libertarians and Austrians have totally failed to make the public understand that inflation is an intentional government program and not a mysterious force of nature. And they have failed to make the public understand that with each injection of new funny money, YOU have been robbed of purchasing power if you weren't the recipient.

  4. Mr Wenzel,
    Do you consider Cantillion effects to be part of ABCT?

  5. Just a few things: Fed governor Evans just came out with a tweet saying that rate hikes could be delayed for years. JPMorgan just said they think recession could occur this year in the U.S. Perhaps QE has been done by the Fed for decades to a minimal extent, but nothing compared to what was done in response to the 2008 financial crisis. Just look at a long term chart of the Fed's balance sheet.
    Robert, your statement about how the bankers don't want hyperinflation is not relevant due to the fact that they don't want a systemic deflationary collapse of the banking system even more. In other words, nobody wants to die by lethal injection, but they don't want the electric chair even more. Hyperinflation allows the banks and the banking system to survive longer than does a deflationary systemic banking system collapse, which would occur if the Fed brought in the reincarnation of Paul Volcker. This is basic Austrian theory of the Misesian variety. The crisis will always be delayed by the Fed when the survival of the banking system depends on such a delay. Your view that the system could survive another Volcker is an opinion that I do not share. The 2008 crisis is evidence that the banking system could not survive a real tightening of monetary policy. Where is the evidence that it could?

  6. Bob.

    On the "end game". The commentator said that Austrian-lites see an imminent endgame. It would probably be more accurate to say that they fear it. As for the evidence. The only thing that staved off a complete collapse in 2008 was massive interventions from the Feds. Back then, the Fed's balance sheet was around $800 billion, now its $4.5 Trillion. Back then, the bubble was largely limited to housing related assets. Now it the bubble is in real estate, stocks AND treasuries. There will be no bailouts when this bubble bursts. Either we'll see massive defaults on debt, including sovereign debt, or we'll see hyperinflation. That is what people mean with "End Game".

    If you think this can end in any other way, e.g. a papering over like we saw in 2008, please explain how that would work.

    Please explain how you think the US and other countries would be able to service their debts if the interest rate goes up to normal (aka pre 2008 levels).

    Please tell me who would buy the trillions in US debt if the Fed not only stops buying, but also tries to unload the trillions of US tresuries on its balance sheet.