Saturday, July 16, 2016

Austrian Lites Meet Your New Fellow Traveler: Paul Krugman

P. Krugman writes:
The fact that the major averages have lately been hitting new highs — the Dow has risen 177 percent from its low point in March 2009 — is newsworthy and noteworthy. What are those Wall Street indexes telling us?

The answer, I’d suggest, isn’t entirely positive. In fact, in some ways the stock market’s gains reflect economic weaknesses, not strengths...

[W]ith interest rates on long-term government bonds not only very low by historical standards but zero or negative once you adjust for inflation. So investors are willing to pay a lot for future income, hence high stock prices for any given level of profits.

But why are long-term interest rates so low? As I argued in my last column, the answer is basically weakness in investment spending, despite low short-term interest rates, which suggests that those rates will have to stay low for a long time.
Krugman doesn't realize that the facts he lays out describes an economy as explained by Austrian school business cycle theory.

According to ABCT, central bank money creation drives down interest rates below the market rate and also causes a boom in the capital goods sector, which of course includes the stock market.

This is not difficult to understand, except apparently by Krugman and Austrian-lites.


1 comment:

  1. What does ABCT say about central banks directly purchasing stocks?

    This would seem to be very different from investors running to safety of stocks because of artificially low interest rates.

    What if investors are exiting stocks but central banks are buying them at a faster rate? Does ABCT apply to the latter? Is that the same kind of "bubble"?