Business Cycles | The Daily Capitalist

Let The Reign Of Terror Begin

Congress has been looking for a scapegoat for the crash. It appears that Goldman Sachs is it. Let the show trials begin.

The government always finds someone who did something rotten, blames them for everything, they are tried and convicted with proper bloodletting, the public is satisfied, and everyone forgets about it. This is what happens after every economic crisis yet the cycles keep coming and no one seems to know why other than the usual answer that “greed” caused it.

Greed has nothing to do with the crises, boom or bust.

Greed is a human trait and as such it always exists. This trait is magnified on Wall Street where legions of young MBAs are turned loose, striving to become another Paulson, Soros, or Buffet. Nothing wrong with making money. Greed is moral issue not a legal one. Yet if greed is always there, why aren’t business cycles perpetual?

If you are a follower of J. M. Keynes, then the reason we have business cycles is “animal spirits.” Not a very satisfactory answer from such a lauded economist. All of a sudden, for no apparent reason, our animal spirits, greed or whatever, turn loose and we create booms and busts. Keynes just couldn’t think it through very well.

Fortunately, Ludwig von Mises did. In 1912 he wrote his famous The Theory of Money and Credit which is a groundbreaking study of money in the Austrian tradition. It looks at individual action rather than “national” economic quantities. Begun by Carl Menger, this Austrian School created what is now known as the Marginal Revolution. It rejects the aggregate approach of looking at the economy such as espoused by Keynes. Keynes was an arrogant technician and liked the idea of manipulating things like national money supply, national demand, national wages, and like. Austrians view the economy as the behavior of billions of individuals (Mises referred to this as “human action” or by the Greek name he invented, “praxeology”). Good luck, the Austrians say, trying to figure out what the multitudes are all up to at any given time.

What creates the business cycle, says Mises, is the inflation of money and credit. … Continue reading Let The Reign Of Terror Begin

How Long Will It Last v.2.0

In January I published How Long Will It Last, v.1.0 and discussed some new research on the results of studies of past depressions. You may wish to review that article. Professors Rogoff and Reinhart show that the historical average of banking crises have the following characteristics:

Housing prices declined an average of 35% over six years;

Equity prices declined an average of 55% over 3.5 years;

Unemployment rises to an average of 7% over four years;

GDP declines an average of 9% for over two years;

Government debt increases an average of 86%.

Here is an update on that information. Robert Barro, another Harvard professor and an associate introduced a new study that showed depressions don’t occur without a stock market crash.

In the end, we learned two things. Periods without stock-market crashes are very safe, in the sense that depressions are extremely unlikely. However, periods experiencing stock-market crashes, such as 2008-09 in the U.S., represent a serious threat. The odds are roughly one-in-five that the current recession will snowball into the macroeconomic decline of 10% or more that is the hallmark of a depression.

If you are seeking comfort, he said that the economy will likely recover despite the policies of the Obama Administration. But he said, “On the other hand, the 59 nonwar depressions in our sample have an average duration of nearly four years, which, if we have one here, means that it is likely recovery would not be substantial until 2012.”

What can we take from all this?

… Continue reading How Long Will It Last v.2.0