a couple of interesting points in the article but he needs to read up on the austrian school of economic and the subject of demand for money after a downturn. Here is a place for him to start his inquiry. When the Central banks screw with the invisible hand this much. Its like pushing on a string.
https://en.wikipedia.org/wiki/Austrian_business_cycle_theory
Austrian business cycle theory
From Wikipedia, the free encyclopedia
The
Austrian business cycle theory (ABCT) is an economic theory developed by the
Austrian School of economics about how
business cycles occur. The theory views business cycles as the consequence of excessive growth in bank
credit, due to artificially low interest rates set by a central bank or fractional reserve banks.
[1] The Austrian business cycle theory originated in the work of Austrian School economists
Ludwig von Mises and
Friedrich Hayek. Hayek won the
Nobel Prize in economics in 1974 (shared with
Gunnar Myrdal) in part for his work on this theory.
[2][3]
Proponents believe that a sustained period of low interest rates and excessive
credit creation result in a volatile and unstable imbalance between saving and investment.
[4] According to the theory, the business cycle unfolds in the following way: low interest rates tend to stimulate borrowing from the banking system. This leads to an increase in capital spending funded by newly issued bank credit. Proponents hold that a credit-sourced boom results in widespread
malinvestment. A correction or "
credit crunch" – commonly called a "
recession" or "bust" – occurs when the credit creation has run its course. Then the
money supply contracts (or its growth slows) causing a curative recession and eventually allowing resources to be reallocated back towards their former uses.
The Austrian explanation of the business cycle differs significantly from the
mainstream understanding of
business cycles and is generally rejected by mainstream economists. Mainstream economists generally do not support Austrian school explanations for business cycles, on both theoretical as well as
empirical grounds.
[5][6][7][8]
Assertions[edit]
Malinvestment and “boom”[edit]
According to ABCT, a period of "
malinvestment" is caused by a period of excessive business lending by
banks, and this credit expansion is later followed by a sharp contraction and period of distressed asset sales (liquidation) which were purchased with overleveraged debt.
[9] The initial expansion is believed to be caused by
fractional reserve banking encouraging excessive lending and borrowing at interest rates below what full reserve banks would demand. Due to the availability of relatively inexpensive funds, entrepreneurs invest in capital goods for more roundabout, "longer process of production" technologies. Borrowers take their newly acquired funds and purchase new capital goods, thereby causing an increase in the proportion of aggregate spending allocated to
capital goods rather than
consumer goods. However, such a shift is inevitably unsustainable over time due to mispricing caused by excessive credit creation by the banks and must reverse itself eventually as it is always unsustainable. The longer this distorting dislocation continues, the more violent and disruptive will be the necessary re-adjustment process.
Austrians argue that a boom taking place under these circumstances is actually a period of wasteful malinvestment. "Real" savings would have required higher
interest rates to encourage depositors to save their money in term deposits to invest in longer term projects under a stable money supply. The artificial stimulus caused by bank lending causes a generalized speculative investment bubble which is not justified by the long-term factors of the market.
[9]
“Bust”[edit]
The "
crisis" (or "
credit crunch") arrives when the consumers come to reestablish their desired allocation of saving and consumption at prevailing interest rates.
[10][11] The "recession" or "depression" is actually the process by which the economy adjusts to the wastes and errors of the monetary boom, and reestablishes efficient service of sustainable consumer desires.
[10][11][
not specific enough to verify]
Continually expanding bank credit can keep the artificial credit-fueled boom alive (with the help of successively lower interest rates from the
central bank). This postpones the "day of reckoning" and defers the collapse of unsustainably inflated asset prices.
[10][12]
The monetary boom ends when bank credit expansion finally stops – when no further investments can be found which provide adequate returns for speculative borrowers at prevailing interest rates. The longer the "false" monetary boom goes on, the bigger and more speculative the borrowing, the more wasteful the errors committed and the longer and more severe will be the necessary bankruptcies, foreclosures, and depression readjustment.
[10]
Government policy error[edit]
Austrian business cycle theory does not argue that fiscal restraint or "austerity" will necessarily increase economic growth or result in immediate recovery.
[13] Rather, they argue that the alternatives will make eventual recovery more difficult and unbalanced. All attempts by central governments to prop up asset prices, bail out insolvent banks, or "stimulate" the economy with deficit spending will only make the misallocations and malinvestments more acute and the economic distortions more pronounced, prolonging the depression and adjustment necessary to return to stable growth.
[13] Austrians argue the policy error rests in the government's (and central bank's) weakness or negligence in allowing the "false" unsustainable credit-fueled boom to begin in the first place, not in having it end with fiscal and monetary "austerity". Debt liquidation and debt reduction is therefore the only solution to a debt-fueled problem.
[14][15]
According to Ludwig von Mises:
[10]
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
The role of central banks[edit]
Austrians generally argue that inherently damaging and ineffective central bank policies, including unsustainable expansion of bank credit through
fractional reserve banking, are the predominant cause of most business cycles, as they tend to set artificial interest rates too low for too long, resulting in excessive credit creation, speculative "
bubbles", and artificially low savings.
[16] Under
fiat monetary systems, a
central bank creates new money when it lends to member banks, and this money is multiplied many times over through the
money creation process of the private
banks. This new bank-created money enters the loan market and provides a lower rate of interest than that which would prevail if the
money supply were stable.
[9][17]
https://en.wikipedia.org/wiki/Steve_Keen " Steve Keen is an Australian-born, British-based economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported. "
