Can there be an endogenous business cycle? Besides other inefficiencies of a national monetary system, can we really say that a central bank that takes a hard line on price inflation will be able to cause a business cycle?
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I few days ago I suggested a post on New Zealand, noting that their Central Bank cash rate was significantly higher than the average of other industrialized countries. Exporters complained that that would cause a severe slowdown. Now the RBNZ has started easing significantly, but I am unable to say if this business cycle is endogenous or just an import of the worldwide business cycle. Please refer to the post on New Zealand about one or two weeks ago for figures and details.
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I don't think it'd lead to business cycles, so much as it'd lead to making borrowing more expensive, and artificially so.
-Jon
To darkness I condemn you...
I am not sure what you mean by an endogenous business cycle but my answer to the second question is Yes. As long as the central bank controls the amount of money and credit in the economy then it will cause business cycles. If the central bank creates more credit than the market would otherwise then it signals businesses to make malinvestments that can only succeed in the presence of forever expanding credit. The opposite is also true, if the amount credit is less than the market would supply otherwise then it signals businesses to not make investments it otherwise would which would be profitable at market interest rates. You might say what if the central bank creates money and credit in synch with the market. The issue here is one of time. The market constantly changes as fickle consumers change their preferences for current consumption and saving. The central bank can only measure this through the use of a price index. The price indexes have time lags of several months. Fixing the price of money and credit is analygous to driving a car with a covered windshield.
So, what is the best anti-inflation policy, given the fact that setting target rates lags through the economy several months? Central banks exist and no country foresees getting rid of them, so my question is actually what is the recommendation for a Central Bank so that, if it actually follows, the country might end up with less inflation?
Set the reserve requirement to 100% and don't print money, I guess.
Three simple yet seemingly impossible little tasks:
1. Stop creating credit and destroying credit in the economy. At this point you are on a Gold Standard of sorts. The economy
2. Stop being the lender of last resort for failing banks. Let em fail.
3. Petition the government to shutdown deposit insurance on banks with less than 100% reserve.
4. Petition the government to end legal tender laws and allow individuals to create competing currencies.
5. Spend time on 3 and 4 above and spend any time left over going around telling everybody how great you are and how important the central bank isn't thus preparing the government for killing the central bank.
6. Retire and charge $200K for speaches endlessly repeating 5 above.
Paul: Set the reserve requirement to 100% and don't print money, I guess.
Would that be the same as setting reserves 100% and not coining gold?
I'm sorry about this post. I don't know where the proper place it is to put this thread, but I have a general question about money supply.
I apologize for this random post and to specifically ask this question which may be confusing. However, I am confused. I have been reading alot of the literature on mises.org and Lewrockwell. I am new to your Austrian perspective and I find it refreshing thus far. However, one particular question I have. I understand that the Fed gets carried away and starts printing away the currency which consequently decreases the value of money. However, what about the expanding population? As the population is growing don't you need to print more money to sustain the economy? How would that work exactly? I assume most have read Human Action, so you probably have an answer for that. There is already a level of circulation of current currency through whatever means, but since population keeps expanding and businesses keep growing, how do you keep a steady flow without having to supply more money (by printing that is). There is going to be a very high level of deficit. Also, if there is a concept of credit in existence wouldn't it be difficult to set a limit, which in essence would be regulated and monitored by whom? If the credit allowance keeps growing there has to be a sufficient supply of currency to match it, however if the credit is not regulated it can be exponentially increased to the level that it no longer matches the money supply. Isn't it when the government prints more?I realize I am nitpicky here, but if you do not have the time to answer, can you please refer me to any literature or articles that may?
SkepticalInquirer: I'm sorry about this post. I don't know where the proper place it is to put this thread, but I have a general question about money supply. I apologize for this random post and to specifically ask this question which may be confusing. However, I am confused. I have been reading alot of the literature on mises.org and Lewrockwell. I am new to your Austrian perspective and I find it refreshing thus far. However, one particular question I have. I understand that the Fed gets carried away and starts printing away the currency which consequently decreases the value of money. However, what about the expanding population? As the population is growing don't you need to print more money to sustain the economy? How would that work exactly? I assume most have read Human Action, so you probably have an answer for that. There is already a level of circulation of current currency through whatever means, but since population keeps expanding and businesses keep growing, how do you keep a steady flow without having to supply more money (by printing that is). There is going to be a very high level of deficit. Also, if there is a concept of credit in existence wouldn't it be difficult to set a limit, which in essence would be regulated and monitored by whom? If the credit allowance keeps growing there has to be a sufficient supply of currency to match it, however if the credit is not regulated it can be exponentially increased to the level that it no longer matches the money supply. Isn't it when the government prints more?I realize I am nitpicky here, but if you do not have the time to answer, can you please refer me to any literature or articles that may?
Welcome to the only school of economic thought that actually makes sense. The money supply does not need to grow relative to the population, as this would do nothing except decrease the purchasing power of each monetary unit as inflation always does (aside from an equal increase in productivity). If people nominally all have less money that doesn't mean they will experience a decreased standard of living. On the contrary, each monetary unit can buy more of a good or service because there is a higher value to the money (less of it). If for any reason the money supply needed to be increased the market would take care of it (gold mining, etc.) but there shouldn't be any concern with a "shortage" of the money stock simply due to a population growth. Would you rather have money which nominally grows by 5% every year along with 10% inflation (-5% purchasing power) or would your rather have your nominal money remain the same or decrease slightly (storage fees maybe) and gain purchasing power? If you only care about numbers on a computer screen or piece of paper you may want to decrease your standard of living with the former; if you realistically want to buy more things with your money you will choose the latter.
As far as credit goes it would not be difficult to have the market create a limit on it. If there is an economy with many people having a low time preference and choosing to save and invest more the interest rates will be lower as there is a large base for the credit to expand from. This is sound credit that reflects market conditions. If people are consuming more today and saving less for the future there is a decreased amount of savings and investment so due to a lower supply the "price" or in this case interest rate on the money is higher. This is how there is, as you deemed it, a regulation on credit. This regulation is not governmental but rather a natural occurrence in the market. Picture something like a gold standard, as there is inflation within the country the inflation makes prices of domestic goods rise so people buy imports, and as they do so the gold will flow out of the country leaving a diminished money stock. With less money to base the credit off it must contract and rates will rise naturally, increasing the purchasing power of the money and letting prices come down which will then begin to reverse the trend. It's a beautiful equilibrating effect! And yes, you are correct that when the amount of credit is distorted it is due to the government creating money/credit artificially. When this happens capital is misallocated because what was previously not profitable at a certain rate is now proiftable at a lower one, yet when the chickens come home to roost and these go sour the capital is essentially lost and there is a contraction (the bust after the boom). This is very vague but I'd strongly recommend reading about the Austrian Theory of the Business (Trade) Cycle which you can find some great information for free at http://mises.org/tradcycl.asp
I hope I answered your questions, if you have more feel free to let me know. To everybody else, if I've made an error please correct me so our friend here does not become misinformed.
In liberty,
Chris
SkepticalInquirer:However, what about the expanding population? As the population is growing don't you need to print more money to sustain the economy?
The key point is that money is a good as any other. Regardless of population growth a change in the demand for money for whatever reason is supposed to be accompanied by a change in the supply of money to restore equlibrium. A good lecture on Austrian monetary equilibrium theory was given by Steven Horwitz. He defined inflation, deflation, monetary equilibrium and discussed ideal monetary policy.
Well, there were other problems that I thought of while posting this thread, such as the fact that the money supply will tend towards equilibrium better in a free market.
I guess my question was whether or not if small amounts of liquidity are injected, within an inflation target rate, if that would really cause a business cycle. In other words, are there forces besides price inflation that will correct the misallocation of, well, money? For example, would there be a very mild reallocation of resources as consumer good products become more profitable in the long run?
Dunno.
Funny you would mention this but....
The Fed dropped interest rates to 1% to supposedly stop a deflation bubble after the bursting of the dot.com bubble and the events of Sep 11, 2001. Then you can see a moderately smooth increase in the interest rates until they reached about 6.5%. Historically 1% is very low and 6.5% is still low. I was alive in 1979 when they went to over 12%. People were buying homes at 16% interest.
The rising of rates to 6.5% bursted the housing bubble that the Federal Reserve refused to admit existed with a flurry of bankruptcies and unpaied mortgages leaving a trail of lenders the two largest among them in bankruptcy.
The point is that the Fed does not know the break point. They are driving the race car without the windshield. So they are guessing as the point where deflation takes over from inflation.
The whole system stinks and amounts to nothing but a blatant transfer of wealth from most people to a banking elite.
If production stays the same, prices will not change ever and the central bank could do nothing to stabilize prices: they would not need stabilization. The tendency on the market is for production to increase and therefor prices to decrease. if the central bank increases the money available for consumption so as to increase the prices to their prior level a business cycle will be engendered.
cf. The "Paradox" of Saving
"Why don't you go stand under a stalactite, and bellow the resonate room frequency and wait for it to impale your brain!" -The Brain
You made the money supply and it's relation to gold a little more clear. I didn't realize that you can mine gold for money "expansion," the first and the only thing I think of is printing, this way it does make sense.
Chris:Picture something like a gold standard, as there is inflation within the country the inflation makes prices of domestic goods rise so people buy imports, and as they do so the gold will flow out of the country leaving a diminished money stock.
I've read that buying domestic goods (especially food) may result in a disastrous economy. Yet according to you, buying more imports may be hazardous. Considering that 90% of our goods are produced abroad, can we blame the current financial state on international dependence when it comes to production? I just think that given globalization, sustaining economy on domestic production is unrealistic, simply because businesses will always seek out best financial route (and rightfully so).
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