Political Theory

Re: Best way to argue that the Fed creates the business cycle

eliotn — Sat, 06 Sep 2008 17:09:34 GMT

krazy kaju:

Someone much more intelligent than myself has already done that (Chapters 5 and 6).

Thanks, I am beginning to read it, and it is helping my understanding of Austrian Econ.

Re: Best way to argue that the Fed creates the business cycle

krazy kaju — Fri, 05 Sep 2008 23:07:29 GMT

Someone much more intelligent than myself has already done that (Chapters 5 and 6).

Re: Best way to argue that the Fed creates the business cycle

eliotn — Fri, 05 Sep 2008 21:03:11 GMT

krazy kaju:

I think the best way to argue this point is to show how central banks can create higher demand for capital goods by lowering real interest rates, which increases the rate of economic growth. Then, you have to show how the low real interest rates are bound to rise because they are not backed up by saving but by monetary creation. It's inevitable that central bank monetary creation creates a credit crunch.

Basically, if the Fed lowers rates, which in turn makes banks lower rates, the lower real interest rates allow for more investment in capital goods - the source of economic growth. However, the credit creation will undoubtedly raise prices across the board, making the natural interest rate higher for investment in capital goods. Likewise, the real interest rate will raise as banks begin to raise interest rates to hedge for inflation. Another factor is that consumer goods producing businesses will find it more profitable to employ labor instead of capital because inflation will rob labor of its wages and bring in more profits to the employer. Yet another thing is that increased profits in consumer good industries will funnel investment away from capital goods industries and towards the consumer goods industries. This is another contributing factor to the inevitable collapse of capital goods industries that we see at the end of a boom.

ABCT can be essentially summed up like this: Lower interest rates spur a boom in capital goods purchase and production, causing an economic boom. However, the inflation that results from credit creation robs employers from the return they get on capital and makes it comparatively more profitable to employ labor instead of capital. Likewise, inflation causes banks to raise interest rates. This causes capital goods producing businesses to downsize and even shut down, while consumer goods producing businesses cease use of capital goods in favor of labor. This causes a downturn in production and, consequently, a recession.

could you please provide a more in depth explanation krazy kaju?

Re: Best way to argue that the Fed creates the business cycle

Peter Griffin — Thu, 04 Sep 2008 21:28:08 GMT

I found it useless to argue with the professor or anyone in my macroeconomics class, that's why I dropped that class.

I felt like a black man trying to join the KU KLUX KLAN.

plus, you never learn anything useful. It's a waste of time and money. But

if you really have to take the class, just make sure to get the highest grade you can coz you don't

have to prove anything to them, for now.

Re: Best way to argue that the Fed creates the business cycle

krazy kaju — Thu, 04 Sep 2008 20:57:32 GMT

I think the best way to argue this point is to show how central banks can create higher demand for capital goods by lowering real interest rates, which increases the rate of economic growth. Then, you have to show how the low real interest rates are bound to rise because they are not backed up by saving but by monetary creation. It's inevitable that central bank monetary creation creates a credit crunch.

Basically, if the Fed lowers rates, which in turn makes banks lower rates, the lower real interest rates allow for more investment in capital goods - the source of economic growth. However, the credit creation will undoubtedly raise prices across the board, making the natural interest rate higher for investment in capital goods. Likewise, the real interest rate will raise as banks begin to raise interest rates to hedge for inflation. Another factor is that consumer goods producing businesses will find it more profitable to employ labor instead of capital because inflation will rob labor of its wages and bring in more profits to the employer. Yet another thing is that increased profits in consumer good industries will funnel investment away from capital goods industries and towards the consumer goods industries. This is another contributing factor to the inevitable collapse of capital goods industries that we see at the end of a boom.

ABCT can be essentially summed up like this: Lower interest rates spur a boom in capital goods purchase and production, causing an economic boom. However, the inflation that results from credit creation robs employers from the return they get on capital and makes it comparatively more profitable to employ labor instead of capital. Likewise, inflation causes banks to raise interest rates. This causes capital goods producing businesses to downsize and even shut down, while consumer goods producing businesses cease use of capital goods in favor of labor. This causes a downturn in production and, consequently, a recession.

Re: Best way to argue that the Fed creates the business cycle

Peter Griffin — Thu, 04 Sep 2008 14:42:32 GMT

the best thing to do is to drop the class, that's what I did

Re: Best way to argue that the Fed creates the business cycle

Jon Irenicus — Thu, 04 Sep 2008 14:26:34 GMT

Substitute Fed for coercively imposed FRB, and the answer remains the same.

-Jon

Re: Best way to argue that the Fed creates the business cycle

liberty student — Thu, 04 Sep 2008 12:19:40 GMT

I'm not sure if I am helping with this comment, but it is much easier to attack the FED on price stability. Pre-fed, prices were stable, post FED, prices have been consistently inflationary.

In order to mount an attack on the business cycle, you first have to cover Austrian theory on credit.

If possible, my advice would be to attack the FED on price stability, and if given follow up opportunities, make the case for Austrian theory on credit expansion, and then finally how the FED facilitates such expansion without allowing for the natural contractions to maintain price stability, which leads to deep and depressing downturns.

Also, there may be something to be gained by looking into Rothbard and Hayekian analysis of Keynesian theory as it relates to a central bank.

Re: Best way to argue that the Fed creates the business cycle

mattch — Thu, 04 Sep 2008 11:57:10 GMT

Hi Elliot,

Business cycles occurred in the US prior to the creation of the Fed, and also occurred in nations that consistently followed a fairly strict interpretation of the gold-standard (although they did allow fractional banking).

Of course this isn't to say that the Fed does not or could not do so. Maybe your teacher is only trying to point out that business cycles might also have other causes.

Re: Best way to argue that the Fed creates the business cycle

Jon Irenicus — Wed, 03 Sep 2008 00:00:32 GMT

Why should this cause systematic clusters of errors? This isn't so much an answer as a cop-out. Inefficient entrepreneurs are penalized on the market, efficient ones rewarded. Factors that are released from production are diverted elsewhere.

-Jon

Re: Best way to argue that the Fed creates the business cycle

Knight_of_BAAWA — Tue, 02 Sep 2008 21:10:37 GMT

eliotn:
I asked him what the root cause is and he responded:

"When businesses see a profit to be reaped by any given situation they will increase production. When more suppliers enter the market, there is often times a glut of products or services, and more than enough supply to meet demand. Businesses then slow production and in the process freeze hiring or slash employment. This is then the downturn we often see in an economy."

Looks like this still isn't the root cause. Oh well.

The problem with your teacher's idea is that he isn't looking at where the funding comes from for those new suppliers. Usually it's either from venture capitalists or the credit expansion of the central bank.

Re: Best way to argue that the Fed creates the business cycle

eliotn — Tue, 02 Sep 2008 17:07:52 GMT

Jon Irenicus:

Then I agree with BAAWA. She is not identifying the root cause.

-Jon

I asked him what the root cause is and he responded:

"When businesses see a profit to be reaped by any given situation they will increase production. When more suppliers enter the market, there is often times a glut of products or services, and more than enough supply to meet demand. Businesses then slow production and in the process freeze hiring or slash employment. This is then the downturn we often see in an economy."

Looks like this still isn't the root cause. Oh well.

Re: Best way to argue that the Fed creates the business cycle

Jon Irenicus — Tue, 02 Sep 2008 03:07:07 GMT

Then I agree with BAAWA. She is not identifying the root cause.

-Jon

Re: Best way to argue that the Fed creates the business cycle

eliotn — Tue, 02 Sep 2008 03:04:09 GMT

Oops, Jon, I meant overproduction.

Sorry about the typo.

Re: Best way to argue that the Fed creates the business cycle

Knight_of_BAAWA — Tue, 02 Sep 2008 02:50:57 GMT

Let your teacher know that she's not looking at the ultimate cause. To be sure, if one wants to use the Keynesian language, you could say that certain goods were overproduced, and that certain goods were overconsumed in the production thereof (aka misallocation of resources). However, that's merely looking at the end result of the whole credit expansion.