Jesus Huerta de Soto: Boom/Bust Cycles
Posted by Orrin Woodward on March 21, 2014
I have read one of the best books on the Boom/Bust cycle yet in Jesus Huerta de Soto’s book Money, Bank Credit, and Economic Cycles. Although a very thick book and not one I would recommend to start an economic journey, with the proper Austrian Economic foundations, this book reveals the reason for the predictable boom/bust inflationary cycle. Further, it reveals why the State and its cronies self-interests makes it difficult for society to end the State’s madness.
Like a druggie that constantly needs another hit to ease his troubles, the American economy is addicted to cheap money that only exacerbates its problems. Instead of pyramiding fiat money on top of fiat money (which is what the State supported Big Banks do), money should be subjected to the free-market forces that would temper the gambling nature of today’s Big Banks who know that the profits are privatized and the losses are socialized thanks to the State. I believe the State/Big Bank partnership is the greatest money scam against society in the world.
Think about it. If a business knew that its losses would be transferred to the people, but its gains would be enjoyed by the owners of the business, what behavior would one expect from the business? Predictably, Big Banks can make rash investments locally and internationally knowing all the while that they are “Too Big to Fail” and most of society is “Too Ignorant to Care”. LIFE Leadership is a group of people who care about all areas of leadership truth and justice. America was founded upon the principle of justice for all and that means no special deals for anyone regardless of how big or small they might currently be.
The Western ideal dreams of creating a land where there is opportunity for everyone, not a land of special deal bailouts and handouts for copouts and dropouts! Simply stated, the working Middle Class is being squeezed. The Bible states, “He who will not work, will not eat.” It is time for the West to relearn the value of hard work for a worthy cause. Isn’t our children’s future worth the effort?
Here is Part I of the introduction to de Soto’s book.
The policy of artificial credit expansion central banks have permitted and orchestrated over the last fifteen years could not have ended in any other way. The expansionary cycle which has now come to a close began gathering momentum when the American economy emerged from its last recession (fleeting and repressed though it was) in 2001 and the Federal Reserve reembarked on the major artificial expansion of credit and investment initiated in 1992. This credit expansion was not backed by a parallel increase in voluntary household saving. For several years, the money supply in the form of bank notes and deposits has grown at an average rate of over 10 percent per year (which means that every seven years the total volume of money circulating in the world could have been doubled).
The media of exchange originating from this severe fiduciary inflation have been placed on the market by the banking system as newly-created loans granted at very low (and even negative in real terms) interest rates. The above fueled a speculative bubble in the shape of a substantial rise in the prices of capital goods, real-estate assets and the securities which represent them, and are exchanged on the stock market, where indexes soared. Curiously, like in the “roaring” years prior to the Great Depression of 1929, the shock of monetary growth has not significantly influenced the prices of the subset of consumer goods and services (approximately only one third of all goods).
The last decade, like the 1920s, has seen a remarkable increase in productivity as a result of the introduction on a massive scale of new technologies and significant entrepreneurial innovations which, were it not for the injection of money and credit, would have given rise to a healthy and sustained reduction in the unit price of consumer goods and services. Moreover, the full incorporation of the economies of China and India into the globalized market has boosted the real productivity of consumer goods and services even further. The absence of a healthy “deflation” in the prices of consumer goods in a stage of such considerable growth in productivity as that of recent years provides the main evidence that the monetary shock has seriously disturbed the economic process.
As I explain in the book, artificial credit expansion and the (fiduciary) inflation of media of exchange offer no short cut to stable and sustained economic development, no way of avoiding the necessary sacrifice and discipline behind all high rates of voluntary saving. (In fact, particularly in the United States, voluntary saving has not only failed to increase in recent years, but at times has even fallen to a negative rate.) Indeed, the artificial expansion of credit and money is never more than a short-term solution, and that at best. In fact, today there is no doubt about the recessionary quality the monetary shock always has in the long run: newly-created loans (of money citizens have not first saved) immediately provide entrepreneurs with purchasing power they use in overly ambitious investment projects (in recent years, especially in the building sector and real estate development).
In other words, entrepreneurs act as if citizens had increased their saving, when they have not actually done so. Widespread discoordination in the economic system results: the financial bubble (“irrational exuberance”) exerts a harmful effect on the real economy, and sooner or later the process reverses in the form of an economic recession, which marks the beginning of the painful and necessary readjustment. This readjustment invariably requires the reconversion of every real productive structure inflation has distorted. The specific triggers of the end of the euphoric monetary “binge” and the beginning of the recessionary “hangover” are many, and they can vary from one cycle to another.
In the current circumstances, the most obvious triggers have been the rise in the price of raw materials, particularly oil, the subprime mortgage crisis in the United States, and finally, the failure of important banking institutions when it became clear in the market that the value of their liabilities exceeded that of their assets (mortgage loans granted).