Austrian Business Cycle
Posted by Orrin Woodward on July 21, 2015
Jesus Huerta de Soto
The perpetual booms and bust we see in Capitalism are not caused by the free market. Rather, they are the direct result of interventions in the natural rate of interest by Big Banks and the State (yes, it’s the dreaded Financial Matrix). These centrally planned interventions into the free markets cause the booms and bust, but in an ironic twist, the free market is blamed when the predictable dismal outcome occurs. Hence more central planning is proposed to fix the allegedly broken free market. The illogicalness of this argument almost makes me lose my emotional intelligence. 🙂
For it reminds me of the story of a drunk suffering from a hangover who blames his pain, not on too much drinking, but rather believes his body’s natural systems are imbalanced. Thus, he surmises to drink even more because he must make up for his body’s deficient natural system. When the pain goes away temporarily, he proclaims his intervention successful because he is pain-free. Unfortunately, the party (boom) always ends and when tomorrow morning hits, the cycle will repeat itself with even more rationalizations about the inherently unstable bodily systems and the need for more drugs. Of course, this leads to even worse cycle of temporary joy and longterm pain until the drunk either wizens up or dies. I wish I were exaggerating here, but the drunk’s logic is the same as our modern day politicians and economists (owned mouthpieces of the Financial Matrix controllers) who increase interventions into the economy which cause increasingly disruptive boom/bust cycles.
Nonetheless, further government intervention within the free market is always the answer when the previous intervention fails. Regretfully, many seemingly intelligent people buy into this line of thinking because it is promoted across the mainstream media outlets by the hired hands of the elites. As for me, I could care less how many “authorities” state their opinions because no matter how many people with whatever titles say something foolish, it’s still foolish. Even a majority doesn’t change this because foolish plus foolish is foolish, not wisdom. As an aside, if anyone is seeking rational discussion on this subject, he or she need look no further than de Soto’s fantastic book on money, banking, and business cycles displayed on this blog post.
To wet your appetite, I will attach a short description of the Austrian Business Cycle theory that I found online. In my nearly 15 years of research into the Austrian School of economics, I have not found an economic philosophy that reasons clearer and states the facts better regardless of the political costs than this group does. LIFE Leadership is on a quest for truth and the Austrian School has much truth to share.
Sincerely,
The article below was written by Ben Best and describes the Austrian Business Cycle Theory:
Austrian Business Cycle
Austrian analysis asserts that in a world of hard money and free banking, the inflationary forces of credit expansion due to fractional reserve banking would not exist. If banks were warehouses of commodity money — gold, for example — then currency would consist of bank notes representing claims on the gold held by a bank. Any bank that made loans in excess of its reserves (fractional reserve banking) would soon find itself insolvent when other banks demanded hard money in exchange for checks & banknotes issued by that bank. This effect on banks is entirely analogous to the effects on countries that occurred after World War I when most nations attempted to implement a fractional reserve gold standard for their currencies. Countries issuing large amounts of currency backed by small amounts of gold found themselves in trouble when other countries sought to exchange currency to obtain gold. (See History of Modern Monetary Standards.) Banks in a free banking system would face similar pressures against fractional gold backing for their banknotes.
According to Austrian Economists, fractional reserve banking only became possible through the outlawing of private money and the creation of central (ie, government-controlled) banks — which allowed governments to control money supply and bank credit expansion.
In a free market interest rates are determined by subjective time-preference and the supply & demand of loanable money. If there is a low rate of savings the quantity (supply) of loanable money will be low and competition for this money (demand) by potential borrowers will result in high interest rates. High interest rates will encourage more savings and thereby bring the price of loans (interest rates) downward. As with supply & demand for any good or service, a free market will find a “clearing price” for the supply & demand of loanable funds. This clearing price is the natural rate of interest.
The natural rate of interest plays an extremely important role in the capital structure of an economy. Entrepreneurs/capitalists base decisions on whether to begin long-term capital projects based on interest rates. If interest rates are low, then borrowing to build a new factory, invest in a telecommunications network or assemble the capital goods for a new business venture appears feasible. Supply & demand of loanable funds will respond gradually to adjustments in business activity. If business investment (competition for loanable funds) rises, so too will interest rates — reducing borrowing for investment.
Central bank control of money & short-term interest-rates in national economies is at the root of contemporary business cycles. (For background on the mechanics of short-term interest-rate manipulation by central banks, see Money-Creation by Banks and A “Managed Economy” Under the Federal Reserve System.) When central banks artificially lower short-term interest rates below natural market levels, this results in two major distortions in capital markets. First, those who would save money receive less than the natural rate of interest — and this disincentive to save actually reduces the amount of loanable funds in real (as distinct from nominal) terms. Second, those who would borrow money for large capital projects are paying less than the natural rate of interest — thus encouraging borrowing investors to believe that capital projects are more sustainable than they really are.
Artificial lowering of interest rates by central banks is thus accompanied by expansion of the money supply — resulting in an artificial stimulus to spending for both consumer goods and capital goods. This artificial stimulus results in an inflationary boom which is not sustainable. Central banks are ultimately forced to raise short-term interest rates to counteract the inflation, resulting in a bust. Supporters of central bank monetary manipulation justify the practice as a means of leveling-out the business cycle when, in fact, central banker monetary manipulation is the cause of the business cycle!
In the 19th century, when money was based on gold & silver rather than government fiat, economic growth was mildly deflationary — because increased productivity lowers production costs. Inflation follows from government expansion of money supply and is not the result of an “overheating” economy that is growing rapidly. A distinction should be made between non-inflationary economic growth due to enterprise & technology and inflationary unsustainable booms due to central bank interest-rate cuts. Lack of clarity about this distinction has misled many economists into believing that there is an upper limit to growth (about 3%) above which growth is inflationary and unsustainable. Artificially low interest rates increase consumption spending, reduce incentives to save and increase investment spending with new fiat money that creates the illusion of new wealth. After having expanded the money supply with credit-expansion, central bankers worry that economic growth is “overheating” the economy, and the bankers then increase interest rates to “fight inflation”.
19 Responses to “Austrian Business Cycle”
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Randy Robson said
Such a great article!
Lloyd weiler said
Love it!! Orrin I appreciate your thought and simplified style of writing so the common man inside the matrix can understand the system were in!
Jeff Quick said
If only more people knew and understood what the government was actually doing with our money. The truth IS getting spread. Great job Orrin!
Nancy Monsipapa said
wow! very eye opening
JB Thompson said
Thank you for the awesome post Orrin. I am excited to learn more about the playing field.
Gyorgy Veszpremi said
Orrin,
Thank you for the information. Very well written.
Gyorgy
Steve Meixner said
Thanks Orrin, another book I will be reading,
Steve
Andrew LaFleur said
Isn’t it interesting how complicated coin-clipping has become? Lol
How is it those that produce these artificial boom/bust cycles, being subjected to the same interest rates and currency values, yet prosper?
Orrin Woodward said
Andrew, Great question. Every time the chicken hits the fan and the money deflates and the banks would go broke under normal business rules and conduct, they have the Central Banks to print money at will to keep banks liquid. In other words, the banks have a magic genie that gives them fiat money to pay back depositors money they had fraudulently used for their own profits and power. Of course, when the Central Banks are overloaded (as in the 2007-2008 Financial Bust), the Big Banks fall back on national governments to bail them out. Absurdly, the Big Banks and National Governments collude to bilk society through FRB and Central Banking and when the inherently unstable system fails, they are bailed out by increasing society’s taxes. Heads they win and tails we lose. This is unjust and must end.
Tim Stephens said
As always Orrin, thank you for taking a complex problem and explaining it in simple terms.
Chad Palmer said
Orrin, the frozen chicken has hit the fan, thank you for being so bold and matter of fact with the truth. I hear spines stiffening around the world, your a modern day Patrick Henry!
Micah Kramer said
It’s amazing to see that out there, in the matrix, people fight to deny it, protect it and stay in it. Perhaps, at times for some, the truth is too painful to accept or admit? Thank you Orrin. Your courage, resolve and ability to shine light/inspire others to shine is moving mountains in the lives of families across the land…
Rob Brown said
Great research! Your expertise is making ours.
So one day, China, Russia, and India, who have been buying up all the gold and silver, are going to demand we pay our debts, and with no value in our currency and no precious metal to back US the house of cards falls? Do you see another outcome?
What steps must be taken to stop this free fall? Can it be stopped? Obviously we are people of faith, and we hold onto hope, so what is the path to take that can brake this speeding train?
Orrin Woodward said
Rob, Build a community, build your skills, get out of debt. Then when the USA currency resets, we will be in a great position to produce wealth and not rely on fiat handouts from a bankrupt government. 🙂 Seriously, the Germans turned around from fiat money bankruptcy to a thriving economy very quickly once the money was backed again by precious metals and the printing of fiat dollars was stopped. thanks, Orrin
Tim Marks said
Orrin
This is a great post. Its one of those things we think about and wish it just wasn’t true. The good news is, we have a great vehicle to get folks out of the matrix and build a big business to do our part in restoring TRUE capitalism
Tim
Scott said
Wow. This is a great post. Thanks Orrin for all the research and the reference to the book
Roosevelt Jean-Francois said
Orrin,
How do central banks earn their money? What services do they provide?
What investments do they do to have infinite returns on their fiat money creation?
As you said, the only way out is to escape the matrix. The private banking system, and its monetary affiliates, and their managed central banks make money because they are living on the debt of the masses.
The debt is their lifeblood. And when, more and more people live a debt free life, we will be approaching a freer capitalist marketplace.
Orrin Woodward said
You got it Roosevelt!
Joel said
Hi Orrin,
As always, thank you for doing God’s work.. You and your leaders really are a blessing to this semi-free, once great Republic. And no, sir, I am not kidding. You and your leaders truly are a blessing; and sadly, America is no longer what it used to be – FREE..
We are living in insane times, Orrin. INSANE!! Thanks to your Financial Fitness, I have decided to ‘stack’ actual physical gold and silver – i.e. God’s Money..
The more I learn from your LIFE materials, the more I want to learn about everything else that’s going on around us.. INSANITY.. For example, regarding FRB, I was unaware that the precious metals world also works on fractional reserve.. For example, for every ounce of physical gold (or silver) there are at least 100 ounces of PAPER gold (or silver).. I know.. INSANE!! This is how they manipulate precious metals (PM).
These criminal bankers should be jailed.. Unfortunately, there are only 1% stackers in the US.. While all this shenanigans is going on, China and the rest of BRICS are hoarding actual precious metals at CHEAP prices.. Ho.. Lee.. Cow…
This is INSANE.. America will lose its reserve status soon enough..
If the American People actually woke up and started stacking PMs, We the People could actually expose these criminals when we realize there are not enough PMs to cover the paper assets..
America: Please wake up! Turn some of your fiat currency created out of thin air (i.e. dollar) into actual money – Gold and Silver.. We can expose the truth if each and every one of us would buy God’s Money..
Sorry for the rant, Orrin.. I love America.. I’m a veteran and I will die fighting for the principles that made America great. This insanity must stop.. Thank you for what you and the others are doing. God Save America..