If I believed in Austrian business cycle theory, 2020 edition

If I believed in Austrian business cycle theory, I would think that the Fed lowering interest rates and flooding the system with liquidity, post-2008, was a disastrous decision, associated with a cascade of corporate debt, an equity bubble, and massive indirect subsidies to inefficient, now-doomed-to-fail smaller companies.

The restructuring or bankruptcies of inefficient retail, high production cost energy companies, and bad European banks were postponed, but now the bloodbath will come.  The coronavirus will be seen as the immediate cause, but it also will turn out to have been the mere messenger of inevitable structural changes.

This will become clear as, post-coronavirus, so many of the companies from those sectors simply do not come back, nor will they birth more liquid replacements or counterparts.  We will end up with much more “big business,” and much more on-line commerce, and the status quo ex ante will have been revealed to be full of malinvestment.

Fortunately, I do not believe in Austrian business cycle theory.  And for those relatively new to MR, here is my 2005 post If I Believed in Austrian Business Cycle Theory.


Someone please tell me what to believe.

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believe the libertarians are lobbyists, the Keynesians are basically right and they price in corruption fallibility into their prescriptions. Sure Keynes looks weird or wrong or inefficient, but basically hayek is a scold, a lecturer and a try to keep the spending down prescriptive voice, and Keynes is basically this is the best democratic govts can do considering the politicians and humans are sinners etc,

or im not going to help the libertarians win with my political capital or resources and they should prepare for spy vs spy killing wars

The best of the Austrians has long been incorporated into the mainstream. Austrian Business Cycle Theory has not, for good reason.

How would the next 5-10 years have to play out on this question for you to change your mind on that?

A theory can be logically correct without having anything to do with reality.

Sounds like libertarianism.

+5 i.p., would have accepted communism as well.

Yeah, sadly.

We need libertarianism with sufficient state capacity to ward off the consequences of fat tail events.

The CDC has a $12 billion budget.

$38 million is allocated to......controlling disease.

1/3 of 1% of our CDC budget is allocated to attempting to prevent pandemics.

"Look at all this wisdom you can gain from studying Austrian School economic theory."

"That's just mainstream econ! Except for the stuff I don't agree with."

No need to bring in wacky ideas like ABC. If there's a downturn it would be for good reasons. Loss of real global production, overexuberant and oblivious stock markets, populism, pandemics, crop failures, trade war, reduced economic activity, significant loss of life, loss of the world's most expensive generation, etc. You name it, it's there. The Fed if anything has been irrelevant since around 2008/2009 possibly before and that's mostly a good thing.

I do not see how any business could survive for 10 years after the Great Recession if it was not pretty sturdy. There is a lot of competition in every market and gluts of capital and productive capacity globally. An exception might be property developers in areas where there is strict property zoning.

For all of his flaws, the lamentable President Trump has come up with the right idea for the present economic outlook: a payroll-tax holiday through the rest of the year,

Call it a helicopter drop on Main Street, as opposed to a helicopter drop on Wall Street.

Have the Federal Reserve buy treasury bonds and place them in the Social Security trust fund to make up for lost tax receipts.

And dudes, get a grip. The coronavirus does not harm children, barely harms healthy adults and is a risk to some elderly.

The right way to fight the coronavirus is allow herd immunity.

I do not see how collapsing our economy and financial system will help fight the coronavirus.

Probably naively, I see the current reactions as Federalism in action. The Federal Government has been seen as doing (almost) nothing or being actively counterproductive.

Business owners, local governments and individuals have learned about severe shortages of hospital beds and ventilators in other countries and are making decisions to self-isolate and flatten the growth curve of infection. If people trusted the Feds to correctly track, report, and isolate small areas of infection, then the rest of the country not affected could continue with business as usual.

Instead we got almost immediate country-wide disruption.

The saddest thing about this is that if everyone could stay home, practice intermittent fasting, watch Netflix, and do calisthenics for 14 days, we might stop the flu, colds, covid19, as well as put a huge dent in obesity and heart-disease all in one fell swoop. Instead those living paycheck-to-paycheck, the bored extroverts, and so on, will wait for 2 or 3 days and then try to get back to normal. We'll be almost back to the same exponential growth that the overreaction should've stopped.

"And dudes, get a grip."

I told the stock market to get a grip. So far I'm down 25%. Being greedy when others are fearful isn't paying off yet.

Unfortunately, herd immunity won't work here as easily. COVID-19 (like a few other coronaviruses, AFAIR) uses the immune response (antibodies) to attack the immune system cells. People with a history of SARS/MERS are more vulnerable to a reoccurrence, not less.

"right idea for the present economic outlook: a payroll-tax holiday through the rest of the year,"

Yeah, Trump and the GOP believe the only way to put income into consumer pockets is tax cuts and more debt pushed by the Fed.

... Rejecting Keynes who called for paying workers more to drive both more consumer spending and savings to drive building more capital.

"I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce."

-- Ch 24.

anonymous responds to the Virus.


"The right way to fight the coronavirus is allow herd immunity."

Without further elaboration, this sounds like empty buzzwords or PR. For actual real world success cases, look at Singapore and Taiwan then contrast that with a real world failure in Italy.

Well...you will likely become infected sooner or later---it is a novel virus.

Most likely your immune system will win, and easily. After that, you will no longer be a carrier. When enough people are immune, then the virus fades. You, and millions of others, are natural circuit-breakers.

Italy is reporting a lot of deaths. A lot of old people.

But, can they hide in their homes forever...awaiting vaccines?

The virus us reported to be very contagious. The minute people congregate again, you get fresh outbreaks.

No more NBA, MLB, NFL, NHL, movies...the Donks want to cancel the convention anyway....no more cruises, airplanes, conventions....

You are also forgetting the fact COVID-19 is related to SARS which was known to puncture holes and leave scars in the lung tissue of its survivors. It remains to be seen what the long term effects of COVID-19 are. Don't think you will many over to this idea.

Suggest a confounding variable. See Saudi Arabia and the Gulf Emirates. Over 600 active cases, but < 2% coded 'serious or critical', v. 10% elsewhere. Temperatures as we speak in Taipei, Hong Kong, Macao, Manila, and Singapore are between 67 and 87 degrees F. The virus has been in the peripheral Far East for weeks. Over a set of a dozen countries in Southeast Asia, you have nearly 500 active cases, but only about 20 coded as 'serious or critical'.

I don’t see that failure will be all that correlated with corporate inefficiency. For example if all cruise lines go bankrupt because they had to stop sailing it won’t be because they were inefficient.

A lot of Chinese businesses had hair thin margins. Many will go under and it also won't be because they were inefficient but that they were too efficient.

Or at least it is not good business. Enough said.

Agreed that resilience has costs associated with it so should it be incentivized in some way by our system? If a chain is only as strong as its weakest link, then this seems to be a big glaring weakness in the global economy.

There are a number of businesses that are still around even though people have been predicting their dooms for a long time, like movie theaters and print magazines. The former is going to take a direct hit this spring, which might lead to changes in standard business practices: will Marvel still release tentpole movies in 4000 theaters in 2022? Or will they go directly to streaming?

Print magazines will be hit by the general economic downturn.

Going out to a movie is a nice traditional moderate-cost evening out. But the people who make comic book movies understand they have multiple ways to make money and they don't absolutely need their current practice of giving theaters an initial monopoly as the only way to see the movie. So, a lot could happen.

Or maybe people wind up missing going out to the movies and hurry back When It's All Over? For example, movie box office boomed after 9/11 and after 2008.

Do you pay the tax man with invisible money? An invisible hand does not stop a sneeze.

What is the sound of one invisible hand washing itself?

Why is the Fed injecting $2T when there is a supply shortage? This is recipe for hyperinflation. Is the Fed bending over too much to appease Trump and forgot their independence?

The Austrian Business Cycle Theory assumes that firms have a preference for investment in productive assets. While that assumption may have at one time been valid, not so today. Even at zero percent interest rates, firms wouldn't borrow to invest in productive assets. Sure, they might borrow to purchase/invest in their own stock, but not in productive assets. Of course, globalization had something to do with the shift. And the novel coronavirus might make Cowen believe in the Austrian Business Cycle Theory. What was old will be new again! Bankers beware.

The Austrian Business Cycle view is rather dour and bleak. I'm more interested in business formation and entrepreneurship. Too many businesses are ancient, crusty bureaucracies that very lazily collect their share of rent for doing nothing and overcharging the consumer for the "privilege". The financial sector, for example, is badly in need of dynamism: better electronic payments to break the duopoly of Visa/Mastercard, support for micropayments would enable micropreneurship on a big scale, better neo-banks to compete with stodgy brick and mortar ones (see Monzo, N26 for examples here), America's ACH network takes days to clear checks or payments but its all bits and bytes which move at the speed of light so there is little reason for this. Opportunities are everywhere but the authorities need to cut the red tape, work with new entrants, and very importantly, stop shilling for existing cartels!

As always in a big complicated world there are a lot of moving parts. Pandemic preparation has always been rooted in the idea that a disease wave was inevitable. It was just a matter of when. It would come no matter the state of the economy or who was running the country. Maybe it would have been worse if the recession had come first and the pandemic second? We at least start from a position of wealth. I think individuals have pretty good balance sheets right now, historically speaking. (And the implicit training of all those zombie movies.)

On politics not so much.

On June 3, 2017 at 4:12 am, a poster called Thanatos Savehn posted this comment at MR:

"Apparently you missed the memo. We're in the "burn it all down" phase. And that's a good thing; unless you're one of the parasites that don't like it when their hosts take antibiotics."

That as a comment to Trump and the collapse of America’s global role (POTMR)

Sometimes people get what they ask for. Maybe that's harsh to say in this moment, but I don't think it would be honest to sweep it under the rug. A lot of people hated on Obama's smoothly running "socialist" government, and so now we have this.


That tweet is interesting, and just what a certain commentor here keeps repeating -

Sleepy Joe Biden was in charge of the H1N1 Swine Flu epidemic which killed thousands of people. The response was one of the worst on record.

Trump is far too modest here, since his administration was able to make Sleepy Joe look, well, sleepy. "On February 10, 2018, Fortune reported that influenza in the United States was killing up to 4,000 Americans a week, likely to far outstrip the rate of deaths in the 2009–2010 season."

Basically, that flu season was a foretaste of what we are seeing now. Which, of course, is the phase before the U.S. gets its act together.

If you're a morality tale is that health care is an issue of personal responsibility, it is kind of hard to have a robust public health response.

The CDC has spent about $60 billion over the last five years. Apparently on everything except ......controlling disease.

Of course you turn this into a partisan shitfest and then wish the Corona virus on a stranger for being anti-globalism.

Stay classy, “California Boomer up at 3:30 AM to wish death on Americans”

For the record, 3:30 AM PST is 1:30 PM in Saint Petersburg.

I'm not sure how many names you've been using, but let's say that since 2016 I've been saying "Trump is an immoral idiot" and you've been saying "who cares."

Now, when lives are on the line you say "we can't talk about this now!"

Well, maybe you should have fucking listened.

No, you’re lying again. You white liberal lying douche.


anonymous says he is:

A Boomer that saved money in 1965 by buying Mongolian BBQ every day for $45 per lunch.

He programmed Python scripts in 1970 and he’s a master or virus identification.

But he’s immediately said he doesn’t know anything about anything.

Voices in your head.

By the way, as a related topic:

We Americans have typically liked walls between different parts of our government. We considered it necessary for freedom and privacy. The South Koreans did it differently. They have a national ID, which is also used in their national health system, which is also used in passport control. So when they wondered who has traveled and has then gone to see the doctor, it was a pretty simple query.

I might have to revisit my beliefs on walls between government departments.

The U.S. could easily work at the South Korean level, but then the surveillance state would be made plain. We like to pretend that our data systems are somehow not easily capable of keeping track of everyone's cellphones, for example, or credit card numbers, or vehicle license plates, or SS#. It is true that are institutions are considerably more splintered - Aetna and Blue Cross probably share zero information and have incompatible systems at many levels. The same likely applies at the hospital system level.

There is no question that ATT, Verizon et al could just as easily put together a tool similar to the one South Korea used to alert everyone in a block that someone has covid19, and to then list all the places that phone had been for the last several days. The phone companies, much less the people who pay handsomely for such information, will do everything in their power to keep from using such capabilities openly.

Oh I understand that the intelligence services and probably some private companies could construct a synthetic version of this, based on big data.

But that ain't the same as a simple query.

And given the complexity of data aggregation, and walls between responsibilities, it's probably not surprising that no one did ask Palantir or the NSA to identify sick people.

The cell phone companies have this capability right now, once given a list of people who have tested positive.

That was not the task I set.

"So when they wondered who has traveled and has then gone to see the doctor, it was a pretty simple query."

Google just has a breadcrumb trail of motion, not purpose in taking your mother to the doctor.

Oh, then you must be a big fan of the Patriot Act now.

I think that's actually an orthogonal question.

Whether we have a national ID, and integrated national services, does not actually imply unlimited government power.

Safeguards would just be implemented differently, and we wouldn't rely on the rude hack of data incompatibility or firewalls.

Look who’s on board with putting kids in cages now. They’re not gonna let you into the country club anymore.

Completely unrelated.

You, like the majority, assume that the government that exists now will always remain that government, administered in the future as it is now.

I expect democratic evolution of government, that's true.

The cell phone network is constructed in a fashion to keep track of all devices whenever a signal is connecting them to the network. This has nothing to do with the Patriot Act in the least, and would havde basically technically possible (with considerably less precision regarding location) in 2000.

I love Austria! G'day mate! Watch out for those drop bears! Throw another shrimp on the barbie!

"Dumb & Dumber" came out in 1994

Trump cowed the Fed into submission to continue low interest rates, which enabled corporations to take on even more debt. Why wouldn't you.

From the Financial Times: https://www.ft.com/content/f013c18e-649c-11ea-b3f3-fe4680ea68b5
Business Insider: https://markets.businessinsider.com/news/stocks/us-corporate-debt-10-trillion-record-percentage-economy-expert-warnings-2019-12-1028731031

I am waiting for the Trump administration to propose that the Fed be allowed to purchase corporate debt.

The circle of socialism for the rich will be complete.

"If I believed in Austrian business cycle theory, I would think that the Fed lowering interest rates and flooding the system with liquidity, post-2008, was a disastrous decision, associated with a cascade of corporate debt, an equity bubble, and massive indirect subsidies to inefficient, now-doomed-to-fail smaller companies."

This strikes me as a straw man. Under ABCT, the boom-bust process is initiated by interest rates falling below the natural rate, not just low interest rates in general. There is nothing contradictory about an ABCT advocate arguing that because the Fed prevented short-term interest rates from falling below zero, the yield curve was above any kind of natural level for the bulk of this period (though perhaps not the whole period). This would limit the extent to which a boom-bust cycle could initiate.

Looking at your post from 2005, it looks like 2, 3, and 6 were probably correct on balance. On 6, you probably would have been better off just buying long-term Treasuries, rather than futures, due to the timing issues. It would have been the right call, albeit a little early. 4 is also correct wrt 2 and 3, though you place more emphasis on Asian central banks.

5 clearly did not turn out correctly, but I'm not sure that is a prediction of ABCT. Recall that during the Great Depression we had deflation. PPP would say that if a country has more deflation than others, then it should appreciate against them. Of course, flight to safety was a bigger driver of the dollar's appreciation from 2008, but I don't see that as inconsistent with ABCT at all. Moreover, why does someone need only one theory to explain everything. Use all the stuff that works.

1 is probably more debateable, but when I think of ABCT that probably isn't the main scenario I would consider. But you likely know it more than I do...

"On 6, you probably would have been better off just buying long-term Treasuries, rather than futures, due to the timing issues."

One of us is reading him incorrectly. He was saying he wanted to buy T-bond puts, meaning that he wanted to short US Treasurys. He expected bond prices to fall, i.e. interest rates to rise.

In this, of course, he was wrong, because Austrian business cycle theory isn't really a theory -- just a dumb meme that appeals to men with a particular variety of anti-social personality disorder.

Regardless of ABC or not, Fed actions of pushing rates very low did cause 'reaching for yield', which shows up as more risky investments, leverage, and in some cases investments 'deeper into structure of production' - such as:
- Elon Musk building a spaceship to Mars has to be a 'deep stage' investment....would a society really throw as much capital at this sort of investment exist if markets were not reaching for yield?
- Katerra? attempt by construction companies to vertically integrate? Seems like they were taking on additional business risk without view of how going 'deeper in production cycle' adds risk to business

The point is that, whether we subscribe to ABC or not, artificially low interest rates do indirectly encourage investments in risky businesses that would not have gotten as much capital otherwise.

Straussian post.

I am not sure how it fits all the business cycle theories, but I think I am more comfortable facing a pandemic with a (recently) fat portfolio.

The market is certainly falling, but it seems temporary.

I don't think I would feel so good if we were near a market bottom, I already had an end of the world feeling, and boom disease on top of it.

It would have felt much more like the four horsemen of the apocalypse.

Maybe this is similar to the dot.com crash, when people were "losing paper profits" and so took a less direct hit to the animal spirits.

And it only took 12 years and a black swan shock to prove the Austrians were right!

I think Tyrone hacked into Tyler’s account again.

"If I believed in Austrian business cycle theory, I would think that the Fed lowering interest rates and flooding the system with liquidity, post-2008, was a disastrous decision, associated with a cascade of corporate debt, an equity bubble, and massive indirect subsidies to inefficient, now-doomed-to-fail smaller companies."

OK except post 2008 how much of the stock market rise has been due to a few mega-companies. Take FAANG (Facebook, Apple, Amazon, Netflix, and Google) out of the stock market and the 2008-2020 boom deflates quite a bit (toss in a few other big names like Microsoft and Tesla and you have even less of a boom).

The Austrian model would predict that super low interest rates would spawn huge numbers of small businesses. Lots of people quitting their jobs at the factory and taking out loans to buy, say, pizza ovens.

Post 2008 there's been some smallish businesses that have boomed. I suppose some people have brought cars to go all in on Uber/Lyft driving. Craft beer brewery's, vape shops have popped up all over the place but on a macro scale this doesn't amount to much. If vape shops go under, it just means some shelving units will get sold cheap. If micro-beers go under, some metal vats will show up at the scrap metal yard.

The Austrian theory then has to say the massive investment made by the bigwigs....Amazon, Netflix, Google, Apple....basically direct to consumer retail, consumer information devices, information processing were all misguided by bad 'signals' from a booming stock market.

Who buys that now? Who thinks the real under-invested areas are small retail stores, printed reference books like phone books and encyclopedias, local TV stations?

"OK except post 2008 how much of the stock market rise has been due to a few mega-companies."

First, stock market performance is not the main metric. Unemployment and GDP per capita growth are more important. Second, "if you take out all of the top performing companies, the stock market doesn't look so great after all" isn't a good argument. Like many things, the stock market has its share of outliers on both sides and its undoubtedly true if you, ex post, exclude all of the best performers that is performance may not look as good. Of course, you could just as easily exclude the worst performers and make the argument that if it wasn't for a few large companies tanking, the stock market would have done even better. That's why we have indices.

"First, stock market performance is not the main metric. Unemployment and GDP per capita growth are more important. "

How is unemployment or GDP per capita growth going to tell you that growth is coming from unsustainable 'subsidies' to smaller companies?

" "if you take out all of the top performing companies, the stock market doesn't look so great after all" isn't a good argument."

Rephrase that, you wanted to test whether growth was coming from smaller companies versus the largest, you can simply look at the largest caps versus everyone else. Median rather than mean performance. Take out FAANG and you take a way a lot of the growth over the last stock market boom, but it is easy to imagine a counter factual where the top 5 companies matter very little to overall performance....even a 'small cap boom' where huge companies like GE falter while huge crops of small caps zoom up in its place.

Now do Russel mid-cap / small-cap and compare to SP500.

Why are you guys even on an academic economics blog ?

I agree about Austrian Theory, but at least they're not Socialists, and, again, Mises nailed Socialism's coffin in his book on Socialism. Socialism was really a negative movement, pointing out problems with Capitalism, but unable to articulate the sinews of a realistic economy that didn't involve the necessity of massive coercion to work. It always involves analogical reasoning that isn't valid, for example, if we need dresses, we'll just have dressmakers make them, which sounds, at first glance, plausible, until you realize on deeper reflection that it's outright magical thinking.

Ok, Tyler, you nailed yourself to this mast long ago, and thus failed to welcome anything resembling a true gale of creative destruction post-2008. Now with that heavy leaden hammer still clasped in your hand, everything, even a coronavirus multiplier, will look to you like another nail. But maybe, simply, the gale has yet to blow hard enough (the target has grown immeasurably larger since 2008, and thus easier to blow at).

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