Austrian business cycle theory today

That is the topic of my latest Bloomberg column, excerpt:

One reason the current economic situation is so fraught is that the world is facing three kinds of business-cycle mechanisms at the same time. The first two are well-known, but the third — known as the Austrian theory of the business cycle — is not.

And in more detail:

When the combination of high inflation and pending disinflation came along, real interest rates spiked upwards. It is difficult to estimate the current level of expected future real interest rates, because market participants disagree about the likely future course of inflation. Nonetheless, market prices are indicating that traders expect higher interest rates to continue through the decade, if not longer. Anecdotal evidence from secondary capital markets, such as venture capital, is strongly consistent with the notion of capital being harder and more costly to obtain.

The more significant issue concerns a decline in long-term building and long-term projects.

The decline in asset prices came first to crypto in late 2021. Crypto was originally marketed as a hedge against inflation, but the data have refuted that idea. Instead, crypto has become a project to build out a new and different kind of financial system. That project has been years in the making, and even true believers admit that the revolution is years away, if it comes at all.

In fact, at higher real interest rates — in essence, higher rates of discount — the project looks less appealing. It is striking that crypto prices, which are about the least “establishment-determined” of all major classes of asset prices, were to first to register this change in market expectations.

Major tech companies have also seen their valuations fall significantly due to higher interest rates. Whatever else they may be, Meta, Alphabet and Amazon are also some of America’s more promising corporate research labs, and now they don’t have the resources they did less than two years ago. Their successors will have a hard time as well, due to rising capital costs, again at the expense of innovation and America’s collective future.

I am always struck by both a) how many economists will badmouth the Austrian theory, and b) how many of the same will resort to some partial version of it to explain current events.

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