Saturday, 31 January 2015

A Graphical Introduction to the Austrian Business Cycle Theory

By Gaurav Mehra

Business cycles, simply put, are the fluctuations of economic growth about an economy’s long-term trend. Identifying the symptoms of business cycles is simple enough but identifying their cause is a much more formidable task. Indeed, many theories have tried and many have failed to provide convincing causational links. Many economists and politicians have even come to accept business cycles as an inherently pernicious trait of capitalism. This article attempts to explain, to the best of its author’s ability, a relatively forgotten and anti-conventional theory that aims to explain business cycles; the Austrian Business Cycle Theory (ABCT). Named after its origin in the Austrian School of economic thought, this theory places emphasis on the rate of interest. Specifically, the theory argues that when the rate of interest is set arbitrarily by monetary authorities different from where the market would have it, there is an adverse affect on the structure of production which serves as one of the main catalysts behind the booms and dreaded busts of the business cycles.

"Austrian" True Money Supply Weekly (19 Jan 2015)

The short version of the "Austrian" True Money Supply for the U.S. decreased 0.31% on last week for the week ending 19 January 2015. At $10.5792 trillion, the money supply is now down $22.9 billion, or 0.31%, year to date.

The 1-year growth rate in the money supply ended the week on 7.31%, down from 7.39% the previous week. For the first time in six weeks, the growth rate was lower than the same week a year ago. 


Click here for a recap of 2014 and historical data for the money supply since 1981.


Also see:

The True Money Supply and the Future of the U.S. Economy

Friday, 30 January 2015

GDP and Stock Market

The first estimates of Q4 GDP in the U.S. are just released which shows a nominal GDP growth of 3.70% compared to Q4 2013. Not much to celebrate as the money supply (M2) increased by 5.69% during the same period. Incorporating the population growth as well, the money supply adjusted GDP per head remains lower than it was some 15 years ago. 


No real growth in GDP per head therefore since 1999. The stock market on the other, well, that's a different story as it has been outpacing both nominal GDP growth and money supply growth for quite some time. As a result, the stock market to GDP ratio below has never been higher. 


At least QE helped fuel something. 

The Dark Side of "Norway's Golden Age"

Household debt has increased more than NOK 1.978 trillion, or 271%, since December 1999...


...while the Norwegian krone has lost more 76% of its purchasing power against gold during the same period.


And while the overall tax burden remains as high as ever in Norway, the government managed to run a fiscal surplus for the mainland economy (which excludes oil and gas) only twice during the last 15 years (2000 and barely in 2007, the deficit will be record high in 2014).


A golden age for the oil and gas industry? Yes. A golden age for government spending, bureaucrats and public employees and the private companies servicing them? Yes, absolutely. As for everyone else, what they thought was a golden age was little more than a debt fest fueled by easy money policies. And all parties ultimately need to be paid for. 


Related:

What Has The Norwegian Central Planning Bureaus Done to Our Currency and Wealth?


Norwegian Debt Slaves and the Bloated Norwegian Government

Deflationary Pressures Increase Further in the U.S., Eurozone and the UK

The aggregate money supply for the U.S., Eurozone and the UK, measured in U.S. dollar terms, continues to decline. In December, the money supply declined 1.04% compared to previous year, the biggest decline since August 2012.


A stronger dollar and a still declining UK money supply were the drivers of the negative growth rate.

Eurozone money supply when measured in Euro increased sharply during the month.

Overall, deflationary pressures as measured in U.S. dollar terms increased further on aggregate in December for the three economies.