Monday, 15 December 2014

"Normal" Credit Expansion, Saving and the Austrian Business Cycle Theory

"The notion of "normal" credit expansion is absurd. Issuance of additional fiduciary media, no matter what its quantity may be, always sets in motion those changes in the price structure the description of which is the task of the theory of the trade cycle."
Ludwig von Mises, Human Action

In the soon to become mainstream economics blogosphere (unless monetary cranks and demagogues manage to persuade the public to live blindfolded for yet another 100 years) we today often refer to this as the "boom-bust cycle". And this cycle is driven by money supply growth, and not by real saving. A ratio of money supply to saving above 3 has been pretty bad news for the U.S. economy in the past... 

PS: this distortion cannot be cured by creating even more money (as this is what created the distortion in the first place!).

Also see:

Ten Charts Demonstrating the 2014 U.S. Stock Market Euphoria