Jesús Huerta de Soto’s Six Stages of the Austrian Business Cycle: Which Stage Are We in Now?
One reality that the unprecedented Reddit/GameStop short squeeze alerted more people to is the major disconnect between the ballooning stock market and the actual economy. A stock market bubble is a significant indicator of the boom phase of the boom-bust economic cycle that we have grown accustomed to over the past several decades.
Many, mostly on the left, blame free market capitalism for economic cycles, however, boom-and-bust cycles are not an inherent feature of a market economy. Austrian school economists have for a century convincingly argued that business cycles are a result of monetary distortions in the economy created by artificial, or fiat, money creation and the false credit expansion that results from it.
Mises, Hayek, and Rothbard are perhaps the best-known proponents of this theory. An unheralded but incredibly insightful work on Austrian business cycle theory that rivals the work of those greats is Jesús Huerta de Soto’s 1998 Money, Bank Credit, and Economic Cycles.
Covering everything from the legal (or illegal) nature of fractional reserve banking to free banking theory, to a critique of Keynesian theory, Huerta de Soto’s work is as thorough as it is enlightening.
With specific regard to the business cycle, possibly the most useful analysis is Huerta de Soto’s, which breaks the business cycle into six stages. The entire book is certainly daunting for the layman, but for curious beginners looking for an introductory explanation of Austrian business cycle theory (ABCT), understanding these stages will alone make you more intelligent than 99 percent of politicians and leftist econ professors.
Stage One: Expansion Phase
The expansion phase of the boom is initiated by the creation of fiat money by the central bank (the Federal Reserve in the case of the US), which is injected into the economy in the form of loanable funds. This enables banks to extend credit not backed by real savings but conjured up out of thin air.
Most fiat money is created by the Fed via open market operations. This process involves the Fed buying government securities owned by banks: banks swap out relatively illiquid government bonds for cash balances that can be loaned out. But the Fed doesn’t use any of its cash reserves to pay for the bonds but rather digitally creates new money to credit to the banks selling the bonds.
Money out of thin a
Article from Mises Wire