The Coming Recession Will Be a Global One
Over 100 years ago, Austrian economist Ludwig von Mises discovered what causes the boom-bust business cycle.
As Mises explained, the boom is caused by central and commercial banks creating money out of thin air. This lowers interest rates, which encourages businesses to borrow this newly created money to fund capital-intensive investment projects.
The bust is caused when the money creation process slows. It is then that businesses discover there are not enough scarce resources to complete their projects, so these projects must be liquidated to allow for labor and other resources to be allocated to where they are most desired by consumers.
As a result, not only does the boom-bust business cycle cause tremendous short-term hardship, but it also lowers long-term living standards by wasting scarce capital. This is another application of the fact of economics that “there is no such thing as a free lunch”. The only way to keep the business cycle from recurring is to prevent banks from creating money out of thin air in the first place.
This explanation of the business cycle is known as “Austrian Business Cycle Theory”, in honor of Mises and his Austrian School students who further developed his groundbreaking theory.
One of his best students was economist Murray N. Rothbard, who summarized the theory as follows:
When the government and its central bank encourages the expansion of bank credit, it not only causes price inflation, but it also causes increasing malinvestments, specifically unsound investments in capital goods and underproduction of consumer goods. Hence, the government-induced inflationary boom not only injures consumers by raising prices and the cost of living, but also distorts production, and creates unsound investments. The government is then faced repeatedly with two basic choices: either stop its monetary and bank credit inflation, which then will necessarily be followed by a recession which serves to liquidate the unsound investments and return to a genuinely free-market structure of invest
Article from Mises Wire
