How Easy Money Creates the Boom-Bust Cycle
According to the popular way of thinking, various economic data can provide an analyst with the necessary information regarding the state of the economy. It is held that by inspecting various economic indicators such as the gross domestic product or industrial production, an analyst could ascertain the state of the economic business cycle.
Following the experts from the National Bureau of Economic Research (NBER), business cycles are seen as broad swings in many economic indicators, which upon careful inspection permit the establishment of peaks and troughs in general economic activity.
Furthermore, according to the NBER experts, because the causes of business cycles are complex and not properly understood it is much better to focus on the outcome of these causes as manifested through the economic data.1
If the driving factors of boom-bust cycles are not known, as the NBER underlying methodology holds, how could the government and the central bank introduce measures to counter them?
Contrary to the NBER way of thinking, data does not talk by itself and never issues any “signals” as such. It is the interpretation of the data guided by a theory which generates various “signals.”
By stating that business cycles are about swings in the data, one says nothing about what business cycles are. In order to establish what business cycles are the driving force that is responsible for the emergence of economic fluctuations needs to be ascetained.
Why We Have Boom-Bust Cycles
Contrary to the indicators approach, boom-bust cycles are not about the strength of the data as such (for instance, for the NBER a recession is a significant decline in activity spread across the economy lasting more than a few months). It is about activities that sprang up on the back of the loose monetary policies of the central bank.
Thus, whenever the central bank loosens its monetary stance, it sets in motion an economic boom by means of the diversion of real savings from wealth generators to various non-wealth-generating activities that a free unhampered market would not facilitate.
Whenever the central bank reverses its monetary stance, this slows down or puts to an end the diversion of real savings toward activities that do not generate real wealth and that undermines their existence. The trigger to boom-bust cycles is central bank monetary policies and not some mysterious factors.
Consequently, whenever a looser stance is introduc
Article from Mises Wire