Germany, 1923:
Workers were paid twice a day, and the housewife would stand at the factory
gate and rush with wheelbarrows full of million mark notes to buy anything at
all for money. Production fell, as people became more interested in speculating
than in real production or in working wages. Germans began to use foreign
currencies or to barter in commodities. The once-proud mark collapsed. Rudolf
Havenstein, the head of the Reichsbank-the German Central Bank made clear that
the bank would meet its responsibilities by increasing higher denominations of
notes and keeping its printing presses open all night to fill the demand. In
July 1914, 1$ = 4 marks and by November 1923 mark value had spiralled down to
1$ = 4.2 trillion marks.
US, 2002:
In the aftermath of 9/11 and
the bursting of the dot com bubble, the US was entering a recession. In
response, the Federal Reserve then led by Alan Greenspan launched on what they
called an “accommodative” monetary policy, a euphemism for pumping the market
with money to try to stimulate the economy. Money was created basically by
creating new debt. It was therefore necessary for recipients of the new money
to lend it out again in order to profit from it. More money created by the Fed
meant more loans that just had to be made. Property was seen as a “safe” asset
to fall back on in the event of default. There was a general feeling that
property prices would continue rising forever. Since money just had to be lent,
many lenders relaxed lending norms and made loans easy to get. This combined
with rising property prices drew borrowers like bees to honey. People with
little or no income came looking for loans hoping to collect the profit from
the house in the future or betting on rising price of the property to keep
financing their payments. Lenders relaxed income-proof and asset ownership
criteria to the point where loans were given knowing well that the borrowers
had absolutely no ability to repay them. This led to Sub-prime mortgage crisis
of 2008. This cycle continues. 15 Panics / Recessions / Depressions from 1796
to 2008.
So, what is the cause for this business cycle?
Mainstream economists like Paul Krugman say this is an inherent feature of
Capitalism. And what we can do is to predict outcomes and take preventive and
corrective measures. But to according to economists following Austrian school
of thought, causes are completely monetary flaws in the banking system and can
be eradicated by attacking the root causes.
Structure
of production: The organization
of production into different stages of transformation of land and labor into
(eventually) consumers’ goods. During production land and labor are paid before
the actual sales take place. Where does the money to pay land and labor come
from? The money has to be paid in advance, which is done by using the saved
capital. Someone has to forsake consumption now and prefer consumption in the
future. Money thus saved becomes available for payment to land and labor. A
producer produces for future consumption and not for present consumption. But
how do producers get to know that people have decided to consume in the future?
For example consider the following case with 5 levels of production.
Interest income is the
calculated price spread between two successive levels of production. Total savings
required = 95 + 76 + 57 +
43 + 28 + 19 = 318 ounces. Suppose that consumer savings
increase by 20 ounces and expenditure decrease to 80 ounces.
The interest income
decreases at every level i.e. the price spread falls. This is a signal for the
producer that consumers have decided to consume in the future. Eventually there
is a matching of producers’ and consumers’ decision across time and leads to
greater economic stability.
Now consider the entry of the Central Bank, the Central
Bank does not see the 20 ounces as savings but as credit expanded, so the total
consumption spending remains at 100 ounces. And the saved capital for future
consumption is zero. Hence, total gross savings required = 100*318/80 = 397.5 ounces. This increase in 79.5
ounces(397.5-318) is compensated by reducing the interest rate by 20%(79.5*100/397.5).
Hence, the production seems more profitable than ever and massive investments
happen in their production and a huge bubble is created. Exactly what happened
to create the property bubble of 2001-07. The result of interest rate
manipulation creates mismatch between investment decisions and consumption
patterns. Requires non-stop credit expansion to sustain the boom, monetary expansion
required to fuel credit expansion– causes consumer price inflation. Consequent
massive monetary inflation makes the bust inevitable, boom-Bust cycle thus
created by interest rate manipulation. Why does the Central Bank do this? This is
how it earns interest for money which it does not own. This is how money is
created out of thin air. Finally, what is the solution for this?
-
K. SATYA HARISH
12PGP074
0 comments:
Post a Comment