Austrian Business Cycle Theory Confirmed by the BIS

The Bank for International Settlements says the entire strategy of stimulus by global central banks is based on a false premise.

So begins the latest commentary by Ambrose Evans-Pritchard.

The world's monetary watchdog has thrown down the gauntlet. It has challenged the twin assumptions of secular stagnation and the global savings glut that have possessed - some would say corrupted - the Western economic elites.

I would say “corrupted.”

It has implicity indicted the US Federal Reserve and fellow central banks for perverting the machinery of interest policy to conjure demand that may not, in fact, be needed, and ensnaring us in a self-perpetuating "debt-trap" with a diet of ever looser money.

Will that indictment come with a trial followed by prison time?

The BIS believes it has found the smoking gun in a study of recessions in 22 rich countries dating back to the late 1960s. The evidence suggests that the long malaise of the post-Lehman era - and the strange episode that preceded it - can be explained almost entirely by the destructive effects of boom and bust on productivity growth. (Emphasis added)

I have looked at the underlying BIS document (PDF), searching for the words “Austrian,” “Mises,” or “Hayek.”  Zip, zero, and zilch.

I didn’t need to study recessions in 22 rich countries; one visit here should be enough for any semi-rational individual to properly understand economics, money, and credit.

Credit bubbles are corrosive. They gobble up resources on the upswing, diverting workers into low-productivity sectors and building booms.

Apparently this is news to the BIS and Ambrose.  It wouldn’t be news if they spent time with this book – 50 pages, a quick read.

Ambrose finds room to comment on the vindication this study offers to Schumpeter’s “creative destruction” and Hansen’s “secular stagnation.”  He also flushes down the toilet bowl the nonsensical “global savings glut,” touted by Bernanke; “there is no lack of global demand.” 

There is no mention by Ambrose of the Austrian Business Cycle Theory.

The entire strategy of global central banks is based on a false premise.

Maybe, maybe not.  It all depends on what premise you believe.  The false premise is that central banks are intended to manage the economy; the correct premise is that central banks are intended to control the population and siphon wealth from the productive.

In any case, where does this realization lead?

The BIS lodestar is the "natural" rate of interest, coined by the Swedish economist Knut Wicksell.

Nothing about the market, nothing about Mises, nothing about the Austrian Business Cycle.

In any case, Ambrose isn’t buying any of it: it was all just caused by “policy error.”

And the answer?

Mr Borio would like us to pluck up our courage and restore rates to their Wicksellian equilibrium, come what may.

My fear is that it is already too late. The social and political consequences of a liquidation purge are too terrible. We are trapped in this insidious circle, and we will have to live with it.

“Too late”; “we are trapped.”  A convenient statement from someone who regularly advocates more money pumping.  There were others who advocated liquidation from the beginning.  They were dismissed by Ambrose as “Austro-nihilists,” being consumed by “Austro-outrage,” and described as pedantic;  all along, Ambrose preferred “magic.”

Money and debt contracts are social conventions. They can be torn up, or reinvented.

Such is the respect for contracts and property.  Tear ‘em up, make up something else.

Never fear, Ambrose eventually throws a bone to the Austrians:

Economic life will go on. As the Habsburgs used to say, the situation is desperate but not serious.

Fooled you.