Thursday, January 7, 2016

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.


  1. Odd, because BIS is "... wholly owned by BIS members (central banks) but still operates in the private market as a counterparty, asset manager and lender for central banks and international financial institutions." (Wikipedia). Hard to imagine during semi-annual meetings at BIS of central bank heads, that their support staff berates them for running on a false premise.

  2. In 1974 at age 23, I bought a little “Bramble Mini Book” by Rothbard called “The Essential Von Mises”. Chapter 3 was very short and entitled “Mises on the Business Cycle” which I did not think was particularly difficult for people to understand:

    From these three important but scattered theories, Mises constructed his great theory of the business cycle. Into the smoothly functioning and harmonious market economy comes the expansion of bank credit and bank money, encouraged and promoted by the government and its central bank. As the banks expand the supply of money (notes or deposits) and lend the new money to business, they push the rate of interest below the “natural” or time-preference rate, i.e., the free-market rate which reflects the voluntary proportions of consumption and investment by the public. As the interest rate is artificially lowered, the businesses take the new money and expand the structure of production, adding to capital investment, especially in the “remote” processes of production: in lengthy projects, machinery, industrial raw materials, and so on. The new money is used to bid up wages and other costs and to transfer resources into these earlier or “higher” orders of investment. Then, when the workers and other producers receive the new money, their time preferences having remained unchanged, they spend it in the old proportions. But this means that the public will not be saving enough to purchase the new high-order investments, and a collapse of those businesses and investments becomes inevitable. The recession or depression is then seen as an inevitable re-adjustment of the production system, by which the market liquidates the unsound “over-investments” of the inflationary boom and returns to the consumption/investment proportion preferred by the consumers.

    Mises thus for the first time integrated the explanation of the business cycle with general “micro-economic” analysis. The inflationary expansion of money by the governmentally-run banking system creates over-investment in the capital goods industries and underinvestment in consumer goods, and the “recession” or “depression” is the necessary process by which the market liquidates the distortions of the boom and returns to the free-market system of production organized to serve the consumers. Recovery arrives when this adjustment process is completed.

    The policy conclusions implied by the Misesian theory are the diametric opposite of the current fashion, whether “Keynesian” or “post-Keynesian.” If the government and its banking system are inflating credit, the Misesian prescription is (a) to stop inflating posthaste, and (b) not to interfere with the recession-adjustment, not prop up wage rates, prices, consumption or unsound investments, so as to allow the necessary liquidating process to do its work as quickly and smoothly as possible. The prescription is precisely the same if the economy is already in a recession.

    Other than the rare usual suspects who are apparently genetically predestined to understand this simple Austrian stuff, no one else ever cares to even think about it. And no one does. Why is that always the case? Is there anything we can do about it?

    Is it a good or a bad thing that our opponents are afraid to directly engage us? I submit that if they were not afraid of us, they would calmly and fairly state our position and then refute us. Their bizarre reaction to us is proof that they fear us so much that they do not want to even think about what we are saying. I suspect that the problem begins with people being emotionally invested in seeing their political views as helping humanity and seeing themselves as good people. They are not prepared to respond to our position which holds that their political views and policies are not helping humanity at all but are, in fact, the cause of most of humanity’s most horrific problems.

  3. In 1974, Hayek won the Nobel Prize. I thought we were on a roll. Hayek even appeared on “Meet the Press” and I was quick on the draw in pulling out my student cassette recorder and setting it near the TV speaker. What is so complicated about these explanations?

    The unemployment of which you speak, which is the initial cause, is due to labor being temporarily directed into places or activities or industries where they cannot be maintained without further inflation. Therefore you can only cure that by achieving a new redistribution of labor between employments. Adaptation to a condition in which aggregate demand need not progressively increase to maintain that employment.


    [T]he present difficulty is not due to a deficiency of aggregate demand. It is due to the fact that without continued inflation, you cannot maintain the people in the new employments in which they have been drawn by the inflation of the past."

    Has anyone EVER seen an informed engagement or response to these simple concepts by our opponents?

    1. Bob,

      Nope. The only remotely informed engagements I've found so far are from LK, over at

      And obviously he doesn't actually understand that which he pretty well memorizes. I keep reading him thinking one day he will grasp the ideas he so quickly dismisses. Of course I revel in the back-and-forths between him and either you or Major.Freedom.