#austrian

Here some of my rambling thoughts.

An introduction. The austrian business cycle theory, besides what the name might suggest, is a theory related to all business cycles and not those particular only to Austria. Its name originates from Austrian School of Economics. The pioneers of the school were F.A. Hayek, Mises and Rothbard. The ideas pushed by the Austrian School of economics are mutually exclusive with Keynesians economics and differ with Milton Friedman. That's a brief history and more can be found on the internet.

The theory explains the boom of a business cycle is the result of the expansion of bank credit, which is created by the federal reserve through quantitative easing. Artificially low interest rates cause entrepreneurs to malinvest. These malinvestments realize later as unprofitable because there was never enough savings to sustain them. Malinvestments also cause inflation in prices of physical capital, capital machines, intermediate goods and final consumer goods. Eventually, the inflation from the malinvestments runs high enough that the federal reserve raises interest rates. That is the end of boom period. Then the bust occurs. Easy money in the boom elevated asset prices and incomes. This comes crashing down with the rise in interest rates. An increase in interest rates lowers the prices for many assets types and it also makes business ventures unaffordable and unprofitable. The bust ends after the malinvestments emerge as bankruptcies and prices of various asset types bottom out.

End of Part 1)

Part 1) Background information

I might add more later of my thoughts while I thought through the theory, instead of merely background.