Cause of the Boom-Bust Business Cycle
The primary cause of the recurring “ growth and bust” business routine is central banks like the Federal Reserve creating money out of thin air. This was 1st explained by Austrian economist Ludwig von Mises over a century ago. His student F. A. Hayek gained the 1974 Nobel Prize in economics for their work on this theory, which is now known as Austrian business cycle theory.
The basic outline of Austrian business cycle theory is really as follows:
- the government “ central bank” (in the US, it is the Government Reserve or “ Fed” ) creates money from thin air (they effectively “ print it, ” although typically in the form of electronic entries now), usually by buying Treasury bills or provides from commercial banks, which then …
- is certainly deposited in commercial banking institutions which, through the process of fractional reserve banking (where banks are legally allowed to keep only a fraction, such as 10 %, of their deposits in money reserves), create even more cash out of thin air to give loans to their customers, which then …
- leads to reduced interest rates than would prevail in a free market with no central bank and fractional reserve banks legally creating money out of thin air, which then …
- leads to businesses and consumers in order to borrow the newly made money to invest in long-term projects such as mines, factories, houses, etc ., since the profitability of these investments appears higher today with a lower cost of funds, which then …
- leads to the unsustainable “ boom” phase of the business cycle where scarce funds is misallocated to unsustainable investments since the real sources of raw materials, equipment plus labor needed to finish these types of long-term projects are not bodily available; while paper money may literally grow upon trees, the actual scarce sources needed to create goods and services do not (printing money does not produce the goods needed for profitable investment— if it did, Zimbabwe will be the wealthiest country in the world and could all stop working, preserving and investing); then …
- the higher cash supply leads to higher cost inflation, which raises production costs and usually causes the central bank in order to slow the growth rate of money supply and increase interest rates to try to lower pumpiing (if they do not, it will eventually result in hyperinflation, which effectively destroys a functioning currency plus economy), which then …
- leads to the “ bust” phase of the company cycle, where the unsustainable purchases are proven to be unprofitable plus must be liquidated to budget for capital to the most productive uses that meet consumer desires.
As this theory shows, the particular dreaded boom and bust business cycle is not natural in a free market economic climate. It is caused by the lawful privilege granted to main and fractional reserve industrial banks to create money out of thin air. As Mises summarized:
True, governments can reduce the speed of interest in the short run. They could issue additional paper money. They can open the way to credit score expansion by the banks. They can thus create an synthetic boom and the appearance of prosperity. But such a increase is bound to collapse soon or late and to bring about a depression.
Fed Panicked More than Covid
As a result of the stock market crash and global economic collapse caused by government covid policies in early 2020, the Fed panicked and aggressively improved the money supply by forty percent, more than double the increase in the money supply in prior recessions, as shown below (which is the “ Austrian money supply, ” calculated as M2 less small time build up and retail money market funds plus Treasury deposits at the Fed).
This particular massive money creation resulted in the highest inflation rates within over forty years, using the latest CPI report displaying inflation at 8. six percent, well above the particular Fed’s 2 percent focus on. And now that money supply development has slowed substantially to only 7 percent — and the Fed-controlled monetary base (currency plus bank reserves in the Fed) is now declining 2 . 6 percent year over year — the economic climate is starting to slow.
Recession Indicators Are Mounting…
Economic growth has already weakened substantially. US gross domestic product fell 1 . 4 percent in the first quarter of 2022 as well as the Atlanta Fed is now estimating 0. 0 percent GDP growth in the second quarter.
Real individual income is down several. 5 percent year over year, and was down 17 percent in March, the biggest decline in over 60 years. Real manufacturing plus trade sales are now down 2 . 5 percent year more than year. This broad product sales measure only declines within recessionary periods, as demonstrated below (recessionary periods are usually shaded gray).
Interest rates have been skyrocketing due to high inflation and slower money supply growth. The ten-year Treasury yield increased through 1 . 19 percent last summer to 3. 25 % now, while the two-year Treasury yield increased from 0. 13 percent last summer season to 3. 17 % now. The thirty-year fixed mortgage rate has increased from 2 . 77 % last summer to five. 78 percent now, which is causing a collapse within mortgage applications and homebuilder sentiment.
The particular “ yield curve” distribute between the ten-year and two-year Treasury yields has now flattened to only 0. 08 percent. This spread “ inverted” briefly a couple of months ago when the two-year yield rose above the ten-year yield. It could very easily invert again soon. As shown below, a flattish or inverted yield curve spread between the ten-year plus two-year Treasury yields provides occurred before every economic downturn in recent decades.
The spread between high-yield “ junk” corporate provides and Treasury yields has risen to the highest ranges since the covid panic associated with 2020, as junk connection investors start to price in the risk of a recession, since shown below.
Copper mineral is known as “ Dr . Copper” for its ability to predict recessions due to its sensitivity to the economic climate. Copper prices have fallen 20 percent in the past 3 months.
Initial joblessness claims are the best leading indicator of employment. They have been rising steadily for the past three months, because shown below (weekly claims are the black line as well as the four-week moving average may be the red line).
The University of Michigan Consumer Sentiment survey has fallen to the lowest levels in over forty years, since shown below.
Likewise, The Conference Board CEO Confidence survey has fallen to recessionary levels, as shown below.
Verified leading economic indices have got weakened to recessionary levels. The Economic Cycle Study Institute’s Weekly Leading Catalog, which leads the US economy by at least six months, has dropped from a high of around +28 percent last year to – 6. 3 percent now. This highly regarded economic predicting firm has recently gone general public with their forecast for a coming recession.
The particular Brave-Butters-Kelley Leading Index has fallen well below the – 1 threshold that signals with 86 % accuracy that a recession will probably start within eight weeks, as shown below.
Now the Given Is Trying to Crash Financial Markets and Cause a Recession
Usually, the Fed would be slashing interest rates and printing cash to try to prevent a recession and stock bear market at this point, which they tried plus failed to do in the early 2000s Tech Bust and 2008– 09 Great Recession.
But instead, the Fed is being forced to hike prices aggressively to try to bring inflation down. They already hiked the Fed Funds rate to 1. 50 percent to 1. seventy five percent and will need to walk at least 1 . 50 percent more to catch up to the two-year Treasury yield.
The Fed is explicitly saying they want to lower relationship, stock and housing costs and raise unemployment. It is said they can do all of that with no causing a recession. That is clearly a fantasy.
As Bill Dudley, former president of the Nyc Fed and vice chairman of the Fed’s Federal Open up Market Committee, has said recently:
The particular Fed’s application of its platform has left it behind the curve in controlling pumpiing. This, in turn, has made a tough landing virtually inevitable…. To produce sufficient economic slack to restrain inflation, the Fed will have to tighten enough in order to push the unemployment price higher…. Getting inflation lower will be costly, in terms of work opportunities and economic growth…. Traders should pay closer focus on what Powell has said: Financial conditions need to tighten. If this doesn’t happen on its own (which seems unlikely), the Given will have to shock markets to offer the desired response. This would imply hiking the federal money rate considerably higher than currently anticipated. One way or another, to get inflation under control, the Fed will need to push bond yields increased and stock prices lower…. So far, financial conditions actually haven’t tightened very much…. The Fed has to press up the unemployment rate, once the Fed has done that in past times, it has always resulted in the recession…. It is very unlikely that a year from now we are at this level of bond produces this low and this level of stock prices this high.
Since shown below, despite the share and bond bear markets, financial conditions remain super easy, according to the Chicago Fed National Financial Conditions Index.
If the Fed succeeds in tightening financial conditions enough to try to maintain their reputation as an “ inflation fighter” (i. e., endeavoring to lower the inflation these people created in the first place), this will likely be the biggest government-caused economic catastrophe since the 1930s, as we expected here last year .