The problem in economics is that it's very hard to invalidate a theory.
What would you consider an invalidation of the theory?
What would you consider an invalidation of the theory?
One recent example: the choice between austerity and stimulus, in the US and Europe, shortly after the 2008 downturn. Keynesian economic theory claimed that if your interest rate approached 0%, that you could no longer stimulate the economy via interest rates, but that the best way to improve the situation was for the government to create and spend money. And that doing so wouldn't cause sudden inflation.
Another theory said that fiscal austerity measures and the reduction of government debt would improve the situation. This theory also suggested that the US should experience strong inflation in the years immediately following 2008.
IIRC, the US government spent something like 1/3 to 1/2 the money that some Keynesian economists recommend spending on a stimulus. Other countries tried varying degrees of austerity. So to test the theory, you'd need to compare what happened in different countries.
Note that this particular "Keynesian" theory does not necessarily recommend heavy government spending when the Fed interest rate is above 0%. Basically, it's only about emergency measures when ordinary economic theories have failed.
For an easily-accessible version of this particular "Keynesian" theory, and why it's supposed to work, see this paper on the "Capital Hill Baby Sitting Co-op": http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coo... This is really more of parable than anything else, but it explains the logic.
Tl;dr: At the government's scale, money is a weird abstraction and you can't always pretend that it works like grain or cars or other simple economic goods. Or to put it another way, if the economy gets bad enough, then everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give.
I'm not qualified to comment on whether this theory is actually true. But that's how you might test it, and an explanation of why it's supposed to be useful under certain circumstances.
- the record-breaking auction prices of art pieces (Picasso, etc) at Christie's & Sothebys
- the vast pools of money chasing late-stage tech startups driving up late-round valuations,
- the increase in student loans for college students driving up tuition prices outpacing "official" inflation metric
There's also "shrinkflation"[1] which is a form of inflation but does not count in CPI calculations. Also, many homeowners complained that their house insurance went up 20+ percent even though they don't live in a hurricane or flood zone.
The pundits saying there's no inflation seem to only look at the flawed CPI statistic. If the Fed's quantitative easing creates $4 trillion in new money, that has to show up somewhere in the economy. (Unless _everybody_ coordinates to hide all $4 trillion in a mattress to negate its effect.) If citizens are seeing a reduction in purchasing power in real terms, you have inflation happening.
I have the most exposure to this in the realm of medical products. A family member has Type I diabetes, and so must continually buy insulin and blood testing supplies as an everyday expense; several times, he has been forced to switch products (between varieties of insulin, from purely chemical test strips to ones with an electronic reader, &c.) by the discontinuance of the older product. The new one is always much more expensive, and never reduces in price to match the old; this has resulted in a significant increase in his expenses for these supplies, despite nothing ever occurring that would appear in inflation statistics.
Yes, and airlines charging a new extra fees for baggage when they used to be included in the base airfare is another form of inflation. This "shrouded pricing" is used to hide price increases in various industries.
- the "Walmart" economy - no inflation there, regular Joe Schmoes have not had a real raise in years
- the "Hamptons" economy - lots of money sloshing around (thanks to the Fed), bankers, etc spending big on luxury real-estate, etc.
The Austrian economists would argue that what happened in 2008 was a breakdown of the fiat monetary system and that the responses were just bandaids. In the longer-term view, when you look at shifts in power and rising and falling of empires, 2008 could be the first of many massive shocks to the economy.
Economics is a challenging area to have theories because it is really really hard to run experiments. As a result you have to use existing choices and try to identify what the theory predicts, then walk forward in time to see if that prediction was accurate or inaccurate. It is really hard to do because humans tend to want things to succeed and can unconsciously add or subtract data points that move them closer to 'prove' or 'disprove' depending on what they want. Eliminating that bias is very difficult.
On a related note, we're also due for an ice age based on historical cycles. However as systems change and the balances within them shift, it can be difficult to see which variables force the cycle and which merely enhance it. Easy to see an enhancer as a major force when it isn't.
So back to business cycles; there are four outlier economic events which I think can provide some insights into what may or may not happen in the next decade. These are (in chronological order) The dissolution of the USSR in the 80's, Japan's meltdown in the 90's, the misnamed "Mortgage crisis" of 2009, and the collapse of the Venezuelan economy in 2015. Each of these events share a common thread of state controls and markets being ripped apart by events. I don't think we have yet learned all we need to learn from them.
What I observe is that the rapid shift of materially significant (from a GDP perspective) wealth from the general market to a much smaller number of market 'maskers' on a sovereign state basis, has an attenuating effect on systemic controls and other market damping systems.
So looking at how business cycles happen in a system where more and more interacting economies are less market driven and more exploitation driven is, again in my non-professional opinion, might shed some light on how the cycles will evolve.
Ideally the restaurant would lower wages until fewer people want to work there, and lower prices until people want to eat there. Decreasing the value of money feels like a dirty hack that benefits the richest at the expense of everyone else. Remember before we adopted these policies recessions used to be really short.