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The only school that has any explanation for this is the Austrian School of Economics. Their theory of the business cycle is the reason they successfully predict every crisis to the tee (except for timing, no one can do that), while other economists are just blown away in surprise that it even happened.

Mises and Hayek wrote big and hard to read books about it, but two that explain this to the layman are "Meltdown" by Tom Woods[0] and "How An Economy Grows And Why It Crashes" by Peter Schiff[1]. The first is an explanation using the 2008 crisis, and the second is a very amusing yet educating economy lesson told as a kids' story.

Another book that can help grasp this, although I wouldn't read it first, is "The Forgotten Depression: 1921: The Crash That Cured Itself" by James Grant.

If you're interested in the actual business cycle theory, Tom Woods explained it briefly while promoting Meltdown. Explanation starts 14:03:

https://youtu.be/NBwJm68FkMc?t=844

[0] https://www.amazon.com/Meltdown-Economy-Tanked-Government-Ba...

[1] https://www.amazon.com/How-Economy-Grows-Why-Crashes/dp/B004...

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The Austrian School seems to have been wrong about the last 15 years' money printing causing inflation. In particular, the general Austrian school would have predicted a lot more inflation by now. The prediction on this has fared so poorly that the last 15 years has given rise to a school nearly diametrically opposite to the Austrian school: modern monetary theory. (My understanding of the Austrian response to this is some amount of semantic contorting: "well... let's define inflation this way and there is inflation... or will be... lots of it!")

Also, current consensus, of course among mainstream economists, is that countries that more believe the Austrian school, like Germany, has caused unneeded pain on themselves/their neighbors by advocating of austerity versus stimulus during downturns. If you want the mainstream steelman against the Austrian school, you can search Paul Krugman's take on them.

Are you aware of the stock market, housing market, bond market, precious metals? Asset price inflation absolutely is happening. The FED up until now was able to keep the CPI increases fairly low even though they were creating trillions of dollars, because the money was locked into assets. This has had a severe effect on anyone in the market for these assets that have risen.

How do the assets lock up money?

The stock market, no matter how enormous it's market cap, doesn't lock up any money. When I pay through the nose for Tesla stock, the other fellow then has some money that he either has to spend or park somewhere.

Leverage and subsidies. The money did not exist to begin with, hence the FED balance sheet and gov't debt.

The money is funneled into these assets by regulatory incentives 401k, HUD, federal student loans, etc. The seller's money goes toward that as well.

I still don't understand. After all those assets have increased in price, the money is still not 'locked up'.

I forgot to mention that China sells us consumer goods at a very low price, keeping CPI down. With the dollars we give them for their goods they purchase US companies, bonds, and real estate. This pushes up prices of the assets they purchase. If the Chinese did not devalue their currency, americans would not be able to afford their products and we would see a rise in the CPI.

Cheap Chinese goods are indeed a boon to the rest of the world. Very nice of China.

I though that, from the Austrian perspective, the stock market would be one of the last things to see inflation. Are not suppose the prices of stocks reflect the aggregate infinite wisdom of the market?

If the money supply was increased across the board this would likely be the case. However, the FED bank no longer operates in the way it was statutorily mandated originally. The FED purchases assets that inflate the stock market indirectly. The Federal subsidies and regulations combine with this to keep the money propping up the assets mentioned(gold only because of it being a historic hedge).

If you're talking about the U.S. that's mainly due to our reserve currency status and nothing else. And the money printing has driven certain sectors higher even in the face of low / stagnant growth. Stocks, real estate, etc being some of them.

But you gotta understand that we export a great deal of our inflation. One day those dollars will come home to roost, but until then, Germany's balance sheet looks a hell of a lot better than the U.S.'s. going into this recession. Our deficit is already $3 trillion this year and climbing rapidly, with debt levels reaching their highest in relative terms since World War 2. And we haven't even scratched the surface of this deep recession yet.

The American Dollar was the world's reserve currency in the 1970s as well. They still managed high inflation.

The subdued American inflation despite QE has a more technical and contingent explanation: the Fed started paying Interest on Excess Reserves (IOER) in 2008. Ie they reward banks for keeping the money they are printing out of the economy.

Most of the time since then, the interest on short term US government bonds hasn't been much higher than the interest on excess reserves. So there hadn't been much aggregate economic impact when the Fed bought government bonds with new money.

The banks slightly preferred excess reserves over government bonds, because they regulators preferred them.

The QE was 'sterilized' by IOER.

We decoupled from the gold standard in 1971, so there was quite a bit of digestion that had to occur with the switch to fiat. I agree the Fed has acted to keep a lot of money out of the economy but our M1 money supply is still only just over $4 trillion. However, if you look at dollar denominated debt in the world it is probably more than $100 trillion...so ironically there's more demand for dollars than there ever has been (as those debts must be paid in dollars), which has caused deflationary pressure on the USD.

That sounds like a very ad hoc explanation, what about Japan then?

Supply and demand applies to money and velocity of money matters. The velocity of money in Japan has declined along with the aging population. This is a problem we face in the U.S. as well. So you can't just look at M1 money supply in isolation to determine if market will show inflation or deflation in prices.

This kind of rebuttal to the Austrian school is often based upon a misguided idea of monetary neutrality. Inflation does not happen everywhere in the economy at the same time - this is called the Cantillon effect and is a central pillar of Austrian Business Cycle Theory.

You are right, there is very little inflation in the consumer price index (at least nominally), but there is a significant amount of inflation in assets and other parts of the economy that are relatively close to the central bank/printing press. Inflated Silicon Valley salaries, maintained by an influx of VC money bidding up the price of labour, are a great example of this.

"is that countries that more believe the Austrian school, like Germany"

As a german, this is news to me. Austrian school stands mostly for a free market without or as little as possible state interventions and regulations: a idea very frowned upon here generally and usually rather associated with the US

I think there is a lot of inflation if you measure it properly. We say inflation is low because we adjust for quality. So they say sure, a car costs more now than in 2000 but it has more features so if you adjust for quality it is cheaper. Same goes for other goods like computers, smartphones, etc. The problem is, the cheaper versions of these goods don't exist anymore, because the more expensive version is effectively required to not handicap yourself.

Similarly, things like housing, healthcare costs, schooling costs, etc. are not well captured by the inflation metric, but have grown wildly in the last few decades.

The purchasing power of the average person is probably worse now than it was in 2007 if you look at what people actually have to spend money on versus the artificial basket of quality adjusted goods used to measure inflation.

The government changed the way they measured inflation to purposefully downplay it. For example, if they were measuring the cost of Levi's jeans, and they went up too high, they would replace them in their index with cheaper non-name brand jeans to show that inflation didn't occur.

And same thing goes with groceries. When ice cream used to be a pint, it's now 14 oz. They have decreased the size of things like food packages over the last 15 years, and I don't think that's taken into consideration in the inflation index. Recently they decreased the size of orange juice by 15% but kept the price the same. That is the definition of inflation.

I recently read of an alternate measure of inflation called the "Cost of Thriving Index" which aimed to capture the astute point you're making. See page 18 of this document:

https://media4.manhattan-institute.org/sites/default/files/t...

I'm not economist but I've found this captures the feeling that although we're more productive and wealthier, it still feels harder to get ahead and live an average life.

Krugman's going to supply your steelman? Sorry, no. Krugman has a Nobel, but when he writes (at least for the last decade or two), he does so primarily as a propagandist, and secondarily (if at all) as an economist.

There's plenty of actual mainstream economists that can give you steelman responses to Austrian Economics. Don't go get them from Krugman. You won't get good steel from him; it will have too much straw in it.

Who would you point out as a steelman? I'd love to find a proper, thorough critic of the Austrian school.

Ah, um, well... I don't actually have one in hand. There have to be some (I assume), but I can't point you to one. My point was, Krugman may have a response, but don't think of it as a steelman response.

> Their theory of the business cycle is the reason they successfully predict every crisis to the tee (except for timing, no one can do that), while other economists are just blown away in surprise that it even happened.

A prediction without timing is no prediction at all.

Also, I fail to see how an economic theory can predict a depression caused by a pandemic...

This crisis was not caused by the Corona virus. It is only the pin that burst a bubble that was already there, and if no virus would have happened, something else would have burst it. Austrians see the depression as a necessary correction, and the bubble as a problem.

I actually sat down for a few hours to calculate what would have happened if this pandemic happened in the 50s, and no one could work (especially true since there was no internet). Seems like people saved enough for a year at home, on average. Today people are so levered up not only do they not have savings, they have to pay back debt.

This pandemic is more like a cruise missile than a pin.

I've been saying for a few years that a recession is coming but I'm not going to pretend I thought it would be started by an event like this. Recessions are simply a natural part of the business cycle and after such a long 'boom' period there was certain to be one eventually.

We are de facto not in a bubble. Market growth over the last decade has been steady and healthy. A long term bull market does not define a bubble.

> A long term bull market does not define a bubble.

No, but inverted yield curves do.

The only thing that defines a bubble is the post fact realization that it burst.

A P/E ratio of 94.33 for Amazon is surely a bubble.

Why? Has Amazon stopped growing, does it have 100% market share, are competitors closing up?

P/E ratio is only meaningful for companies with little or no revenue growth. For companies with very strong revenue growth, like Amazon, revenue growth is financed with earnings, which creates a misleadingly high P/E ratio. Investors know this. For these companies, it is more useful to look at metrics like market cap/revenue to determine if they are overpriced, which at 3-4x for Amazon is in a very healthy range. Simple metrics like P/E ratio tell you little about the health of a company when taken out of context; a low P/E ratio is often a sign of a failing company.

As more of the largest companies in the market exhibit strong revenue growth, it drives the P/E ratio of the broader market higher without implying anything about the underlying equities.

The Fed artificially lowered the interbank rate to zero percent for ~7 years after 2008, bought other treasuries across the yield curve, and bought trillions in mortgage backed securities. This created an environment that disincentivized saving and encouraged borrowing for both individuals and businesses alike. The market growth over the past 10 years was completely fueled by this artificially cheap credit. The economy was already extremely fragile before the coronavirus hit due to how over leveraged everyone was.

Less a pin to a bubble, more a wrecking ball to a house made of sticks

Effectively shutting down more than half of all business is slightly more than bursting a bubble. It is world war II scale event, with exception that there is no war that could take all the unemployed hands to the front and to producing weapons.

> Effectively shutting down more than half of all business is slightly more than bursting a bubble. It is world war II scale event,

But let's not forget that this wasn't caused by the virus itelf, it was consciously decided by politicians to trade an (unknown in magnitude) risk for a huge recession.

That seems a bit semantic given that even cartel run Favellas quarantined and they are money over life. It is a bit "I didn't murder the person I kidnapped, they committed suicide." Technically true but the responsibility is the same as if they had.

Are you seriously using (some) Favellas as a benchmark for reasonable assessment of a pandemic? Some people are scared. It won't affect the inherent risk associated with the virus.

There’s no way we can assume that the coronavirus was a pin to a bubble.

Look at the unemployment claims chart. This has never happened before in the entire 20th century. That’s not a pin. That’s a collapse in employment.

It doesn’t really matter whether or not people have savings.

Economic recessions don’t mean “people don’t have their savings anymore.” They’re a reduction in economic activity. That doesn’t have to happen because people are literally out of money, it can happen because people are unwilling to spend as much as they used to.

Take the best-off person right now as an example. They still have a job, working from home. They have 6-12 months of emergency fund. Despite all this, are they going to buy anything but essentials right now? Plus, in many cases, they don’t have a choice. They’re not allowed to pay for their gym membership. They’re not allowed to take dance classes. They’re not allowed to go on vacation.

They’re sitting at home buying groceries and nothing else just like the person with no savings.

==Seems like people saved enough for a year at home, on average. Today people are so levered up not only do they not have savings, they have to pay back debt.==

Odd that you don’t mention wages. Seems like middle-income wages are stagnant while housing, healthcare and education get more and more expensive. Not hard to see how that would cut into household budgets and encourage debt.

Isn't that the whole essence's of Nassim's Taleb work? He actually makes the opposite claim, that a model that doesn't takes extreme events into the equation is not worth anything at all.

It definitely is. The Austrians are very prepared for this crisis, and it seems like it was useful to some people shorting in 2006-2008.

The Austrian school predicted a disease-related economic crisis?

The Corona virus is just a pin to a bubble that's there for years. See my other comment explaining this.

In what ways are they more prepared for this crisis than anyone else?

Most Austrians I've heard see this to be a dollar crisis:

US has huge debt -> No US politician will ever default on it -> They will print money to pay it -> Dollar loses value.

That's fairly simplified but I hope you get the point. Since they see this as a dollar crisis, they are busy buying gold, silver, gold stocks, and assets in countries that have dollar-denominated debt.

I'm going to add my 2 cents here and say that in my opinion, if the Corona situation will be solved quickly enough, or at least be perceived to be solved by the public, a rush of optimism will allow the fed to inflate the bubble and postpone (and worsen) the depression.

I predict it will rain after a sunny day.

Some day.

Then you should buy umbrellas, and not listen to people saying it'll be sunny forever.

No one sane thinks it will be sunny forever, and there is great economic cost in carrying around a bunch of umbrellas when the sun is shining overhead.

You should take a look at mainstream suggestions during 2006-07.

You should take a look at austrian suggestions 2009-2019.

Then there is alot of insane people, and a lot of them are in government. That's why we need to have this conversation.

> The only school that has any explanation for this is the Austrian School of Economics.

I doubt it’s the only ‘school’ that has an explanation. That there are cycles in the economy isn’t a very strong statement. Nor does it seem to apply here because this is a different cause than one underpinning a typical business cycle.

Until this virus is wrestled to the ground somehow (e.g. distancing, sterilization, vaccine, herd immunity, etc...), we’ll continue to see mitigating effects which distort the picture of normalcy pre-2020.

Well, they have a proven track record of predicting crises in a very precise manner. You can just browse YouTube to see it.

See other comments of my explaining the virus is a pin that burst a bubble already there.

The best theory I've seen for crash cycles is:

1. The establishment encourages making credit widely available in order to pacify the less well off who would otherwise demand a better deal out of the social contract.

2. This leads to unsustainable debt, as people are forced into borrowing to meet basic needs with no means to pay it back.

3. Eventually this comes to a head as people begin to default, causes a cascading chain through the economy as people are unable to meet their obligations, leading to crash.

4. At which point, governments step in and debt is forgiven, correcting the imbalance created in step 1.

Seemed to make a lot of sense to me. And the interesting thing is that it suggests a solution: replace widely available credit with direct wealth redistribution and you end up with the same net effect (as the debts are being forgiven in the end anyway), but without the destructive boom-bust cycles.

> 2. This leads to unsustainable debt, as people are forced into borrowing to meet basic needs with no means to pay it back.

People borrow for much more than basic needs and they do so voluntarily without anyone forcing them. This does not substantially affect your logic, but I think lots of the blame for mismanaging debt lies at the people in debt themselves.

Hmm... they do, but this is actively incentivised with low interest rates, which directly inventivise borrowing, and also have secondary effects, such as easily available mortgages leading to increased house prices, which leads to further borrowing.

You can also see this in student loans. Sure, people volutarily choose to take them out. But this is because they live in a society where access to a lot of jobs is gated on having a degree, and degrees are so expensive that a loan is the only option more often than not.

> People borrow for much more than basic needs and they do so voluntarily without anyone forcing them.

People can be forced without there being an "anyone" to do the forcing. Being underemployed in some expensive city, unable to make your next car payment that you need to get to your job doesn't require an "anyone" to force that person into a loan at gunpoint. They're still being coerced into that decision, even if there isn't an "anyone."

The way I see it, it's the cheap money problem. Big businesses with lots of capital are incentivized to borrow cheap money and make stupid investments with that borrowed money.

The establishment you describe in step 1 is the government. Wall street could not do what they do now without government involvement. They will run out of money, and have to suffer the losses of the bad loans they make, instead of relying on the Fed to save them by depreciating the money of regular working people.

Agreed. Although one might note that those involved in wall-street are highly likely to be amongst those voting for conservative governments that are enacting these policies.

Both aisles, conservatives and leftists, support Cronyism with their actions. It was the Bush adminstration that came up with the plan the save Wall Street, and it was Obama's that passed that plan, in one form or another.

Agreed that cronyism is a problem across the political spectrum. Supporting cheap debt, and its use as a tool to prop up political support for otherwise uneven wealth distribution is something else though. Letting organisations like Wall Street pay for their stupid risks is one way of dealing with the problem. But IMO not particularly workable one due to all of the colateral damage it would inflict on ordinary people. We need to prevent this behaviour before it happens. That means making our economy less reliant on finance.

I would argue that there has been no truly left government in either the US or the UK (where I live) since Reagan/Thatcher introduced this style of economics in the 80s.

How does step 2 work? Are the creditors fools?

Lol, I'm not as familiar with some of the other economists, but these days I'm always amused by the bloviating of Peter Schiff when I hear him on TV.

The biggest thing I find incomprehensible is this belief that when a recession or crisis hits, you have to let pretty much everything go to shit so the bad firms can get wiped away and better, more innovative firms can take their place. On the face of it, that is very reasonable, and I certainly worry about the moral hazard of bailout after bailout.

But at the same time, Schiff seems to incomprehensibly believe that our political systems live in a world separate from our economic ones. There is just no way the populace at large in a liberal democracy would stand for a deep recession/depression without demanding the government do something to soften the blow. There is even less of a chance of that happening with a command-control/fascist type economy. This fantasy that he believes that people would just stand idly by thinking "thank God the free market is clearing out the detritus!" while they lose their jobs is laughable at this point.

A very simplified version of Austrian economics boom and bust cycles would be that central banks provides money too cheaply which leads to non productive investments resulting in a first a boom and then a bust when those investments don't pan out. Worth noting is that empirical evidence for this is slim at best. I think a better explanation for the 2008 crisis is that commercial banks mismanaged risk of mortgage backed securities. And I have a hard time seeing the current crisis having anything to do with cheap money

You should check out corporate debt levels over the last 10 years.

The response of governments around the world doesn’t look like it’s been informed by Austrian economics, and in places which have implemented some kind of policy derived from MMT (esp. Australia) things have been looking pretty good. What would Austrian economic policy have done differently and better?

Maybe I'm don't understand it properly, but it seems to me that Austrian economics would predict hyperinflation and high interest rates in Japan the last twenty years when the opposite have happened.

As you say Modern Monetary Theory models predict Japan and, also, the missing depressions in Australia.

Their central bank practically nationalized the entire economy:

https://research.stlouisfed.org/publications/economic-synops...

As for Australia they are heading into a deep recession as we speak and who knows if it will be a depression or not but given the state of the world, odds are reasonable.

I’m on the same team as you, but this is dangerous advice to take because that’s not the world we live in. Don’t buy gold because you expect the sky to fall tomorrow. In 20 years? Yeah, we’re pretty fucked. But right now? Markets can always stay irrational longer than you can stay solvent.

> Markets can always stay irrational longer than you can stay solvent.

That's very true. People will read and decide for themselves.

I disagree that ABC is the only school of thought that has an explanation. Almost every economic school of thought can discuss decreases in aggregate demand and aggregate supply. Not every school of thought may have theories regarding the drivers thereof, which is a feature ABC spends a lot of time on, but some do and most can assess and even build predictions for anticipation.

As an example where ABC will go off the rails, our current crisis is not one build up due to overage in inventory, a favored ideal rationale for ABC to explain the business cycle. Much more explanatory, surprisingly, is Keynesian animal spirits.

The thrust of ABC is that artificially cheap credit, induced by the central bank, causes malinvestment. Interest rates are signals of risk. When you artificially lower interest rates, people take on more debt than they normally would and invest in capital improvements that only make sense in a low interest rate environment. When the central bank attempts to raise those interest rates to the natural level, or there’s a large change in consumer preferences that causes a drop in aggregate demand, all of those over leveraged business fail en masse, which results in layoffs, reduced production, and falling asset prices. It has nothing to do with inventory.

It does. What do you do with the capital malinvestment? Build up inventory consumers don't want or aren't paying enough for, resulting in layoffs, lost revenue, etc.

The central bank is not the only interest rate driver, as the last 5 years have shown, especially for rates of long tenure bonds. But, regardless of drivers, malinvestment certainly does occur.

I don't think the Austrian School explains what's happened so far, but may help explain some of what is to come. Everything we've seen so far is simply the result of people not being able to operate their businesses. What we will soon see is businesses closing down and probably mass default on debt.

I do believe that the Keynesian economics that has been practiced for the last few decades has left the global economy woefully unprepared and venerable. Low interest rates have fuelled massive asset price inflation and encouraged governments, businesses, and individuals to take on far more debt than is prudent.

Keynesian economics has been practiced for the last few decades? Where? They don't call it the neoliberal period for nothing.

If you are talking about the QE programs, that's what Keynesian economics would call "pushing a string". Keynesian would be fiscal policies, not monetary policies.

> Keynesian would be fiscal policies

Well most governments around the world have been running deficits (the US to the tune of~$1T annually) since the last recession. I consider that to be some pretty serious fiscal stimulus.

Most governments have been running deficits since forever, not since the last recession, after all, if there is economic grow, new money have to be created, and all money is originated in government spending.

But that's just a reality of how the economy works, that doesn't mean necessarily that Keynesian policies are followed (beyond the automatic stabilizers that are certainly Keynesian in design). Keynesian policies would be to try to offset a fall in aggregated demand by increasing fiscal spending, and that have been taboo since the 80's

> Most governments have been running deficits since forever

I don't think that's a fair assessment. The US has certainly been running deficits for a long time but the deficits of the last 10 year have been much larger (as a percentage of GDP) [1]. Some other countries [the exception not the rule] have been more prudent with their finances. In my part of the world New Zealand has been running a surplus since 2015 and prior to COVID-19 starting Australia was due to have a small surplus this year for the first time since the GFC.

> Keynesian policies would be to try to offset a fall in aggregated demand by increasing fiscal spending

I guess you can argue that spending hasn't been Keynesian enough.

[1] https://tradingeconomics.com/united-states/government-budget

>>"Some other countries [the exception not the rule] have been more prudent with their finances"

I'm going to dispute that this have something to do with "prudence".

If an economy grows (bigger GDP), that means that more money is spent in the economy. That money have to come from somewhere otherwise there will be not grow (1).

New Zealand have a positive commercial balance, that's where the money is coming from. Obviously, not all the countries can be net exporters at the same time.

If the USA government were running a surplus instead of a deficit, they will not be being more prudent, but less. Running that surplus would mean that the GDP doesn't grow or that the private debt increase (after all, money has to come from somewhere). Private debt is a lot more dangerous that public debt.

On the other hand, if New Zealand government, with a positive commercial balance, has an economy a full utilization (I don't know if that is the case) and run a deficit, they will create inflationary pressures on the economy.

(1) - http://bilbo.economicoutlook.net/blog/?p=21287

Predict every crisis to the tee? Citation needed. Reminds me of the economists have "predicted nine of the last five American recessions."

According to Wikipedia, inverted yield curves are good predictors for economic recession.

After about 12 months in average from when the inversion stars, the recession will start itself. >"All the recessions in the US since 1970 (up through 2018) have been preceded by an inverted yield curve (10-year vs 3-month). Over the same time frame, every occurrence of an inverted yield curve has been followed by recession as declared by the NBER business cycle dating committee.[12] The yield curve became inverted in the first half of 2019, for the first time since 2007." https://en.wikipedia.org/wiki/Yield_curve

> they successfully predict every crisis to the tee (except for timing

What does this mean?

They describe the source of the problem, the way it will affect the market, and the extent of the effect, usually.

I'm sad that economic cycles are considered a natural law, rather than something to be mitigated or designed away.

FWIW, Richard D. Wolff doesn't accept crashes as a given. He advocates worker self-directed enterprises as a mitigation. Having done some workplace democracy (am a huge fan), I regard his effort as more aspirational than prescriptive, but it's nice to have people floating new ideas.

"The only school that has any explanation for this is the Austrian School of Economics. Their theory of the business cycle is the reason they successfully predict every crisis to the tee (except for timing, no one can do that), while other economists are just blown away in surprise that it even happened."

Mises is a big joke. Never made it past assistant professor. Never worked a day of his live in private enterprise. His theories describe barter economies in the middle ages; alas this quite well. Due to his lack of understanding of the principal nature of capitalism he offer no insights into economics.

"Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump."

Ludwig von Mises

Von an outstanding an deep insight, not. While not explicit mentioning it, he suggests that this is a bad thing. Trick question: What kind of boom does not bring a credit expansion with it? His quote is just a tautology and offers no insight. Yes, the boom/bust cycle is an inherent feature of capitalism.

1) Steal manhole cover 2) Sell to junkyard for drugs 3) Take drugs whilst waiting for it to be replaced 4) Repeat

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