Marginal REVOLUTION

If I believed in Austrian business cycle theory - Marginal REVOLUTION

2005-01-19 · 00:00 UTC ·Tyler Cowen ·1 min read

Brief

This brief post from 2005 presents Tyler Cowen's hypothetical embrace of Austrian business cycle theory as a lens for understanding contemporary economic conditions. The Austrian framework would interpret Asian central banks' dollar purchases as creating fundamental distortions in real exchange and interest rates, leading to malinvestment in the U.S. economy - particularly in residential housing and other non-export durables. The theory suggests this debt-fueled boom is unsustainable, requiring ever-increasing monetary stimulus like an addiction, ultimately leading to a dollar collapse and forced reallocation toward export industries. Cowen notes this perspective would recommend betting against Treasury bonds and elevating Hayek's "Monetary Nationalism and International Stability" as essential reading. However, he explicitly distances himself from this view while acknowledging others (referencing Brad DeLong) do subscribe to Austrian cycle theory.

Why it matters

Tyler Cowen outlines what Austrian business cycle theory would predict about the U.S. economy circa 2005:

Key details

  • [prediction] Asian central banks buying U.S. dollars creates massive distortions in exchange and interest rates
  • [overinvestment] U.S. economy overinvested in non-export durables, especially residential housing
  • [debt] Excessive debt accumulation in both private and public sectors makes trends unsustainable
  • [outcome] Theory predicts dollar plunge and painful sectoral shift toward exports
Source evidence

title: If I believed in Austrian business cycle theory - Marginal REVOLUTION
author: Tyler Cowen
contenttype: article
publication: Marginal REVOLUTION
published: 2005-01-19T00:00:00
sourceurl: https://marginalrevolution.com/marginalrevolution/2005/01/ifibelieved_i.html

word_count: 221

If I believed in Austrian business cycle theory

  1. I would think that Asian central banks, by buying U.S. dollars, have been driving a massive distortion of real exchange and interest rates.

  2. I would think that the U.S. economy is overinvested in non-export durables, most of all residential housing.

  3. I would think that we have piled on far too much debt, in both the private and public sectors.

  4. I would think these trends cannot possibly continue. Asian central banks may come to their senses. Furthermore the U.S. would be like an addict who needs an ever-increasing dose of the monetary fix. This, of course, would eventually prove impossible.

  5. I would think that the U.S. economy is due for a dollar plunge, and a massive sectoral shift toward exports. Furthermore I would think it will not handle such an unexpected shock very well.

  6. I would buy puts on T-Bond futures and become rich.

  7. I would think that Hayek’s Monetary Nationalism and International Stability, now priced at $70 a copy, is the secret tract for our times.

Of course that is not me. But at least someone appears to believe in Austrian business cycle theory. By the way, here is one summary of the theory, although I do not agree with the characterization in all respects.