From: CurtAdams@aol.com
Date: Wed Mar 21 2001 - 01:57:55 MST
In a message dated 3/20/01 9:08:34 PM, neptune@mars.superlink.net writes:
>Many media pundits compare the business cycle to a party in which the host
>(the central bank) takes away the punch bowl (raises interest rates) just as
>the party (the boom) is really getting underway. The idea is that tight
>money and credit policies trigger recessions. Ergo, loose or easy credit
>policy is the way to prevent a recession.
Not entirely fair to that recession model; the assumption is that the central
bank does so to stop or end inflation.
>In contrast, the Austrian business cycle theory traces the cause of economic
>recession (bust) back to the beginning of the party (the boom). The host is
>guilty, not of taking away the punch bowl and spoiling the party, but of
>spiking the punch and thus causing many of the partygoers to suffer from an
>unanticipated hangover.
Both the "stop inflation" (party pooper) and the "malinvestment" (hangover)
models of recession are quite old. The economist just had an article
(March 10, 2001, p 67-70) speculating that the US has generally had
"party pooper" recessions since WWII but now is due for a "hangover".
In your metaphor, the punch *has been* spiked, but the host (the
Fed) pulls the punch when the guest start getting rowdy, and they never
get drunk enough for a hangover. Now that the Fed has gotten quite good
at managing inflation, we've had a boom run on long enough for serious
malinvestment (e.g. internet mania) and now we're due for a hangover.
The economist observes that Japan's malaise of the 90's (which still
continues) is a hangover type recession, which indicates how bad they
can be. IMO Japan's trouble qualifies as a depression, albeit mild and
drawn-out.
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