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Conjunctures
Courses 6-9
II. A Detailed Explanation of the
Depression/Boom-Bust Cycles
Bank Credit Expansion
Economic Consequences of Bank Credit
Expansion
The Depression
Fractional
Reserve
and
100%
Addenda
Mainstream popular explanations of the crisis
The under consumption thesis
The crisis is caused by the small degrees of consumption in
economy => an infusion of money in the economy can give
it a boost
The degrees of optimality in consumption is given by
consumer/individuals preferences (consumers do not under
consume or over consume, they just consume)
Implausible, for the problem is not in the consumption goods
sphere but in the capital goods; consumers do not spend money in
the capital goods because they did not change their time
preferences
It fails to regard the real problem: the artificially expanded capital
goods sector or not connected with the proportion of consumers
savings
Assuming that would be the case, how come entrepreneurs
cannot forecast this period of under consumption?
Moderate phase
Inflation lowers the quality of goods and labor (the systematic decrease
of PPM determines qualitative adjustments in the production of goods;
population becomes more interested in illusionary games such as Get
rich fast!, The Wheel of Luck, Lotteries, having a disrespect for
serious effort)
Mal-Investments
Given by readjusting to the old price differentials between capital goods and
consumer goods
Capital goods prices decrease in relation to consumer goods prices; the
later bid away resources from the former
Unemployment occurs in capital goods sphere
Banks continue expanding credit (the greater the credit expansion and the longer it
lasts the longer will the boom last, M. Rothbard, Americas Great Depression; this does
not allow entrepreneurs to adjust
The monetary authority of the government (the central bank) bailouts bankrupt banks
and/or financial companies
Both of the aforementioned are plausible if an electoral process is in progress or if it is
on the way
Mal-Investments (3)
Any investment which is not connected with the demand
side/consumers is a wasteful investment/mal-investment; on the
free market successful entrepreneurs get profits while those
unsuccessful get losses (incentives: effort-reward)
The necessity of mal-investments stems from:
The bad quality of the banking system (fractional-reserve banking
backed by the central bank) which allows banks to take risks by
creating circulation credit/fiat money and loan more than it owns in
reserves
Note that the banking system is connected with different savings and loan
associations and life insurance companies; they all participate in distributing
the fiat money
The fact that entrepreneurs are misled in their actions; they invest in
projects which on the free market would have corresponded with a
lower rate of interest; since consumers do not change their time
preferences and thus rate of interest is still higher the bad turn is clear
Addenda (3)
The hostility towards hoarding: it blocks money
penetration into productive sphere (money should
circulate) and thus depress economic activity => the more
people tend to save or hoard the more depressed will be
the economic activity
The productive sphere can only be fulfilled with saved money; if
no one saves (abstinence of consumption) no further
investments can be made, since no one reserved any capital for
them
Any given amount of money is composed of:
Saved money
Money in consumption (the degree of consumption is an indicator for
the degree of production)