onsdag 14. november 2012

More nonsense on ABCT by Lord Keynes

In a blogpost, the enthusiast for the current social order "Lord Keynes" makes a bold statement. He claims that the Austrian Business Cycle Theory which states that excessive credit creation leads to overconsumption and mailinvestment does not explain the 2007-2009 financial crisis.

Here is the most important of the summary:

"After this, Rothbard (2004 [1962]: 996–1004) expounds ABCT in its usual form. But his footnote has profound significance: “[to] the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur.” In other words, the mechanisms causing recession or depression as postulated by his version of ABCT did not occur if the money is mainly loaned to consumers! ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers to a significant degree."

This view of spending on consumer spending has been held by some Austrians. But most Austrians, even dating back to Hayeks formulation have not formulated in this way. The most updated and comprehensive forumlation of Austrian Business Cycle Theory has been done by Jesus Huerta de Soto in his 1997 book "Money, Bank Credit and Economic Cycles" and he addresses this very point several time.

Let me add a quote to show the jist of his reasoning:

"It is first necessary to point out that most consumer credit is extended by banks to households for the purchase of durable consumer goods. We have already established that durable consumer goods are actually true capital goods which permit the rendering of direct consumer services over a very prolonged period of time. Therefore from an economic standpoint, the granting of loans to finance durable consumer goods is indistinguishable from the direct granting of loans to the capital-intensive stages furthest from consumption. In fact an easing of credit terms and a decline in interest rates will provoke, among other effects, an increase in the quantity, quality and duration of socalled “durable consumer goods,” which will simultaneously require a widening and lengthening of the productive stages involved, especially those furthest from consumption." - page 406

He also quotes confirmation from Hayeks "Prices and Production" and Machlups "Stock Market, Credit and Capital Formation" to illustrate what earlier Austrians have claimed.

Another lie and misinformation Lord Keynes debunked, I will surely return with more :)

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