Re: ECON: The Hangover Theory?

Date: Wed Mar 21 2001 - 01:57:55 MST

In a message dated 3/20/01 9:08:34 PM, 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

This archive was generated by hypermail 2b30 : Mon May 28 2001 - 09:59:42 MDT