In a message dated 3/20/01 9:08:34 PM, email@example.com 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
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
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