Sean Corrigan asks the crucial question: if the causes of the business cycle are that well known and understood, why can business wise up and avoid the trap of making clusters of investment errors. A businessman can never know just where he is located in the structure of production–matters are simply too complicated. However obvious the path along his famous schematic right-triangle seems to be, on paper–in reality, it has the topology of a complex manifold, not a Euclidean solid. [Full article]
Source link: http://archive.mises.org/3177/we-shoulda-seen-it-coming/
We Shoulda Seen it Coming
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Since we are all helpless to stop the business cycle, given that I have yet to be elected, would anyone dispute that the best defense against the downturn is to stay out of debt?
President (to be) White
With each article, Sean pries my eyes JUST a little farther open.
That they should NEED such prying is notable in view of my:
MBA (Wharton)
CPA
(did I MISS something?)
Yes, the effects of the business cycle are very hard to track – but it seems silly not to attempt to do so. It seems to me as if most austrian economists are afraid to try and apply the more complicated aspects of their ideas for fear that they might look like they are trying to prove something via empiricism rather than a priori theory.
I’ve heard of euclidean solids, but would ouzo be a Euclidian liquid? But I ought not combine greek and geek.
A very long time ago I posted an observation about Mises saying socialists can’t calculate extending to capitalist countries where the currency is manipulated, or even floating (subject to market forces where the amount of gold it might buy will vary largely on a daily basis). You can’t calculate there either. So you can’t even hedge.
If the dollar I pay for a shipment with is 20% more or less valuable than when I ordered it, someone will likely have a loss. How can you do contracts for any term?
As an engineer, I would describe this as noise, and if it gets too great as to swamp the signal, you can’t make anything work.
Looking at financial technical analysis, and even fundamentals, you can watch the business cycle and I think under a proper gold standard (no state chartered fiat banks either) you could do a very good stab at the business cycle. Save (hoard) when gold is cheap, buy when gold is dear but otherwise good businesses are failing because of called loans.
But not when the system is flooded with new credit every day the market hiccups (Its been almost 2 years since the SPX has closed 2% lower). Can’t create wealth in the NASDAQ – just have Frannie and Feddie turn homes into ATMs.
Meanwhile, orchestrate the firesale of gold (www.gata.org, http://www.lemetropolecafe.com) to give the illusion of low inflation. No one in England will admit they approved selling most of HM’s Gold at around $275/oz – but it happened. I won’t bother describing the CPI and PPI.
Staying out of debt would be a problem if they make it easy to default. If 60% of the mortgage holders are underwater and owe it to Fannie or Freddie, congress is likely to let them default. One of democracy’s fundamental flaws is debtors normally outnumber creditors so can vote their debts away. If you have no debts, you won’t benefit from the follow on (and there will be no creditors to extend you credit even if your rating was pristine). You could do a leveraged short of the long bond or an index on margin.
Trying to prevent a recession is like trying to prevent sleep. It is both unhealthy (caffeine, stimulants, crystal meth) and doomed to failure – and you will sleep far longer when you eventually fall asleep. But presidents and their central bankers don’t want the recession to happen on their watch.
Joe said: “did I MISS something?”
Yeah, Joe–you missed the fact that the MBA is the most over-rated degree in history.
Should he be looking, not just at the industry trade journal, but also at the weekly/monthly money supply stats from all the major central banks around the world and must he decide not ever to increase output because he always seems to see that money and credit are expanding faster than savings?
If the manufacturer is large enough to have a board of directors, I have no doubt that those directors will cajole and push the president to borrow money like crazy, build up production to ridiculous levels, and use every pro forma accounting trick in the book in order to make the shareholders believe that the company is really kicking ass in the New Economy. Otherwise they will see their market share eaten up by competitors who are taking advantage of the rampant credit creation. That the competitors are actually unprofitable probably wouldn’t be considered – the key management principles being used are Pump and Dump.
I’m intrigued by the use of upstate NY in this hypothetical example. About 1-1/2 years ago I read an article on one of the “bear” websites that made a pretty solid case that upstate NY is in economic depression. The author painted a grim picture of job losses in manufacturing along with out-of-control government spending on welfare, schools, health care, and law enforcement. (I can’t find the article online any more, it could have been a Sean Corrigan opus for all I know) What really grabbed me was that I had travelled through central-eastern NY on a little driving trip just a couple of weeks previously, and that is exactly what I had told my partner: this place looks depressed! Around that time I also started noticing that the NY state radio stations that I occasionally listen to seemed to be playing fewer and fewer ads from real businesses, and more and more public-service announcements and government ads (Homeland Security is especially prominent). Even a lot of the “real business” ads are quite dubious, since refinancing companies and debt-counselling agencies make up a large part of them.
To some degree one can ascertain the effects of the business cycle. First rule of thumb is that “where-ever the money is going first from the expansion of credit is most likely to most out-of-whack from the market”. The distance from the epicenter of money creation are the most “undervalued”. The Fed stops the “deflation” by having the government create debt the Fed can monetize (essentially helicopter money).
The major problem is timing and size-of-move. Shorting the NAZ in 2000 would have been great, but how many average guys (me?) could have done that without being picked off by the insane rally up to the peak?
But nearly everyone could have gone “long” real estate by some method (stock investment, borrowing more and buying, etc.). My guess is a few steps ahead is the opportunity, so I wouldn’t settle for playing the game in one dimension.
Thank you Sean for raising a fascinating topic. This is an area that deserves closer attention by Austrian economists.
I don’t think it is the case that investors are totally helpless in the face of economic cycles. While forecasting the future course of cycles with any precision is utterly hopeless, nonetheless it is possible to learn from historical experience which kinds of capital structures have tended to be more vulnerable to malinvestment losses in the past, and assess risk premiums based on the assumption that future cyclical risks will somewhat resemble the past risks.
Of course, this assumption does have serious limitations in light of the everchanging nature of economic data over time (much of the data being beyond the purview of any single investor, as Sean pointed out). Thus, this sort of investor response to cyclical risks can’t stop malinvestments from happening altogether, but it might slow down the pace at which they occur.
It might also help explain a few other things of interest, like how during booms intense bubbles (e.g. the 1990′s dot com’s) might form in specific sectors where past experience is less relevant as a guide to future results, or why stocks that are more sensitive to cyclical effects (“high-beta” stocks) have higher rates of return.
Another reason why we all get sucked in is glaringly obvious from the comments on this list.
Rather than focusing on the fundamental issue of how wealth-creators – i.e. entrepreneurs – are supposed to cope in managing their businesses, the body of the argument here has degenerated into a series of regurgitated platitudes about how wealth-distributors (perhaps a needlessly polite term for the activities of Monday morning QB, stock-market paper-traders)can perhaps more successfully game the present atrocious monetary order as they buy and sell financial assets.
If even the Mises weblog has become so polluted by the casino mentality, what hope for the poor widget maker as he tries to minimize his exposure to the fickleness of hot money flows around the world?
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