Archive for the ‘Finance’ Category


December 6, 2007

為期三日的中央經濟工作會議,在北京結束,會議提出,當前宏觀調控的首要任務,是要防止經濟增長由偏快轉為過熱、防止價格由結構性上漲演變為明顯通脹,明 年內地將實施穩健的財政政策,而貨幣政策會由目前的適度從緊,加強至從緊貨幣政策,這種政策搭配,在近年來尚屬首次。

Austrian Business Cycle Theory

October 6, 2007

Austrian Business Cycle Theory

According to Ludwig von Mises and his followers, the boom-bust cycle is not inherent in the free market, but is rather caused by the government’s interference in the credit markets, specifically its manipulation of interest rates. The government causes the boom period when it injects new credit into the system (pushing down rates), and then the unsustainable, non-economic investment projects put into motion necessitate a bust at some future date. (Here is a reading plan for this topic.)

Generally speaking, the chart indicates an inverse relationship between the two series. This accords with the commonsense view that cutting interest rates provides a stimulus while hiking them is contractionary. However, what the Austrian approach provides is the understanding of the real forces behind the boom-bust cycle. In other words, most financial commentators think that today’s interest rates affect today’s economic growth, end of story. But if a previous boom period has led to massive malinvestments, there must be a bust period to liquidate the various projects (for which there is an inadequate capital structure to complete).

To put it another way, many commentators seem to believe that if the Fed held interest rates low indefinitely, then we’d never have high unemployment, just rampant price inflation. And yet, the recent experience shows that this is dead wrong. The Fed didn’t cause the recent problems by “responsibly” hiking interest rates. No, rates had been steady at 5.25% for some time, and then the housing bubble burst and the mortgage market faltered, thus “forcing” the Fed to take action.

Looking back at the chart above, we can see why the worst may be yet to come. In (price) inflation-adjusted terms, the early-2000s levels of the actual fed funds rate is the lowest since the Carter years. And many readers may recall the severe recessions of 1980 and 1982 that followed that period.

Real Yr/Yr GDP Growth (blue, right)
vs. Real Effective Fed Funds Rate (red, left)

Unemployment rate rises again.

September 9, 2007

Bureau of Labor Statistics Data

In 2001, the unemployment rate rised sharply. The Fed has to reuced the interest rate. During this period the inflation climbed steadily. So in 2003 the Fed rate hiked. Now, in 2007 the unemployment rate is on the rise. No wonder rate reduction is anticipated by some analysts. Buy in stock.