Prices and Profits Are Telling Us Something

DIGG THIS

Austrian Business Cycle Theory not only warned us about the present crisis (and previous ones), pointed out its first symptoms, explained the mechanisms and reasons that made it inevitable and pointed an accusing finger at the banking cartel and its colluding heads at the Fed. It not only made obvious the inconsistencies of so called “free-market” economists who denounced price controls and central planning while simultaneously advocating centrally planning and fixing the most important price in the whole market: the price of money.

Mises, Hayek, Rothbard and Huerta de Soto were right about booms and busts. They explained the causes, predicted their development and right now their teachings can help us pinpoint the stages of the cycle and react accordingly to preserve our savings and escape the worst consequences.

How?

Huerta de Soto gives us the answers in his book Money, Bank credit and Economic Cycles. They boil down to the real basics of economics: look at prices, look at profits, study supply and demand.

He explains how credit affects prices and investment along the capital structure (Hayek’s pyramid of production) and drives money into different stages of production. One caveat: do not be fooled by monetary illusions, keep your eyes on reality by looking at relative prices.

So, to all those immersed in the hot/cold, inflation vs. deflation debate, watching where profits appear could be more useful than looking at monetary aggregates. Are price increases concentrating in the final stages of production and in consumer products? Or has the boom been diverted into another class of capital goods? Are Procter & Gamble or Coca Cola posting better results than General Electric? (Fig. 1 above: diversified industrials vs. fig. 2 below: consumer goods.)

Each cycle is different. There is no perfect set of numbered stages, but the same elements are always present. Of course government and central bank manipulations can create fluctuations and uncertainties, but often these are the most predictable as politicians are fond of making the same mistakes again and again.

Austrian Business Cycle Theory can be both a map and a compass with which to navigate today’s stormy markets. It may even someday help to pierce the fog of lies. Truth, reason and understanding will set you free (not just in a spiritual sense).

Or then again, you could invest on Bernanke’s advice.

April 19, 2008