Prices and Profits Are Telling Us Something

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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

Flix Moreno
de la Cova Sols [send him mail]
studied law and economics at ICADE, works as an equity trader in
Madrid, and is a member of FOL.

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