Fans of HBO’s hit series Game of Thrones know well the motto of House Stark: “Winter is Coming.” This motto warns of impending doom, whether brought on by the Starks themselves, devastating multi-year, cold weather, or something far more ominous north of the Wall.
At least since Soviet economist Nikolai Kondratieff wrote The Major Economic Cycles in 1925, recessions have been associated with winter weather.1 Although Kondratieff’s theories contained as much fantasy as Game of Thrones, using seasons as an analogy for the stages of a business cycle is intuitive. If spring represents recovery, and summer the peak of economic growth, then the U.S. economy may well be in autumn. All should be as wary as the subjects of Westeros (the realm of focus in Game of Thrones).
Why Winter is Coming
Few mainstream economists currently foresee a recession. They cite “strong” (a new-found, favorite term in Federal Open Market Committee minutes) economic statistics, a “healthy” stock market (despite gains highly concentrated in the so-called “FANG” stocks), and few warning signs among the “leading indicators.”2 3 But the same exact sentiment existed before the last recession. Most infamously, then-Federal Reserve Chairman Ben Bernanke stated in January 2008 – exactly one month after the recession technically began: “the Federal Reserve is not currently forecasting a recession.” 4
How could Chairman Bernanke have been so wrong then, and why may mainstream economists be likewise wrong today? The answer lies in their erroneous business cycle theories. Without a theory which accurately describes recessions, watching leading indicators or other signs of a slowdown are as effective as reading tea leaves. One can only predict by first understanding causality.
The Austrian school of economics explains business cycles, for it describes their phenomena (e.g., the “cluster of error” exhibited by businesses and economic actors), why they are recurring, and why they first repeatedly appeared in the 19th century (with fractional-reserve banking and/or central banks). In short, when the money supply is artificially increased, interest rates are decreased and distorted. As interest rates are a universal market signal to all businesses and economic actors, investments and purchases which previously appeared unprofitable or untenable now seem economically profitable or reasonable. However, these expenditures are actually “malinvested” relative to the natural level of interest rates. When interest rates revert to their natural level and structure, a recession ensues. Recessions are an inevitable condition which corrects malinvestments by returning capital to rightful purpose.
What causes the artificial boom to end and the winter to begin? Ludwig von Mises offered a succinct explanation:
The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. 5
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