Tuesday, November 22, 2011

Understanding Ron Paul: Business Cycle & Bubbles

 By Dan Beaulieu

"I am an imperfect messenger, but the message is perfect"    
–  Ron Paul

One thing is certain of Dr. Ron Paul, he is not a sound-bite candidate. That is, he often speaks over the heads of voters which causes a lack of understanding. It is in my personal opinion that Ron Paul cannot be understood in the 30 seconds allocated to him in debates. His ideas must be studied; however, once one does understand Dr. Paul, they often stick around.

For this reason I present to you my series: 

Understanding Ron Paul

The Business Cycle & Bubbles

(Image from: http://www.harpercollege.edu/)

The business cycle, first realized by Ludwig Von Mises in the 1920’s and later developed by Freidrich A. Hayek, is a phenomenon that happens through Keynesian intervention of the markets. In a business cycle you have a boom or period of economic euphoria and a bust, period of economic agony. The business cycle is propelled by the central bank’s (Federal Reserve) manipulating or “propping” the market through low interest rates which forms bubbles. It should be noted that in a true free market economy the business cycle would simply not exist, that is, there would be no cyclical boom or bust (depression).

Bubbles form when the Federal Reserve lowers interest rates below the natural levels of a market, it influences expansion of investments well beyond sustainable levels. This manipulation distorts the signals that business uses to assess risk and these distortions then lead businesses to believe that consumers have the savings to back up their investments. However, artificially low (below market) interest rates don’t generate new wealth to make good on investments. So when the bubble pops these fallacies are realized in lost investments, this is called correction.

Regardless of government interference the powerful true market is always at work and like gravity, the true market pulls the cycle back towards the median in a sensation we call correction. This correction inhibits business cycle bubbles from perpetual expansion and further attempts at avoiding correction through stimulus or quantitative easing only prolongs the agony, the correction must always occur.

This is precisely how the housing market collapsed in 2008 and Ron Paul’s understanding of the business cycle, through Austrian studies, is what allowed him to foresee the disaster several years before it occurred (you can watch his predictions here: 1983, 2001, 2002, 2003, 2007).

For a deeper understanding on why we must change our monetary policy please listen to this audio from one of Ron Paul's mentors, Murray Rothbard, titled "Economic Depressions: Their Cause and Cure".

Back to Understanding Ron Paul Index

No comments:

Post a Comment