Business Cycles and Timing

Even in a free market economy, there is sort of a business cycle, at least in the sense that it is constantly changing.  Human wants and needs are constantly changing and this factor, along with changes in supplies, means that prices fluctuate and resources are constantly being redirected based on those prices.

However, in a free market economy, we would tend not to see the business cycle as we know it today.  We wouldn't see the huge swings, particularly with virtually everything at once.  In a free market economy, there would be less tendencies for big bubbles and busts, particularly without a central bank (or some other institution with a monopoly over money).

The Austrian Business Cycle Theory is very helpful in explaining past bubbles and busts.  It is also helpful in telling us that artificially low interest rates and increases in the money supply are likely to lead to new bubbles.

The tricky part is that we can't know where the next bubbles will occur.  We can certainly take educated guesses.  And even if we could take a good educated guess, it is impossible to determine the timing of when the bust will occur.  There are simply too many variables.  And one of those variables is human action, which is almost impossible to predict.  Again, we can take a good guess, but it really is impossible to say.

If it were easy to determine where the bubbles are and when they will go bust, then the Austrian school economists would be rich.  Perhaps we could say that there are some Austrian school people who have above average wealth and above average investment returns because of their knowledge.  But there are also plenty of Austrians who have gotten things wrong.

Some recognized that there was a housing bubble at the time.  Most did not understand just how big it was, but there are some people who saw it.  But some people saw it in 2004.  It would have been hard to listen to them, as housing prices increased most dramatically in the next couple of years.

The same could be said for tech stocks in the 1990's.  Some people thought a crash was imminent in 1997.  They were somewhat right in their analysis, but a couple of years too early in their call.

The point is that these bubbles can drag on far longer than it almost seems possible.  Timing is more of a guessing game than anything.

I think that interest rates will eventually rise and government bonds will get crushed.  But I do not own one single short position on bonds because I have no idea when it will happen.

I think there is something of a student loan bubble and a college bubble in general.  I don't think the increasing prices are sustainable, particularly when so many college graduates are unemployed.  But again, I have no idea when we will see a change big enough to actually cause college prices to drop.

I have no particular investment advice with this post, other than to say that you should always be cautious with your investing in regards to timing.  It may seem obvious to you that bonds are a losing proposition, but you have to realize that not everyone else sees it that way.  And even if others are starting to see it that way, it doesn't mean they will act on their knowledge.  Of course, you also have to realize that it is a manipulated market because the Fed is a buyer of bonds.

The same goes for price inflation.  Many Austrians have been predicting serious price inflation for the last several years.  It seems like a good guess because of the huge increases in the money supply.  But again, the human race had other things in mind.  Banks have been tight on lending and many people have been tighter than usual on spending.  This has helped offset the huge increases in the money supply.  Again, there are always variables to consider.

In conclusion, I think the Austrian Business Cycle Theory can be very helpful in understanding economics and even in making sound investment choices.  But don't think that it can give you the knowledge of where and when bubbles and busts are going to happen, or at least not with any precision.  It is impossible to predict human action with any certainty.