Industrial production data for April has just been released, surprising analysts with the index rising by 17.4 per cent over the last one year. However, a multinational bank which has done its number crunching sent me a private report that says that "the key driver was capital goods, production of which rose by a record 72.8 per cent." The bank adds that this is "not sustainable." Thus, this is bad news, although at first glance it seems good, for the index has risen substantially. To understand why the news is bad we need Austrian Business Cycle Theory (ABCT). Note that without sound theory, statistics (which is "history") cannot be correctly interpreted.
ABCT tells us what goes wrong when business cycles of "boom and bust" occur. It tells us that the real damage occurs in the "boom" period, when all business calculations are torn asunder by cheap money at artificially low interest rates. Thus, projects which would not have been deemed profitable under normal circumstances are entered into, loans are taken, and investments made in capital goods. When the bust hits, it is this false optimism of the boom that causes widespread losses. This is the bust - the "correction" of the boom.
What the Index for Industrial Production tells us therefore is that Indian businessmen have made huge "malinvestments" in capital goods - and that a "bust" is forthcoming, when losses will have to be booked. Bad news, indeed.
The lesson: Keynesianism - or should we call it Chachaism? - and central banking CAUSE business cycles. If we are to be rid of them forever, we must adopt the gold standard. Under a gold standard too businessmen will make losses when their optimism over the future proves unfounded, but they will be few. What is happening today is that these errors are widespread. Why is everyone making the same error?
The reason for that is that the boom is accompanied by inflation - and this makes "economic calculation" impossible. Businessmen will overestimate profits under inflation and further overestimate demand. This is another way by which inflation leads to "capital consumption." And that, as we all know, is the very opposite of progress.
Note that it is government management of the economy that is causing all this. With gold, no politician can meddle with money. That is the only cure.
Thanks for writing this.
ReplyDeleteYou can also look into the percentage increase in money supply in the recent years (been close to 20 pc). That means the Central bank decides a lot on the allocation of a lot of the economy's resources. The increased money supply has started showing it's effect on consumer goods (the typical consumer reasserting his preference for consumer goods working against the 'forced saving' of the central bank). The money supply inflation has to stop. We are in for trouble.
This comment has been removed by a blog administrator.
ReplyDelete