The flaw in the Austrian business cycle is not that it predicts easy credit booms and credit crunch busts. That's empirically true, although it's long on the "it's going to happen" and not on the "when, and how much". It's that it predicts that the bust is characterized by a sudden withdrawal of investment (true) and an increase in consumer spending (false). An overspending in the investment goods sector is matched by an underspending on consumer goods. This leads them to believe that the cycle will correct itself without needing to increase demand - it's a sectoral shift, not a structural problem. Therefore, no room for government to step in, no sir, just the private sector minding its own business.
But demand is down across the board. Consumers are not increasing spending. They're not even holding spending flat. They're squirrelling away as much cash as they can, in bills, bonds, and gold. And that, unlike the Austrian scenario, is not going to lead to automatic recovery, since if everyone is betting on tomorrow, there's nobody betting on today. Thus, investment stagnates until the outlook improves, leading to a further flight to safety, leading to yet more stagnation. Snap goes the trap.
-Jester
Afterthought: If you believe some kind of "unstable system" theory of economic collapse, then you are very much in the Minskyite camp, or maybe off in the nonlinear market tails with Taleb.
But demand is down across the board. Consumers are not increasing spending. They're not even holding spending flat. They're squirrelling away as much cash as they can, in bills, bonds, and gold. And that, unlike the Austrian scenario, is not going to lead to automatic recovery, since if everyone is betting on tomorrow, there's nobody betting on today. Thus, investment stagnates until the outlook improves, leading to a further flight to safety, leading to yet more stagnation. Snap goes the trap.
-Jester
Afterthought: If you believe some kind of "unstable system" theory of economic collapse, then you are very much in the Minskyite camp, or maybe off in the nonlinear market tails with Taleb.