Here’s another Hayekian macroeconomist who saw the artificial boom and the coming of the inevitable bust — economist Kurt Richebächer, writing Dec. 29, 2004 in a paper titled “The Missing Link”:
What governs the U.S. trade deficit is not the law of “comparative advantages,” but the careless depletion of domestic saving and investment resources though policies that have recklessly bolstered consumption. Essentially, employment creation through capital investment is out. Putting it bluntly, the U.S. trade deficit, like all other imbalances, reflects a grossly skewed resource allocation toward consumption. To American economists, this idea that over time, excessive consumer spending leads to recession and worse, by crowding out capital investment may seem preposterous. Widely unknown, it happens to be the central idea that F.A. von Hayek developed in his famous lectures at the London School of Economics in 1931.
In essence, he explained in great detail that an increase in consumer demand at the expense of saving will inevitably lead to a scarcity of capital, which forces a “shortening in the process of production,” and so causes depression. Putting it in simpler parlance: Excessive consumption inevitably crowds out business investment. As a share of GDP, consumption in the United States is presently excessive as never before. And it keeps worsening.
Assessing the U.S. economy’s prospects, it also has to be realized that the bubble-driven consumer-spending boom represents artificial, unsustainable demand. Apocalypse will follow when the housing bubble bursts – which is sure to happen in the near future.
And here’s Richebächer writing on March 9, 2004:
Apparently, the consensus economists are still convinced that the growth acceleration in the second half of 2003, and above all a sharp rise in profits, have laid the foundation for sustainable growth. In particular, sustainable growth with sufficient creation of employment.
But we must admit that our own assessment is prejudiced by the postulate of the Austrian school, that “the thing which is needed to secure healthy economic growth is the most speedy and complete return both of demand and production to its sustainable long-term pattern, as determined by voluntary consumer saving and spending.”
Friedrich Hayek said in 1931: “If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand, it must mean that part of the available resources is again led into the wrong direction and a definite and lasting adjustment is again postponed. And even if the absorption of the unemployed resources were to be quickened in this way, it would only mean that the seed would already be sown for new disturbances and new crises.”
We think this precisely describes what has been happening and continues to happen in the United States. The Greenspan Fed has discovered a new, amazingly easy and quick way to create higher consumer spending virtually from thin air – by way of so-called wealth creation through asset bubbles. It began with the stock market bubble, to be followed by bubbles in bonds, house prices and mortgage refinancing.
See also Richebächer’s 2004 article “A Most Savage Credit Crunch” (pdf).
In an appendix titled “They Saw It Coming” to his paper “‘No One Saw This Coming’: Understanding Financial Crisis Through Accounting Models” Dirk Bezemer includes Richebächer among a short list of economists who did see it coming (pdf):
Several of the commentators (Schiff and Richebächer) adhere to the ‘Austrian School’ in economics, which means that they emphasize savings, production (not consumption) and real capital formation as the basis of sustainable economic growth. Richebächer (2006a:4) warns against ““wealth creation” though soaring asset prices” and sharply distinguishes this from “saving and investment…” (where investment is in real-sector, not financial assets) ..
Kurt Richebächer (1918-2007) wrote one of the longest-standing investment newsletters, “The Richebächer Letter,” which at various times also circulated as “Currencies & Credit Markets.” Richebächer was chief economist for Dresdner Bank from 1964 and moved into private consultancy in 1977. He warned against the bubble in technology stocks in the late ’90s. After its collapse, he warned against the bubble in housing, writing in September 2001: “the new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fuelled the stock market bubble.” He went on to predict “that the housing bubble – together with the bond and stock bubbles – will invariably implode in the foreseeable future, plunging the U.S. economy into a protracted, deep recession.” (Bonner 2007).
Writing in 2006, Richebächer held that “the recovery of the U.S. economy since November 2001 has been dominated by an unprecedented consumer borrowing-and-spending– binge. …”wealth creation” though soaring asset prices has been driven by ultra-cheap and loose money and credit, and not by saving and investment…” Richebächer (2006a:4). Just before the turning of the US housing market in summer 2006, Richebächer (2006a:4) in July 2006 commented that “[t]he one thing that still separates the U.S. economy from economic and financial disaster is rising house prices that apparently justify ever more credit and debt”… “Given this precarious
income situation on the one hand and the debt explosion on the other, it will be clear that in the foreseeable future there will be heavy selling of houses, with prices crashing for lack of buyers” (Richebächer, 2006a:11). As this prospect began to materialize in the next month, Richebächer wrote in his August 2006 newsletter that “a recession and bear market in asset prices are inevitable for the U.S. economy. … This will not be a garden-variety recession, in which monetary easing unleashes pent-up demand, as it used to do in past business cycles”. He again emphasized its cause: “the great trouble for the future is that the credit bubble has its other side in exponential debt growth” … “The U.S. liquidity deluge of the last few years has had one single source: borrowing against rising assets backed by the Fed’s monetary looseness… all hinging on further rises in asset prices. But they are going to plunge” (Richebächer, 2006b:1,5,9,11-12). And in September 2006 he wrote hat “housing bubbles, when bursting, generally do considerable damage to the economy. Today, they are bound to do far more damage….” (Richebächer, 2006c:4). The question was not if, but “how fast the U.S. economy and its asset markets will turn down. … “There is no question that the U.S. housing bubble is finished. All remaining questions pertain solely to speed, depth and duration of the economy’s downturn” (Richebächer, 2006c:9). Paul Volker, former Chairman of the US Federal Reserve and a long-time friend of
Richebächer, once remarked that the challenge for modern central bankers “is to prove Kurt Richebächer wrong.” Richebächer regarded the expansion of credit under Greenspan as laying the foundation of the worst post-World War II economic contraction. He died on August 24, 2007, two weeks after the events leading up to that contraction began (Bonner, 2007).
UPDATE: Sandy Mount:
It is tragic that Mr Richebacher and fellow Austrian Hans Sennholz did not live to see the crisis they predicted unfold yet had they lived, can we doubt they would be surprised that nothing seems to have been learnt by policy makers who are offering as a solution the very same means that got us into this mess in the first place?