January 19, 2005

TYLER COWEN -- "If I believed in Austrian business cycle theory":
1. I would think that Asian central banks, by buying U.S. dollars, have been driving a massive distortion of real exchange and interest rates.

2. I would think that the U.S. economy is overinvested in non-export durables, most of all residential housing.

3. I would think that we have piled on far too much debt, in both the private and public sectors.

4. I would think these trends cannot possibly continue. Asian central banks may come to their senses. Furthermore the U.S. would be like an addict who needs an ever-increasing dose of the monetary fix. This, of course, would eventually prove impossible.

5. I would think that the U.S. economy is due for a dollar plunge, and a massive sectoral shift toward exports. Furthermore I would think it will not handle such an unexpected shock very well.

6. I would buy puts on T-Bond futures and become rich.

7. I would think that Hayek's Monetary Nationalism and International Stability, now priced at $70 a copy, is the secret tract for our times.[UPDATE: make that now $405.82 a copy.]

Cowen is critical of what he takes to be "Austrian" business cycle theory. In my judgment, Cowen's understanding of Austrian theory is deficient -- at least so far as is meant to include the work of Hayek (as I explained to Tyler when he presented his work at a conference on "Austrian" economics).

What's the theory? Well, the best work on Hayek's account of the trade cycle is from Roger Garrison, and he explains Hayek's work (and much else) here.

Also recommended Time and Money: The Macroeconomics of Capital Structure by Roger Garrison (only one copy left in stock).

UPDATE: Brad DeLong, "Am I a Secret Austrian?":

Tyler Cowen outs me:

"But at least someone appears to believe in Austrian business cycle theory."

I can only plead that my Austrian tendencies are small and (usually) under control. Most of the time I'm a straightforward Keynesian aggregate-demand guy: i.e., get the level of aggregate demand right and most other problems will go away. But the U.S. fiscal deficit, its reflection in the balance of trade, and the... interesting policies of Asian central banks produce problems that cannot be analyzed as either too much or too little aggregate demand. The Austrian theoretical framework thus seems to be the only tool at hand. And when all you have is a hammer ...

UPDATE II: Brad Setser, "I guess I am a secret Austrian too." Posted by Greg Ransom | TrackBack