Austrian Business Cycle Theory tells us that recessions are an indication an economy is healing. Booms created by government printing presses and fiscal interventions will be cleansed by downward reset of asset prices and labor misappropriation will be righted by rising unemployment. Murray Rothbard wrote in America’s Great Depression, “The adjustment process consists in rapid liquidation of the wasteful investments. Some of these will be abandoned altogether (like the Western ghost towns constructed in the boom of 1816–1818 and deserted during the Panic of 1819); others will be shifted to other uses.”
The Chinese economy is experiencing just such a depression and the authorities in command and control China met this weekend and are going to abort the cleanse and aggressively intervene. Bloomberg reports,
- China will borrow more to raise money and help local governments finance their ‘hidden debt,’ or off-balance-sheet borrowing.
- Local governments can use the money raised from their special bonds to buy unsold homes and turn them into subsidized housing. This is the latest step to address the country’s worst property downturn in recent history
- Officials say there’s still “large” room for the central government to raise debt and for the headline fiscal deficit to increase, but they refrained from offering more specifics.
- Major state banks will get help to replenish their capital. The top six lenders have capital levels that far exceed requirements, but the support will help ease any pressure after the central bank unveiled broad reductions to mortgage rates and slashing key policy rates to revive the economy.
- There’s no new stimulus specified to incentivize consumption, which has been a weak link in the economy, and no specifics on subsidies for households either.
Rothbard continued, “The crisis signals the end of this inflationary distortion, and the depression is the process by which the economy returns to the efficient service of consumers. In short, and this is a highly important point to grasp, depression is the ‘recovery’ process, and the end of the depression heralds the return to normal, and to optimum efficiency. The depression, then, far from being an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions imposed by the boom. The boom, then, requires a ‘bust.’”
The Chinese are making the same mistake FDR made with his many government programs during the Great Depression and Trump and Biden made with massive government programs during the COVID crisis.
“The boom will end when bank credit expansion finally stops,” Rothbard wrote. “Evidently, the longer the boom goes on the more wasteful the errors committed, and the longer and more severe will be the necessary depression readjustment.”
Today’s governments and central banks, whether called capitalist or socialist, never let their economies heal. The continued interventions will ultimately lead to more severe depression readjustments.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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