What explains the present hard asset investment boom?
*Financial Times, by John Dizard, September 4, 2006
“The aspect of Austrian economics that will be central to investment decision-making this autumn is the role of central banking in generating unsustainable investment booms and subsequent busts.
The biggest world investment boom in history, which we have been going through for the past decade, is becoming a bust, most notably in the US housing market.
If the founding Austrians had Marxists and Keynesians as their opposition theorists, the present-day Austrians have Alan Greenspan and Ben Bernanke and their enablers in the US political system.
While the profit motive is central to the Austrian economic model, what really motivates the practitioners is the prospect of being able to say “I told you so”, which is much more satisfying than merely getting rich.
What they have been telling the so-far uninterested public is that the Federal Reserve has been keeping interest rates below the “natural rate”, or what an unconstrained set
of lenders would be able to charge borrowers, given what the borrowers could earn on the new capital.
The Fed, with the encouragement and support of the political class, kept rates low so as continually to postpone financial busts over the past decade and a half.
This has led to over-investment, from the technology bubble to the housing bubble, with one bubble obligingly taking over from the previous bubble. Now there are no bubbles left to blow.”
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