Micro-documentary: Boom And Bust Cycles Are Created By Central Banks

Austrian economists argue that central banks don't help in smoothing the amplitude of cycles, but rather are the cause of cycles. This documentary analyzes 4 major busts in the last 100 years.

[nthperson]

There is a good deal to be learned by studying how depression triggers aligned in the past. So, to understand why the "Great Depression" occurred in the 1930s, one must look at what occurred during the years building up to the crash.

A significant amount of the credit made available during the 1920s went into land speculation. A good primer on what occurred is found in the book "Only Yesterday" by historian Frederick Lewis Allen. Not only did investors become captured by the frenzy of the Florida land boom, this same frenzy occurred in many cities in response to population increases that triggered a significant increase in the demand for both commercial and residential land. An agricultural land boom also occurred during the First World War, during which time farmers borrowed heavily to expand their land holdings and production. A few years was required after the war ended for European farmers to recover, but by the mid-1920s global production exceeded demand, prices fell, farmers defaulted on loans when government guarantees were removed, and rural banks failed by the hundreds.

As the land boom crashed, investors shifted heavily into the stock market, driving up prices well beyond what any fundamentals supported. Thus, by the end of 1929 the U.S. economy was stressed across almost all areas of production as well in the financial markets. To be sure, imprudent bank lending deepened the crash and lengthened its duration, but it was a crash in the making because of the failure to utilize tax policy to tame the credit-fueled, speculation-driven land markets. A few economists (e.g., Harry Gunnison Brown, Scott Nearing and John R. Commons) had argued the case made in the late 19th century by Henry George, who showed that cyclical booms and busts would be tamed only if the full or nearly-full public capture of the potential annual rental value of land and of rents from other sources (e.g., the broadcast spectrum) became public policy.

Harry Gunnison Brown was joined over the succeeding decades by a small group of economics professors who continued to make Henry George's case. One could argue that recessions that began again following the end of the Second World War would have been even worse if local governments did not capture some land rent via the taxation of real estate. However, as land prices climbed property assessments rarely kept pace. This made speculation in land an even more profitable investment.

Relying on out-of-date assessed valuations rather than current market values created a serious analytical problem for government statisticians. They simply did not understand that any increase in the price of land is inflationary and did not include such increases in their calculation of inflation. Another failure has been to accurately calculate the annual aggregate rent that is privately captured as unearned income (whether imputed or actual). Since the administration of Ronald Reagan, the federal government has not monitored land prices. The figures utilized in the econometric models relied upon by the Congressional Budget Office and the Federal Reserve are around 5 percent of the actual potential rent in the economy (see Joseph Stiglitz or Mason Gaffney on this particular problem).

I offer here a very rough estimate of the rent attached to just one part of the economy, the residential property market. At mid-2020, the median price of a single-family property was around $295, 000. There are about 140 million existing housing units in the United States. If we assume a fairly conservative median land-to-total value ratio of 35%, this means that the aggregate residential land value in the U.S. is $103, 250 per property, multiplied by 140 million = $14, 455, 000, 000, 000 ($14.455 trillion). Economic theory tells us that this aggregate land price occurs because of the capitalization of the net amount of rent that remains in private hands after taxation. If most or all of the rent were captured via taxation there would be nothing to be capitalized and land prices would fall to very close to zero. What the rent fund might be depends on the discount rate. If we assume that investors will invest in land if they can obtain an annual increase of 5%, the the rent fund would be calculated as follows: 5% of $14.455 trillion = $722.75 billion of rent JUST for the land under existing residential buildings. Add in the number of vacant residential lots around the U.S. and this figure will increase considerably.

Tragically, the public capture of land rent never became public policy, allowing the land market cycle to operate from boom to bust. It is on schedule to crash again in 2026. I have prepared a relatively short video in support of this forecast for anyone who reads this and has an interest in more details:

[placebojesus]

But the boom bust cycles existed before central banks and were worst. The next bust is always just around the corner given the periodic 7-21 year cycles (usually closer to 13-14), and at least g the is introduces some practicable periodicity into the otherwise dramatically swinging cycles. Hence FDR’s most famous quote — “The only thing we have to fear is fear itself.” And snakes. He forget snakes.

[rubinturner]

Welcome to 2020's COVID-19 pandemic crisis.

[victortancheongwee]

Well, this is the first time, i am buying silver, and betting it to run faster than gold. I believe there is still one more run for the ionsphere for gold. This time it will soar much higher than the previous high.

[ethercruiser]

Great video, thanks!  At least the Austrian Business Cycle Theory challenges us to rethink things outside of the Central Banking Keynesian economic point of view that is taught almost universally in its place.  Interest rates & monetary supply should not be artificially set & controlled by the Central Bankers & the government, but by Free Market forces & by money backed by whatever (such as gold) most are willing to trust as a reliable storage form of wealth (if they decide to delay their purchasing power) rather than by something easily manipulated out of thin air (like fiat currency). 

[freddykrueger]

But what's to stop bankers from diverting the paper wealth to their pocket and maintaining the system of paper currency with a scarce supply of paper money?
The people suffer but the private banking crooks remain in control.

[megharshagowda]

Monetary expansion major cause of inflation in india

[davewhite]

Everyone knows the .com bust was caused by the beanie baby bubble bust of 98-99.

[rajeshflywind]

2015 get ready for a crash in global equities

[Avidcomp]

Very good. I realise that you are bullish on precious metals, but I think a mention of crypto assets is worth a mention.