How does the 'Bust' happen?

[Knightskye]

I'm watching Tom Woods' recent speech at Colorado University:
YouTube - Meltdown (http://www.youtube.com/watch?v=541bajR4k8g)

The Fed lowers the interest rate and tricks businesses into thinking there's more money to lend than there actually is, so they start "unsustainable" long-term projects.

I understood that part, but how do they find out there isn't actually enough resources (money) to keep the project going?

[jmlfod87]

Eventually there is such a disconnect between capital production and consumer demand that businesses are producing that which no consumer has the resources to purchase.

Remember, the artificially lowering of interest rates distorts business perceptions about savings. They believe that the lowering of interest indicates an increase in svaings by the consumer. Therefore, they invest is the production of capital goods in order to increase the supply of their product in the future. However, consumer savings haven't really increased therefore the consumers simply wont have the resources to spend more in the future, they will only be able to spend the same amount as they were spending before. Thus, businesses end up with a lot more supply than there is a demand for and they bust sets in.

[Knightskye]

Eventually there is such a disconnect between capital production and consumer demand that businesses are producing that which no consumer has the resources to purchase.

Remember, the artificially lowering of interest rates distorts business perceptions about savings. They believe that the lowering of interest indicates an increase in svaings by the consumer. Therefore, they invest is the production of capital goods in order to increase the supply of their product in the future. However, consumer savings haven't really increased therefore the consumers simply wont have the resources to spend more in the future, they will only be able to spend the same amount as they were spending before. Thus, businesses end up with a lot more supply than there is a demand for and they bust sets in.

Oh, so GM and Chrysler pour money into constructing millions more vehicles than are actually demanded, and then since the money isn't actually there for people to buy the cars?

I don't understand Mises' "master builder" example, then. He doesn't have enough bricks to finish building the house...?

[Elwar]

I'm watching Tom Woods' recent speech at Colorado University:


The Fed lowers the interest rate and tricks businesses into thinking there's more money to lend than there actually is, so they start "unsustainable" long-term projects.

I understood that part, but how do they find out there isn't actually enough resources (money) to keep the project going?

Interest rates are so low that instead of a $200,000 house at $1500 a month you can now buy a $300,000 house at $1500 a month...a lot of people start buying higher priced houses...people see that house prices are going up 20% a year and start buying multiple houses so that they can flip them and get rich.

Then the initial wave of new home buyers are now home owners...they are fine with their house and aren't buying more homes. The prices are no longer going up 20% a year...house flippers start unloading their extra houses since the investment isn't good anymore. Too many people unload them all at once and prices take a dive.

[TonySutton]

Interest rates are so low that instead of a $200,000 house at $1500 a month you can now buy a $300,000 house at $1500 a month...a lot of people start buying higher priced houses...people see that house prices are going up 20% a year and start buying multiple houses so that they can flip them and get rich.

Then the initial wave of new home buyers are now home owners...they are fine with their house and aren't buying more homes. The prices are no longer going up 20% a year...house flippers start unloading their extra houses since the investment isn't good anymore. Too many people unload them all at once and prices take a dive.

You forgot the part where the false demand drove prices up so they actually payed 300K for a 250K house.

[Knightskye]

So, do the bricks represent demand? He's building something there isn't enough demand to finish?

[Dreamofunity]

Says it's private...

Here's a link from Mises

http://mises.org/multimedia/video/Woods_04-03-2009.wmv

[jmlfod87]

So, do the bricks represent demand? He's building something there isn't enough demand to finish?


bricks represent the resources the consumer's have to provide, so yes, in a sense it represents aggregate demand. but only keynesians look at it as a matter of demand, thus giving them the motivation to print more money in order to increase aggregate demand. Its one thing to say that the consumers aren't making purchases because they have no demand for the products, its another to say that consumers aren't purchasing simpyl because they dont have the resources.

[Knightskye]

bricks represent the resources the consumer's have to provide, so yes, in a sense it represents aggregate demand. but only keynesians look at it as a matter of demand, thus giving them the motivation to print more money in order to increase aggregate demand. Its one thing to say that the consumers aren't making purchases because they have no demand for the products, its another to say that consumers aren't purchasing simpyl because they dont have the resources.

Hmm... lower interest rates falsely signaled to businesses that consumers had a lot of money in savings accounts, when there really wasn't much there, and it also gave people a large financial incentive to refinance their homes and created an artificial boom in housing prices?

I might finally understand this. :)