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Austrian predictions

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This page attempts to list various predictions made by Austrian economists about important economic and other developments.

Important note: Austrian economists, as Austrian economists, or praxeologists, do not predict. They can predict not as formal economists, or praxeologists, but, rather, in their role as thymologists, or economic historians. In praxeology, A causes B, other things remaining the same. But, in the real world, other things cannot be relied upon to always remain constant. Therefore, predictions of the "A will necessarily lead to B" type are strictly prohibited. Instead, praxeologists, but not thymologists, must limit themselves to statements of the if-A then-B variety.[1]

The Great Depression

The Great Depression was predicted by several Austrian economists:

  • In Austria, economist Ludwig von Mises saw the problem developing in its early stages and predicted to his colleagues in 1924 that the large Austrian bank, Credit Anstalt, would eventually crash. He wrote a full analysis of Irving Fisher’s monetary views, published in 1928, where he targeted Fisher’s reliance on price indexes as a key vulnerability that would bring about the Great Depression, concluding: "because of the imperfection of the index number, these calculations would necessarily lead in time to errors of very considerable proportions."[2]
  • F. A. Hayek published several articles in early 1929 in which he predicted the collapse of the American boom. Felix Somary, who like Mises was a student at the University of Vienna, issued several dire warnings in the late 1920s.
  • In America economists Benjamin Anderson and E.C. Harwood also warned that the Federal Reserve policies would cause a crisis, and like Somary, they were largely ignored.[3] Albert H. Wiggin summed up in 1931 that the "depression has been prolonged and not alleviated by delay in making necessary readjustments."[4]

End of the Bretton Woods system

The collapse of the Bretton Woods System and the following rise of the gold price has been predicted by several Austrian economists and is covered in the following:

Dot-com bubble

Main article: Austrian predictions/Dot-com bubble

The Dot-com bubble and its bust was foreseen by several Austrian economists.[5] In October, 1999, Sean Corrigan pointed out a massive bubble and implied it will burst. He compared the conditions to those during the late summer of 1987, the Japanese bubble of the late 1980s, and the "roaring Twenties" in the United States. [6] In March, 2000, Christopher Mayer noted that all the ingredients of a bubble - fundamental (i.e., a technological revolution), financial (i.e., a surge in money and credit) and psychological (i.e., a suspension of belief in traditional valuation measures) - appear to exist in the current bull market and predicted it will end with a bust.[7] In August, 2000, William Anderson pointed to the bubble in the high-technology sector, mentioned the negative consequences of a regulatory attack at Microsoft[8] (which was analyzed a year earlier by Thomas DiLorenzo[9]). There were others.

Reference shortlist:
Anderson, 2000; Corrigan, 1999; Deden, 1999; DiLorenzo, 1999; Grant, 1996A, 1996B; Hülsmann, 2000; Mayer, 2000; Paul, 2000; Reisman, 1999; Sennholz, 2000; Shostak, 1999; Thornton, 2000.

Housing bubble

Main article: Austrian predictions/Housing bubble

During and after the burst of the Dot-com bubble, numerous economists predicted the 2000s housing bubble that culminated in the Great Recession from 2008 onward.

In 2002, Robert Blumen summed up the effect of the activities of Fannie and Freddie on the housing market as shows the systemic risk and foresaw a coming bailout.[10] Sean Corrigan pointed to the blooming real estate business among all the bankruptcies, and noted that real estate bubbles tend to pop several years after stock market bubbles, and that mortgages may fare much worse compared to stocks... along with their owners.[11] Congressman Ron Paul criticized government involvement in housing, and said that like all artificially created bubbles, the boom in housing prices cannot last forever.[12]

In 2004, Mark Thornton wrote that higher interest rates (indicated by the Fed) "should trigger a reversal in the housing market and expose the fallacies of the new paradigm, including how the housing boom has helped cover up increases in price inflation. Unfortunately, this exposure will hurt homeowners and the larger problem could hit the American taxpayer, who could be forced to bailout the banks and government-sponsored mortgage guarantors who have encouraged irresponsible lending practices."[13] Later on, he spelled out the consequences for the construction industry, unemployment, foreclosures, bankruptcies, bailouts of banks and GSEs, and a long recession.[14]

Stefan Karlsson wrote that the next crisis will be more serious than the mild recession of 2001 one; as it is, in fact, that very same crisis, only postponed.[15]

In 2005, Doug French after observing the mania in Vegas, quipped "condos are the last segment of the housing market to catch fire in a boom and the first to crater in a bust.", and concluded that the bust must be close.[16] Gary North warned against the danger of ARMs (adjustable rate mortgages).[17]

Investor Peter Schiff acquired fame in a series of TV appearances (most in 2006 and 2007), where he opposed a multitude of financial experts and claimed that a bust was to come.[18] He was warning about the speculation, ARMs, houses that couldn't be sold, people walking away from them and coming bailouts for several years before in print.[19][20][21]

Reference shortlist:
Anderson, 2001, 2003, 2007; Armentano, 2004; Beale, 2009; Blumen, 2002, 2004, 2005; Corrigan, 2002; Crovelli, 2006; DeCoster, 2003; Duffy, 2005A, 2005B, 2005C, 2005D, 2006, 2007A, 2007B, 2007C, 2007D; Economics of contempt, 2008; Englund, 2004, 2005A, 2005B, 2005C, 2005D, 2006, 2007, 2008; French, 2005; Grant, 2001; Karlsson, 2004; MacKenzie, 2003; Mayer, 2003; Mueller, 2004; Murphy, 2007, 2008; North, 2002, 2005; Paul, 2000, 2002; Polleit, 2006; Ptak, 2003; Rockwell, 2002, 2008; Rogers, 2005; Schiff, Undated A, Undated B, Undated C, Undated D, 2003A, 2003B, 2003C, 2004A, 2004B, 2005A, 2005B, 2005C, 2005D, 2006A, 2006B, 2006C, 2007A, 2007B; Sennholz, 2002; Shostak, 2003, 2005; Thornton, 2004A, 2004B, 2005A, 2005B, 2005C, 2006, 2007A, 2007B, 2007C, 2007D; Trask, 2003; Wenzel, 2004; See also Woods (2009, p. 188 for further bibliography).

Other predictions

  • The Skyscraper index shows a correlation between the construction of the world's tallest buildings and impending financial crises. While not developed by Austrian economists, it is compatible with their views about the business cycle.[22]

References

  1. ↑ Walter Block. Austrian Thymologists Who Predicted the Housing Bubble, LRC.com, December 22, 2010. Referenced 2011-11-29.
  2. ↑ Ludwig von Mises. "The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression", collection of works reposted from 1923 and 1928. Referenced 2011-01-12.
  3. ↑ Mark Thornton. "Mises vs. Fisher on Money, Method, and Prediction: The Case of the Great Depression" (pdf), p.13-15; December 2006. Referenced 2011-12-13.
  4. ↑ Murray N. Rothbard. America's Great Depression, Chapter 9, referenced 2011-01-11.
  5. ↑ Mark Thornton. "Who Predicted the Bubble? Who Predicted the Crash?" (pdf), The Independent Review, v. IX, n. 1, Summer 2004, ISSN 1086-1653, Copyright © 2004, pp. 5–30. Referenced 2011-12-13.
  6. ↑ Sean Corrigan. "Will the Bubble Pop?", Mises Daily, October 18, 1999. Referenced 2012-01-08.
  7. ↑ Christopher Mayer. "The Meaning of 'Over-Valued'", Mises Daily, March 30, 2000. Referenced 2011-12-13.
  8. ↑ William L. Anderson. "New Economy, Old Delusion", The Free market, August 2000, Volume 18, Number 8. Referenced 2012-01-08.
  9. ↑ DiLorenzo, Thomas J. "Regulatory Sneak Attack.", Mises Daily, September 16, 1999. Referenced 2012-01-08.
  10. ↑ Blumen, Robert. "Fannie Mae Distorts Markets", Mises Daily, June 17, 2002. Referenced 2011-01-10.
  11. ↑ Corrigan, Sean. "The Trouble with Debt", Mises Daily, July 01, 2002. Referenced 2011-01-10.
  12. ↑ Paul, Ron. "Testimony to U.S. House of Representatives", July 16, 2002. Referenced 2011-01-10.
  13. ↑ Thornton, Mark. "Housing: too good to be true." June 4, 2004. Referenced 2011-01-10.
  14. ↑ Thornton, Mark. "The Economics of Housing Bubbles", June 2006, p. 27, 29, 31. Referenced 2011-01-10.
  15. ↑ Karlsson, Stefan. "America's Unsustainable Boom", Mises Daily, November 8, 2004. Referenced 2011-01-10.
  16. ↑ French, Doug. "Condo-mania.", Mises Daily, July 11, 2005. Referenced 2011-01-10.
  17. ↑ North, Gary. "Surreal Estate on the San Andreas Fault.", November 25, 2005. Referenced 2011-01-10.
  18. ↑ Schiff, Peter. "Peter Schiff Was Right" (video). Referenced 2011-01-10.
  19. ↑ Schiff, Peter. "Fed official admits the emperor has no clothes!", Commentary, March 10, 2003. Referenced 2011-01-10.
  20. ↑ Schiff, Peter. "In Arm's Way: The Tender Trap of Adjustable Rate Mortgages.", Commentary, May 7, 2004. Referenced 2011-01-10.
  21. ↑ Schiff, Peter. "Housing Speculation is More Rampant Than You Think.", Commentary, July 5, 2005. Referenced 2011-01-10.
  22. ↑ Mark Thornton. "Skyscrapers and Business Cycles", Mises Daily, August 23, 2008. Originally appeared in the Quarterly Journal of Austrian Economics vol. 8, no. 1 (Spring 2005) - PDF. There is also an MP3 audio file read by the author. Referenced 2011-12-13.

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