Austrian Economists Can Explain the Coming Recession
High energy prices and the fight against inflation are hampering economic growth — but so are misplaced expectations of interest rates.
Austrian economist on left, American on right.
Photographer: Chip Somodevilla/Getty Images North AmericaOne reason the current economic situation is so fraught is that the world is facing three kinds of business-cycle mechanisms at the same time. The first two are well-known, but the third — known as the Austrian theory of the business cycle — is not.
The first driver of this phase of the business cycle is high energy prices, and the second is the need for disinflation. Both are well-known instruments. The Austrian theory, however, involves a very different mechanism and works something like this: Investors expected that very low real interest rates would hold. They committed resources accordingly, and now forthcoming rates are likely to be much higher. That means the economy is stuck with malinvestment and will need to reconfigure in a painful manner.