02 Sep 2019

Austrian Business Cycle Theory, the Inverted Yield Curve, and the Upcoming Recession

Bob Murphy Show 12 Comments

I explain in the latest episode of The Bob Murphy Show.

12 Responses to “Austrian Business Cycle Theory, the Inverted Yield Curve, and the Upcoming Recession”

  1. Transformer says:

    While I love listening to these podcasts (especially while driving) one downside is that when one goes back to validate what one has heard it is often hard to find the precise quote one is looking for.

    I think I heard you say on this podcast that you disagree with Krugman’s statement ‘Neither I nor anyone else is predicting a replay of the 2008 crisis’ on the grounds that you do predict such a replay. Did I hear that correctly ? if so, would you be prepared to quantify that a bit ?

    What would you define as a replay (in terms of fall in RGDP, rise in unemployment, DJIA fall or whatever) and timeline (I think you mentioned late 2019, or early 2020, but not sure if that was just for a ‘standard’ recession or the 2008 rerun).

    Just curious given your (IMO, somewhat justified) claim to have predicted the 2008 thing, how much you would be prepared to lay things on the line now.

  2. Dan says:

    I was arguing with Kinsella awhile back that my understanding of the business cycle suggested that keeping the interest artificially lower for a longer period would worsen the eventually collapse. He said he didn’t know if ABCT has anything to say in regards to how bad the collapse will ultimately be. It just seems on its face that the lower they are the more unsustainable projects will be started, and the longer they are kept low the more resources will be sunk into these projects. Is there anything in the literature that discusses this, as far as what makes the collapse more severe?

  3. Patrick Szar says:

    As cohost of ContraKrugman and as you missed the episode on Stockman’s views while separately espousing your own about the bond bubble… you owe your fan base a response to Stockman.

    • Patrick Szar says:

      I wrote that last bit in a hurry. You don’t owe us anything, good Dr. But Stockman was making a unique case, and it is unfortunate you weren’t there to offer your thoughts. It seems possible you could agree with him, at least to some extent, but I will not assume this much.

      • Bob Murphy says:


        I mean, one thing I definitely disagree with is when he told Tom, regarding the inverted yield curve, “Central banks are running the show now and all bets are off” (or words to that effect). The reason I think the inverted yield curve exhibits the pattern it does, is precisely because central banks are running the show!

        But other than that I didn’t hear anything that I necessarily disagreed with. If you want to flag some specific remarks I’m open to investigating.

        • Patrick Szar says:

          He made the case that the predictive power of the inverted curve is moot because nature of this “bubble” is so unorthodox. The. He cited the example of the 100yr Austrian bond trading at some ridiculous price, and added some reasonable objections to buying a 100yr Austrian bond at any price.

          The fact that it seems the market is chasing price increases rather than looking at yields makes the inverted curve less significant to traders. I’m not seeing this whole thing clearly because I can’t understand what’s the tail and what’s the dog in this whole bond price v bond yield v inflation signals v recession fears.

          The whole thing about what is signaling what in terms of inflation fears would be helpful to my understanding.

          • skylien says:

            “The fact that it seems the market is chasing price increases rather than looking at yields”

            Right. That is the insane part that even if bonds are negateve the value still rises as long as the yiealds get more negative. So you can play the game of chasing the higher value a lot longer than one would presume until finally someone will be the bagholder of the guaranteed to make a loss bonds!

            That makes it really unpredictable how long this can go.

          • baconbacon says:

            This type of argument only holds if the inverted yield curve isn’t increasing risk. Chasing returns is (supposed to be) a risk adjustment measure. The same with negative interest rates, if you are buying bonds not for their 1% yield but because you think they will fall to 0%, you have that 1% yield to fall back on. If you buy at -1% hoping for it to fall to -2% your default position is much weaker.

  4. Tel says:

    Tel Business Cycle Analysis (TBCA) … https://fred.stlouisfed.org/graph/fredgraph.png?g=oMKB

    Reading the colours downward top to bottom at a given point in time:
    * Red, Green, Purple ➡ expansionary phase (watch for green or red to peak)
    * Red, Purple, Green ➡ early stages of recession (Purple ↗ and Green ↘)
    * Purple, Red, Green ➡ worst part of recession (Purple ↘ and Red ↘)
    * Purple, Green, Red ➡ late stage recession (Purple ↘ and Green ↗)
    * Green, Purple, Red ➡ recovery after recession (look for red to bottom out)
    * Green, Red, Purple ➡ late stage recovery and genuine growth phase (Red ↗)

    At the moment we are moving out of the late stage recovery and into the expansionary stage. The general trend on Red is upwards although there was a tiny peak in 2015 which might have developed into an early recession had Hillary won the election, but that never happened.

    Green did a mini-peak in 2014, started turning down towards 2016 but it’s now back up neck and neck with the red. No drama at this stage.

    Purple is thinking about trending up, but still has a long way to go yet. CPI price-inflation is starting to raise it’s ugly head … yes there is inflation … yes it is real, but nothing to panic about.

    This cycle is characterized by slower than usual recovery and longer time spend in the recovery phase and much smaller Red peak than earlier expansionary periods. In other words, there just has not been anything that might represent what the Austrians call a “big boom”. You might argue that those booms back in 2000 and 2004 were so huge that we still have a lot of cleaning up to do, holdover bad credit from 20 years ago … that’s not impossible, but I’m not convinced by it.

    I reckon that unless some surprise event comes right out of left field, we are at least 12 months off from any recession … also, it’s going to be a relatively mild recession, not as bad as 2008, not as bad as the Volker recession. Given the way everything lately has been in economic slow motion, could well be 24 months before any significant problem hits … also when the recession does hit, that also will feel like slow motion with a long and anemic recovery.

    Here’s a list of possible disturbance events that might shake things up suddenly and without showing up on the graph in advance:
    * Deutsche Bank is wobbly as heck and could fall down any moment … I dunno how it got this far, the Euro regulators must be working behind the scenes to prop the thing up. No idea how big the fallout will be, but mostly it will hit Europe and hopefully not go too far beyond that.
    * Brexit could go any which way … it’s a wildcard. Seriously anything is possible.
    * China push and shove could escalate, so far it has been mostly bluff with a bit of action and the two sides trying to psych each other out. I believe that Washington is working towards one of their “controlled escalation” scenarios … and historically they always mess those up.
    * Internal political friction in the EU is growing, they are looking at a German downturn, so the politics will get rougher but that’s a gradual process (probably). Negative interest rates in Europe can’t be a good sign.
    * Maybe the Democrats in the USA will try something off the wall crazy to unseat Trump. They have no viable candidate, and no plausible policies so this would be a logical time for a complete “Hail Mary” maneuver and violence isn’t out of the question. These guys appear capable of incredibly stupid behaviour.

    • Tel says:

      Darn it … I carefully placed those arrows and they didn’t sit where I wanted them.

  5. skylien says:

    Very nice podcast.

  6. baconbacon says:

    The point that you rarely see is that inversions occur for government bonds, but not for (more or less) market rates. https://fred.stlouisfed.org/graph/fredgraph.png?g=oOti

    Here the 30 year treasury minus 10 year has inverted twice since 1990, but the 30 year minus 15 year mortgage rates (no `15 year treasury or 10 year mortgages for a better comp, but this will do) is always 20 basis points above inversion at least. There is also much less volatility there with the range for the mortgages being between 0.2 and 1 percentage points and for the treasuries its between -0.3 and 1.37, double the range.

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