“An economist can explain yesterday, predict tomorrow, and still be surprised by today’s tide.
If I want to understand the economy, I don’t bother staring at the clouds of statistics—watch the sailboats outside my window. When the tide is high, everyone thinks they’re a captain; when it runs low, you discover who can steer without hitting the rocks. In 2025, we find ourselves on a swollen tide of debt, interest, and worry, with three captains shouting different directions. The Austrians tell us the tide rose too fast and must fall back to its own level. The Keynesians insist we keep bailing water to stay afloat. And the Monetarists mutter that the real problem is the fellow in charge of the sluice gate, letting in too much water here, too little there.
Apologies in advance for tackling such a difficult and often boring topic. I’ll do my best to make it less painful and get straight to the point—but somewhere in all this, the truth is hiding. My opinion isn’t about whether we can change the economics of the world, but whether we should. And on that note, I suppose you could call me an Austrian.
Let’s put the Austrian Business Cycle Theory (ABCT) side by side with Keynesian and Monetarist views so you can see how each explains business cycles:
1. Austrian School (Mises, Hayek)
Cause of cycles:
- Artificially low interest rates from central banks.
- Credit expansion makes businesses think there’s more real savings than exists.
- Leads to malinvestment (bad investments that don’t match consumer demand).
Boom:
- Unsustainable expansion based on false signals.
Bust:
- Necessary correction when reality sets in.
- Malinvestments are liquidated; resources reallocated.
Policy solution:
- Stop central bank interference.
- Allow recessions to play out naturally.
- Return to sound money (e.g., gold standard).
2. Keynesian School (John Maynard Keynes)
Cause of cycles:
- Fluctuations in aggregate demand (total spending in the economy).
- Over-optimism → boom.
- Drop in confidence & spending → bust.
Boom:
- Businesses expand when demand is strong.
Bust:
- Downturn happens when spending falls—creates unemployment and idle resources.
- Recessions can spiral worse without intervention because low spending → layoffs → less spending.
Policy solution:
- Government should stimulate demand in recessions (spend more, cut taxes).
- Use fiscal policy and sometimes monetary policy to “smooth out” the cycle.
3. Monetarist School (Milton Friedman)
Cause of cycles:
- Fluctuations in the money supply, usually caused by central banks mismanaging it.
- Too much money = inflationary boom.
- Too little money = recession.
Boom & Bust:
- Seen as primarily monetary phenomena rather than real investment distortions.
Policy solution:
- Central banks should follow stable, predictable rules for money supply growth.
- No discretionary tinkering—just steady growth in money supply to match long-term economic growth.
Side-by-Side Summary
| School | Cause of Boom-Bust | Bust = Problem or Cure? | Policy Approach |
|---|---|---|---|
| Austrian | Artificially low interest rates, credit expansion → malinvestment | Cure (necessary correction) | End central bank manipulation; sound money |
| Keynesian | Fluctuations in aggregate demand | Problem (wasted resources) | Government spending, fiscal stimulus, manage demand |
| Monetarist | Bad money supply management by central banks | Problem (monetary missteps) | Follow steady monetary growth rule |
👉 In essence:
- Austrians say don’t intervene — recessions heal the damage from artificial booms.
- Keynesians say do intervene — recessions are wasteful and need government help.
- Monetarists say just keep the money supply stable and the economy will be stable too.
Snapshot of now (Oct 20, 2025)
- Mortgage rates: Avg 30-yr ≈ 6.27%, near YTD lows, but still a drag on activity. (AP News)
- Deficit & debt: FY2025 deficit ≈ $1.8T; interest costs ~$0.95T and rising fast. (CRFB)
- Long-run U.S. debt path: Debt held by the public climbing through the 2030s/2050s. (Congressional Budget Office)
- Global backdrop: IMF warns public debt could top 100% of global GDP by 2029. (Reuters)
- Funding strains: Banks have tapped the Fed’s Standing Repo Facility amid tightness. (Reuters)
How each school reads 2025
Austrian (Mises/Hayek)
- Sees today as the unwind of prior easy-money distortions: high debt service and soft housing = malinvestment revealed.
- Warns that more rate cuts/credit boosts prolong the misallocation and set up new bubbles.
- Prefers letting weak firms/projects clear; shrink deficits to realign with true savings.
Keynesian (Keynes)
- Diagnosis: demand risk—elevated rates + housing drag + rising interest bills can sap spending.
- Prescribe targeted fiscal support (infrastructure/human capital) and accommodative money to avoid a deeper slump.
- Beware premature austerity; keep employment and confidence from sliding.
Monetarist (Friedman)
- Focus: money/credit stability. SRF usage and rate volatility = warning to keep liquidity ample and predictable. (Reuters)
- Rule-like policy for money growth; avoid abrupt tightening or whiplash easing.
- Coordinate to prevent deficits from forcing destabilizing rate moves. (CRFB)
Sectors to watch (actionable)
- Housing: Rates ~6.3% keep refis low and supply sticky; watch listings & price cuts. (AP News)
- Consumer credit: Elevated APRs + cooling jobs would hit spending first (Keynesian concern).
- CRE & regional banks: Re-pricing of office loans amid tighter funding; SRF usage is a stress canary. (Reuters)
- Gov’t interest burden: Crowds out other outlays over time—Austrians flag this as structural drag; CRFB projects a steep climb. (CRFB)
- Liquidity/market plumbing: Keep an eye on repo and bill auctions; monetarists want smooth money growth. (Reuters)
- Global spillovers: High sovereign debt reduces policy space; shocks transmit faster. (Reuters)
And so the voyage continues: one captain calling for austerity, another for bold spending, a third for steady hands at the money pump. Meanwhile the passengers—ordinary folks—just hope their wages cover groceries and their mortgage rate doesn’t sink the boat. The river of history suggests only this: every time we think we’ve mastered its currents, it bends again. The choice isn’t whether there will be rapids, but how prepared we are when they come.
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