Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Additional Considerations on the Theory of the Business Cycle 465long as the readjustment, and could last indefinitely if thereadjustment never concludes because new loans prolongmalinvestment, and labor and all other markets are highlycontrolled and rigid. 68When the readjustment has ended the recovery can begin,assuming economic agents regain confidence and againincrease their rate of voluntary saving. In this case the price ofconsumer goods and services will tend to decline, in relativeterms, with respect to the wages and income of the originalmeans of production. This will set off the “Ricardo Effect,”and entrepreneurs will again become interested in launchingnew investment projects to lengthen and widen the capitalgoods stages in the productive structure. This rise in savingwill stimulate growth in the price of securities, which willindicate the recovery has begun and entrepreneurs are againembarking on new processes of investment in capital goods.Nonetheless the upturn in stock market indexes will not bespectacular as long as new credit expansion is not initiated. 69spectacle of a strong boom will of course in any case sooneror later have its misgivings about future yields and the cost ofpresent projects. But we need not doubt that where this is notso, a rising rate of interest would strongly reinforce the discountingfactor and thus damp excessive optimism. (Lachmann,Capital and Its Structure, pp. 124–25)Lachmann explains the great importance of the stock market andfutures market in spreading the dispersed knowledge and informationof the different economic agents, thus enhancing the inter- andintratemporal coordination among them. Hence both the stock marketand the futures market facilitate economic coordination and stability, aslong as they are not distorted by the inflationary impact of credit expansion. Atany rate futures markets will be the first to predict the successive phasesof the business cycle. Even if this should not be the case, the eventsthemselves (an increase in interest rates, accounting losses in capitalgoodsindustries, etc.) will eventually put an end to the stock marketboom and precipitate the economic crisis.68 This is true of the current (2001) Japanese recession.69 Therefore it should not surprise us that the recovery stage combines arelative drop in the price of consumer goods and services, and hence, in