by Mac Slavo, SHTF Plan:
As Mark Thornton has detailed in his brilliant book, The Skyscraper Curse, Austrian School economists’ unique theory of the business cycle has given them a distinct advantage in foreseeing oncoming economic crises: from Ludwig von Mises’s 1920s predictions of looming bank failures, to Thornton’s own 2004 warnings of the housing bubble and its consequences. Contemporary Austrians continue to apply this theory when scrutinizing the anxious landscape of today’s economy, looking for early warning signs of where central bank monetary manipulation will manifest itself next.
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However, depending on the course which history takes, we may someday look back and reflect that today’s Austrians were outdone in their prognostications by one Helen McCaw, who has recently warned that the next financial crisis could be triggered by the announcement of the existence of extraterrestrial life.
Ms. McCaw—a former senior analyst at the Bank of England—wrote to the current governor of Britain’s central bank to warn that a supposedly imminent announcement of the existence of advanced alien life might cause extreme uncertainty in financial markets, possibly triggering bank collapses. “The United States government appears to be partway through a multi-year process to declassify and disclose information on the existence of a technologically advanced non-human intelligence responsible for Unidentified Anomalous Phenomena [the official name for UFOs].” McCaw argued that an announcement of the existence of “a power or intelligence greater than any government and with unknown intentions” could “induce ontological shock and provoke psychological responses with material consequences… There might be extreme price volatility in financial markets due to catastrophising or euphoria.”
Whether or not this announcement is as imminent as McCaw expects, it is doubtless true that such an encounter would provoke a certain amount of emotion amongst the human inhabitants of the Earth, and this would likely result in some economic volatility. However, beneath the surface of this least esoteric aspect of McCaw’s warning, some readers might have noted the faint echoes of a long-running clash of economic ideas. McCaw’s focus on “catastrophising or euphoria” reflects John Maynard Keynes’s famous view that the see-sawing emotions or “animal spirits” of investors are amongst the most significant drivers of the business cycle. While this perspective strikes many as intuitive and straightforward, placing the blame for the business cycle on the chaotic and inscrutable emotions of the rentier class lacks the explanatory power of the Austrian business cycle theory. This latter theory—pioneered by Mises and F.A. Hayek—identifies the creation of fiduciary media (i.e., artificial credit) by banks, and the consequent artificial lowering of interest rates, as the key driver of manic “booms” of malinvestments. However, these factors also cause inflation and outflows of bank reserves, which eventually force interest rates back upwards again. Once this happens, businesses must reevaluate and liquidate many projects that had only seemed profitable due to the unsustainably low interest rates during the speculative mania. This painful reallocation of resources constitutes the “bust” phase of the boom-bust cycle. Ironically, McCaw’s implicit emphasis on the animal spirits that would be unleashed by our discovery of alien life (or their discovery of us) tends to confirm Keynes’s famous dictum that we are all “slaves of some defunct economist” in our ideas, whether we realize it or not.
