Question

what is the Austrian Theory of the Trade Cycle ? why do you think it is important to understand in relation to the markets ?

Answer 1

Austrian Theory of the Trade Cycle views business cycles as the result of excessive growth in bank credit because of the artificially low interest rates set by fractional reserve banks or a central bank. Booms and bust are the consequences of manipulation of credit and money by central banks; and are not endemic to the free market

It is significant to understand the theory in relation to the markets because it is a distinctive theory of the business cycle in relation to the markets. As per the theory, the trade cycle unfolds in an approach: low rates of interest from fractional reserve banks or a central bank tend to stimulate borrowing, which results to a rise in capital spending funded by newly issued bank credit. The bust (recession) occurs when the creation of credit has run its course. Then the money supply grows slow contracts (or contracts), resulting to a curative recession and consequently permitting the resources to be reallocated back towards their former usages.