Austrian Business Cycle Theory Redux (long)

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
the first question i have is with respect to future consumption. how does increased wealth (and thus an increase in consumption ability) as a result of housing price increases (due in part to those low interest rates) and increased investment holdings (again due in part to lower interest rates) play into the theory.

[/ QUOTE ]

I'm no expert, but I believe the correct way to look at this is on an economy wide scale. Housing prices going up doesn't inherently create more wealth at all. The same houses still exist in the same fashion as before, only more expensive. Someone will gain from this (the seller) but someone will also be hurt by it (the buyer). Overall, the economy is not worse or better because houses are more expensive. So increasing housing prices does not create wealth. The amount of houses is still the same.

I'm pretty sure that's correct.

[/ QUOTE ]

I think you're half-right - overall real wealth doesn't change but the economy is worse off for the inflated prices. The way I read it, housing would be considered a factor of production, as shelter for labor. The artificially low interest rate leads to overvalued housing (investment properties). The misallocation of resources continues until an inevitable recession corrects for the mistakes.

[/ QUOTE ]

what proportion of houses in the economy are "investment houses" vs. "home" houses?

when i say that price appreciation increases wealth, i'm looking at the overall wealth of the economy on the grand scale. i.e. buyers of new houses at higher prices lose consumption ability while sellers gain it, but people who aren't looking to sell their houses are the ones i want to look at. they are, as a result of appreciation, able to either invest more for future consumption (via equity and other asset class risk premia that will create more wealth in the future) or choose to invest more now, which would drive up aggregate demand (though that would perpetuate the problem at hand according to the OP since it is just a dislocation of consumption rather than an increase in consumption ability in the future).

however, looking into the future, we can see that if overall house price appreciation can be expected to outpace inflation (i.e. population growth increasing the demand over time for teh same limit amount of land) there will be real wealth creation via strategic investment despite artificially lower interest rates. further, that "present consumption" that perpetuates the austrian cycle need not be a simple one time thing, but something expected in the future as some % of "home"owners use borrowings to spend now.

this increase in aggregate demand can be sustained into the future mopping up some of that excess production that businesses have invested in due to lowered rates.

anyways, my point is that there are things that lead to real consumption appreciation as a result of lower interest rates (in part) and a stronger economy. those things are capital appreciation via investments in stocks, bonds, REITs etc that do in fact create excess returns over and above the relative level of risk above the "risk free" rate of return.

that excess return, in aggregate, will lead to a larger ability to consume in the future.

my question is how does this play into the austrian economic theory assertion that one of the problems with managed economies and artificially low interest rates is the inability of future consumers to consume the extra investment (i haven't seen any treatment of it yet). if they can do this perpetually, then perhaps the system is beyond sustainable. i don't have the answers but i'm posing the question.

thanks,
Barron