Murray Sabrin, PhD, is emeritus professor of finance, Ramapo College of New Jersey. Sabrin was the New Jersey Libertarian Party nominee for governor in 1997 and twice sought the Republican nomination for U.S. Senate. His new book is “Navigating the Boom/Bust Cycle: An Entrepreneur’s Survival Guide“.
Sabrin recently spoke with YoungUpstarts and shared insights on how to foretell when America’s boom economy is about to go bust.
Describe your professional background and how it led to your theory of the causes of the boom-bust cycles in the U.S. economy.
I taught finance in the Anisfield School of Business, Ramapo College of New Jersey, from 1985 to 2000. Prior to that I worked in commercial real estate in Northern New Jersey and as a staff economist at one of the country’s oldest economic research organizations, the American Institute for Economic Research. I also spent time as an investment analyst for AIER’s ’s affiliate company, American Investment Services.
My dissertation for my PhD in economic geography examined the spread of inflation in the US economy from 1967–1971. The data revealed that price inflation tends to be higher in large metropolitan areas because the Federal Reserve’s easy money policies begin with injections of new money entering the financial system through major banks located in large urban areas. In other words, the Federal Reserve’s buying of securities from government dealers who in turn deposit these funds in the banking system increase the banks’ reserves, initiating the inflation cycle. The Fed’s policies lower short-term interest rates, making it attractive for businesses and individuals to borrow more than they otherwise would. The banks, flush with new money from the Fed’s open market operations, then tend to increase their commercial and industrial loans, which is the transmission mechanism for a new money to enter the economy. As the borrowers use the new funds to bid for more employees, commodities, machinery, real estate and other inputs, the boom is underway, and an inflation spiral tends to follow.
My curiosity about the boom/bust cycle was heightened when I read a New York Times op-ed in September 1971, a few weeks after President Nixon imposed wage-price controls to deal with accelerating inflation and issued an executive order ending the dollar’s link to gold convertibility. The op-ed was written by the late economist, historian, and philosopher Murray Rothbard, whom I invited to be a member of my dissertation committee in 1974. Rothbard’s essay triggered my interest in the Austrian School of Economics. Economists of the Austrian School have elaborated the insights of its founder Carl Menger to explain how the business cycle is caused by central banks injecting liquidity into the financial system, which distorts the structure of production and creates an unsustainable boom, culminating in a readjustment known as a depression or recession.
When I was on sabbatical in 2016, I wrote a book on how Federal Reserve policymakers were relatively clueless about the dotcom and housing bubbles that their easy money policies created in the 1990s and early 2000s. Interestingly, Alan Greenspan, who was Fed chairman during 1987-2006, should have known that the easy money policies he and his fellow Fed governors were enacting would create the boom/bust cycle. His 1966 essay, “Gold and Economic Freedom” criticized the Fed for its easy money policies of the 1920s, which led to the stock market boom and crash, and an economic readjustment that turned into a decade long depression.
Your new book, “Navigating the Boom/Bust Cycle: An Entrepreneur’s Survival Guide“, tracks trends in the boom-bust cycles from the “panics” in the 18th and 19th century through the Great Depression and more recent recessions. What common traits do these have?
I taught a Financial History of the U.S. course for several years and we reviewed the major panics before the Federal Reserve was created. A common theme emerges from the data of that period. The forerunners of the Federal Reserve, the First and Second Banks of the U.S., quite simply printed money, which increased speculation, especially land, in the early days of the Republic. So-called boom towns spring up only to become ghost towns as the depression set in to correct the malinvestments of the cheap money.
After the Second Bank was abolished, banking panics still occurred because banks continued to issue more paper notes than the hard money reserves on hand. When people became suspicious of the banks inflating the local money supply, they scrambled to redeem their paper money for gold or silver. Pre–Federal Reserve business cycles unfolded throughout the 19th century and into the 20th century with the panic of 1907. Then, during the Roaring Twenties, President Hoover’s interventionist policies turned a correction of the boom into a major depression.
In short, easy money, inflating the supply of credit, to “stimulate” the economy is a fool’s errand. All booms end in busts, because the economy needs more cheap money to sustain the higher prices and wages at the inflated levels. Once the banks stopped inflating in the 19th century, or the Fed decelerated and stopped the easy money policies, or reduced the money supply, the inevitable depression/recession unfolded, exposing the distortions in the economy.
What clues can businesses look for that portend an end to a boom cycle?
Historically, when the yield curve inverts, that is, as short-term rates rise above long-term rates, the countdown to the end of the boom and the start of a bust is inevitable. In recent years, the yield curve inverted in 1989 before the 1990 recession, in 1999 before the dotcom bust, in 2007 before the housing bubble bust, and in late 2019 the yield curve inverted signaling a recession would begin in 2020. However, the COVID lockdowns caused a short-term plunge in the economy that was not a typical business cycle bust. The Fed went into overdrive, creating $4 trillion in the past 18 months, postponing a bust in 2020-’21, but setting the stage for the current inflationary boom, which will be followed by another bust.
With all the attention now in the news about inflation, do you view this as a sign that the current boom is coming to an end?
The current boom will end when the Federal Reserve policymakers become concerned that price inflation is not transitory but will remain at high levels for an extended period. They will then realize they have to raise short-term interest rates to cool inflation and taper their asset purchases from the current $105 billion per month to zero or close to it. With the Consumer Price Index rising 6.2% in the past year, and with the October increase at .09%, a 10.8% annualized rate of inflation, we could have several months or more of double-digit inflation. A broad measure of the money supply, M2, increased by more than 25% last year, and it would not be surprising if we see, like we saw in the 1970s, two bouts of double-digit inflation in the 2020s.
What measures can businesses take to weather a bust?
During a boom, as more money in the pockets of consumers, investors, speculators, producers create a euphoric atmosphere, it’s counterintuitive to be cautious about the future, because great profits are being made during this phase of the cycle. However, raising cash — the most liquid of assets — could be both a tactical and strategic decision for the obvious reasons. Cash on hand will allow businesses to weather the bust if their sales drop precipitously and they need funds to tide them over until the economy recovers. In addition, having ample liquidity when the bust unfolds would allow businesses to buy assets of competitors or other businesses for cents on the dollar and ride the next boom up.
Warren Buffett, CEO of Berkshire Hathaway since 1965 and considered the world’s’ greatest investor, is cautious about the current boom, given that the company has $149 billion of cash on hand. Thus, enjoy the boom, don’t overexpand aggressively, and have ample liquidity to scoop up assets at bargain basement prices during the next bust.
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Dr. Murray Sabrin retired on July 1, 2020 as Professor of Finance, and the Board of Trustees awarded Dr. Sabrin Emeritus status for his scholarship and professional contributions during his 35-year career. His book, “Universal Medical Care from Conception to End of Life: The Case for A Single-Payer System“, calls for the individual or family to be the single payer to restore the doctor-patient relationship. His latest book, “Navigating the Boom/Bust Cycle: An Entrepreneur’s Survival Guide“, was published in October 2021. Sabrin is also the author of “Tax Free 2000: The Rebirth of American Liberty“, a blueprint on how to create a tax-free America in the 21st century, and “Why the Federal Reserve Sucks“. Learn more at murraysabrin.com.