I think the ABCT has it right, and I've been thinking about how it fits in with some of the ideas about debt-based monetary systems (such as the one we have in the US) that I've discussed here and here. Some ideas:
1: Our debt-based monetary system guarantees that we're always in a boom or a bust.
As discussed in my Credit Money Fun post, our monetary system guarantees that we're either in a credit expansion or a credit contraction. Therefore, combining this insight with ABCT, we see that our economy is always either in a boom or a bust phase! The length can vary -- I would argue that we've been in a long credit expansion/boom phase since the Great Depression ended in the mid-forties, and are now entering a protracted bust phase. From this perspective, there may be something to the various wave/Kondratieff cycle theories.
2: What commences the bust phase?
ABCT assumes that banks can create money (or fiduciary media, as Mises calls it). This is certainly true of our monetary system today. Mises states that what commences the bust phase is:
The breakdown appears as soon as the banks become frightenedMises pins the responsibility for the end of the expansion on the banks, i.e. the suppliers of money, who become afraid that their loans won't get paid back.
by the accelerated pace of the boom and begin to abstain from fur-
ther expansion of credit. The boom could continue only as long as
the banks were ready to grant freely all those credits which business
needed for the execution of its excessive projects, utterly disagreeing
with the red state of the supply of factors of production and the
valuations of the consumers. [p.569 Human Action, Scholar's Edition]
There is another possibility, however: the borrowers become frightened (because they're unable to service any more debt, for example) and demand for credit drops. Given that the a debt-based monetary system must expand or be doomed contract (i.e., it has self-limiting, ponzi-scheme dynamics) a drop in demand will force a credit contraction, leading the economy into a bust phase per ABCT. Today, this is more than a mere possibility, as it looks to me like credit demand is way down and the private sector is looking to shed debt (the public sector is another story).
3: How does actual productivity and wealth creation impact the boom-bust cycle?
What role does productivity and actual wealth creation play in a debt based monetary system? It is this: it gives backing to more debt, thus allowing the ponzi to go on longer. An entire industry, the banks, exists to "monetize" productivity and real wealth. They try to push debt on everyone, those who need it and those who don't alike. An example would be taking out a loan backed by shares in a company. Even for individuals and companies who don't need to borrow, the debt merchants can make it seem really attractive to borrow. People and companies who don't need to borrow money do it anyway because they think they can get a return. Whatever their rationale, this borrowing converts real wealth into money supply.
The irony here is that by allowing the ponzi to go on longer, real wealth creation only makes the resulting inevitable bust that much bigger. Our monetary system is designed to fail us.
4: Present goods are always valued more than future goods, so aren't we doomed to boom/bust?
If there's going to be any lending at all, there will be interested associated with it. Doesn't this imply that a bust is inevitable, as we get the same dynamic of ever-expanding interest needing to be paid? I don't think so, but I believe you have to make it possible to pay loans off with something other than cash.
In a debt-based system all money is borrowed, so there is no stable monetary base (if all loans are paid off, you have no money left in circulation).
Let's say we have a gold-based monetary system, and there are 1000 ounces of gold in existence. Loans are made for the entire 1000 ounces, say at 10% due in a year. Assuming the gold supply doesn't expand at 10% next year, there won't be enough cash (gold), to pay off the loans even if the real wealth in the economy grew at that rate. To avoid the bust, we have to allow for the possibility of paying off some of the loans with something other than gold. Examples might be equity or goods.
