James Grants ("The Coming Bust," editorial page Aug. 28) debunking of the Pollyanna-like forecasts of economists and Wall Street gurus was right on target, especially the reference to Austrian business-cycle theory showing that central bank interest-rate manipulation often leads to "malinvestment" and downturns. The parallels between the 1920s and 1990s are uncanny with market excesses, ostensible price stability, uneasiness in foreign markets. The 1920s phrase new era" has even reappeared as intellectuals, government officials and business leaders overcome by hubris falsely believe that they have overcome basic economic principles.
Some additional Austrian (and even early 20th century neoclassical) economics reinforces the point. The most important factor of production is labor, and when wages rise faster than prices, adjusting for productivity change, unemployment eventually increases. Likewise, the rise in the "adjusted real wage" in Europe over the past generation explains that continents extremely high unemployment.
Over the past three-quarters, the adjusted real wage has risen noticeably. This should lead to some rise in unemployment in months ahead. If accompanied by other policy shocks (e.g., an increase in the minimum wage) or market reactions (e.g., Asian bank failures, a further decline in equity prices), the adverse economic impact could be fairly substantial.