The main problem for the novice investor to solve is how to gauge market rallies. The trick to this, for the Austrian, is to build a strong foundation in theory. The rest is wagering.
When understanding the concepts of manias in prices, that is, the upthrusting of prices on the market, one must strongly consider the rise in the money stock.
The basic Austrian theory is that when the rate of interest is lowered, debt is issued which allows for more money to flow into these lower priced instruments. This is where one arrives at what is called a false boom.
Mainstream economists call this process "Boosting Aggregate Demand." The theory first assumes that every individual demands at the same rate, and at the same time, creating one large abstract demand curve. An assumed desire of investing and saving on a large scale. Completely fallacious.
Aggregate Demand has the theory of diminishing marginal utility applied
to it. Par example, every following bite of ice cream I consume is
desired less. A completely subjective concept.
On the other hand, the agglomerated supply shaped upward sloping. As Aggregated demand assumes satiation, the agglomerated supply assumes a constant increase.
In mainstream economics, due to the desired application of numerical symbols to constant unpredictable human occurrences, a theoretical paradigm was created. It is as follows:
The LM (Liquidity Money or Quantity of Money) curve assumes the government can gauge the inflows and outflows of money into the stock of money in an economy. The mainstream economist hypothesizes that the quantity of money derives from the producer's loan market, since ultimately the number of loans produced influences the money supply.
Therefore, they assume, the central bank is necessary to influence the supply of money, to then indirectly influence the consumption of individuals and do as was aforesaid, "Boost Aggregate Demand." Doltish abstraction.
What is most insightful is that applying this abstract concept down to the individual, one finds that it is merely relative or cerebral, and not at all realistic.
Take for instance the previous idea of the rate of return and individual investment-consumption ratios derived from our subjective value scales I described before. As a vast amount of money is injected into the economy abruptly, all prices are bid up quickly which then causes the individual to consume at higher quantities.
Everyone is hypothetically doing this in tandem. We coin this capital consumption, as purchasing power dwindles at the rate of inflation, which is ultimately subjective.
For the mainstream economist, their objective is to ignite this consumption because, to them, inflation is benign. Their false belief is that they can actually calculate the natural rate of interest, and infuse the markets with new money. They desire higher rates of inflation, all the while misunderstanding the ramifications of a deteriorating monetary unit.
By monopolizing the rate of interest, the benchmark (what the Federal Reserve Board terms the Federal Funds Rate), the central bank believes it can influence the quantity of money. A lowering of the rate of interest, makes them feel they can induce this economic boom which will lead to both higher GDP and therefore the rate of interest need only be adjusted upward to the new equilibrium.
In the abstract, this process of reification seems quite simple and easy to manage. Yet taking into account the more complex aspects of an economy, one realizes that calculating the proper moment in time at which the rate should be raised is practically impossible. Sadly, by monopolizing all agios (creating the monopolized benchmark), the central bank distorts the natural market adjustments that should be constantly occurring.
An expansion of credit, by lowering the monopolized benchmark, will then filter the new funds through the fractional reserve banking system, simultaneously creating more loans and deposits.
Banks attempt managing this process, but are woefully undergirded by the central bank--this is, simply put, further inflation. This pyramiding never ends until individuals readjust their investment-consumption ratios.