“…Boom and bust cycles are caused – not by the mysterious workings of the capitalist system – but by government interventions in that system. » — Murray Rothbard

Another way of putting it is that the primary cause of what you call a recession is central banks, particularly because of their inflationism and their subscription to fractional reserve banking. If you think inflation is the product of greedy merchants or animal spirits, or an economy that’s just too hot, or climate change, you’ve been wrong. In the first place, it is the product of nothing. The term refers to the government’s economic and banking policies.

These policies have three main effects (and many knock-on effects):

1. THE Cantillon effects – redistribution of income and wealth
2. Manipulation of interest rates – creating unhealthy booms
3. General price increases – non-uniform but general price increases

One of the knock-on effects is a potential loss of confidence, resulting in political breakdowneconomy and currency. One of the main historical factors in the decline of civilizations has been the corruption of their money. This is usually the beginning and can last for a century. The corruption of the dollar system has been going on for over a century and the dollar has been completely fiat for 55 years now. During this period, it has lost 99 and 85 percent of its value, respectively (since 1913 and 1971).

This article will discuss the second effect above: the manipulation of interest rates, which results in the business cycle. All economic schools, with the exception of the Austrian school, attribute this to the instability inherent in the capitalist system. And therefore, they all believe that the central bank exists to counteract these same trends and stabilize these extremely free markets.

The Austrian school, on the other hand, argues that the central bank creates instability, and/or makes it worse than it would otherwise be, due to the impact of its forced credit expansion (through base expansion). monetary). particularly on interest rates. In light of this analysis, it becomes obvious that the central bank’s objectives, repeated daily in the press (balancing full employment and price stability), are blatant lies. These theories and the economic theories that justify them conceal the true objectives of the central banking system:

1. Inflate asset markets for his Wall Street friends
2. Support the government’s deficit spending policy indefinitely
3. Support the banking system and increase its deposits

Basically, the central bank is a tool of income and wealth theft for establishment bankers, Wall Street traders, and the pork-barrel interests that most influence government, as well as for the bureaucrats themselves, because they use it to grow the economy. size and scope of government over time.

We recognize that all of these things are justified by the mainstream media, but these justifications are fallacious. However, debunking them is not our goal here. For a more in-depth understanding of the economic theory behind it, several publications are cited. here. Or if you want faster service video developmentsee the hour-long video from economics professor Roger Garrison.

You can think of this elaboration as an introduction or summary explanation of the theory, but with an emphasis on the difference between boom and growth. In order to understand the impact of central bank monetary interventions and interest rates, it might be useful to define “boom” and compare it to true “growth” because, in fact, booms created by this policy can only undermine growth.

One of the flaws in measuring GDP – and the approach most economists take to measuring growth – is that it is weighted by “consumption”. It is true that in theory one can measure wealth by the value of final goods, but in practice this is problematic and influenced by the inflation of the money supply. More essentially, growth should actually reflect production trends and, importantly, whether it aims to produce the things that consumers most urgently want (i.e., what they value most).

Consumer spending contributes 60 to 70 percent of GDP, underestimating all spending on intermediate or productive goods. In this way, economists end up measuring the growth of an economy based on the amount people spend on consumer goods from one period to the next. The more they spend, the stronger the growth is likely to be.

The problem is: how do we know if they are spending some of the new wealth they create, depleting their savings, or simply borrowing to spend more? The latter would not be an example of growth, but it would still be considered growth by the government, the media and Wall Street.

Of course, the cause of growth is not consumption. It’s just the beneficiary. The real cause of growth is saving and investing in the production structure so that the economy can produce more, thereby allowing growth in consumption and wealth.

Unfortunately, many analysts believe savings paradoxa puzzle that Austrian economists long ago solved. This theory posits that although saving may seem like the right thing to do, it collectively produces depression. Indeed, many economists consider that growth emanating from consumption and savings slows down consumption. Decreasing consumption – even if it is intended to produce more growth so that consumption can grow in the future – is seen as negative. But because there is so much pressure on politicians to meet GDP targets and ensure that it always grows, even when consumers don’t necessarily want to grow the economy over a given period, there is immense pressure on the central bank. stimulate investments with printing.

By artificially inflating credit, they can also stimulate investment, except that the consumer does not have to make the sacrifice of abstaining from consumption. Hayek called it: “forced savings.” You can call this “false economies.” New money is confused with an increase in savings available for investment. But since capital is scarce and cannot be created out of thin air, if there is no reduction in consumption, resources (capital and labor) allocated to another section of the production structure will have to be spent where investment bankers want it. direct it.

Because this intervention circumvents or eliminates the trade-off that consumers must make between consuming for today and investing for tomorrow, it simultaneously fuels demand for consumer and capital goods, putting pressure on scarce resources. , causing prices to rise. . This crowds out real savings, encourages people to consume rather than save, and allows the government to borrow without imposing higher interest rates in its competition for available savings.

We should thus be able to understand the long-term effects of such a policy. The emerging investment boom relies on artificial incentives. Lower interest rates inflate the value of various capital goods, typically the favorites of investment bankers and bureaucrats. But this comes at the expense of producing the highest value consumer goods.

Thus, it fails to create real wealth and depletes the reservoir of real savings. Investment is directed towards production lines which appear economical under the effect of fleeting incentives but which are not really so. This only comes about when the incentives need to be revoked, which usually happens when prices rise so much that the central bank loses control over interest rates, or when the central bank reverses its accommodative policy to prevent this situation, or for political reasons.

At this point, investment in unproductive businesses, called “malinvestment,” is exposed, leading to liquidation, and often a financial crisis, thus a system-wide recession. The boom is not only unhealthy because the policy itself is generally temporary, but also because it has diverted scarce capital and labor into unproductive and unprofitable investments. Some economists have called it a “cluster of errors” denoting the result of artificial signals in the market.

To the extent that this diverts scarce capital and labor into the production of goods that must ultimately be liquidated because they are unprofitable businesses in real terms, it undermines growth, because these resources were not available for the production of things that consumers would actually want.

Real growth is fueled by a real increase in savings. Only investments financed by a real expansion of savings can produce sustainable growth. If individuals or businesses save enough to invest in the production structure beyond maintaining their fixed capital, they will essentially be adding to existing capital or forming new capital. Investment generally involves an improvement in productivity or production, or both. This allows consumption to increase in the future.

Conclusion

A boom created by artificial credit expansion (with the help of an inflated currency), generated by government monetary policies, does not rest on solid foundations. And when policy needs to be reversed or when imbalances manifest themselves, bad investments prove unprofitable, and the market therefore liquidates them. This process is necessary to restore a normally functioning system, that is, a system that reflects a market-determined balance between production and consumption, so that prices and interest rates can better inform entrepreneurs.

In this sense, the boom – even if it results in growth in GDP or employment – ​​is not growth, but rather a destruction of capital. On the other hand, the liquidation phase is healthy because it is simply the market attempting to return prices and ratios to levels that reflect true signals.

Normally, the government and everyone with a stake in the central bank will stop this liquidation before it is complete, because it is too punitive. They are hiding this by trying to create a new unhealthy boom. Often with apparent success, since a boom looks like growth to most of us. But it’s ultimately a waste of resources.

And this policy always runs the risk of causing a loss of confidence in fake money. If central banks and their interests were truly interested in eliminating the business cycle, they would stop manipulating money and interest. They would allow the liquidation to run its full course so that the market could reallocate capital and labor on a sounder basis. The important point to make clear here is that not only is “boom” not the same thing as “growth,” but it comes at the expense of growth. It taxes growth.