- As new money enters the economy, it will increase prices in those markets which receive new money first. In the old days, we might see it in the prices of goods being offered for sale near a new gold mine rising much faster than prices distant to the mine. In our present system, monetary expansion occurs from a few specific points in the economy, the credit market and the banking system, and not across the entire economy as a whole.
- Interest rate suppression causes unprofitable business ventures to appear profitable, initiating misguided entrepreneurial ventures. Thus, the types of goods that entrepreneurs are interested in purchasing with the new money will be driven up before other goods.
- Monetary expansion and interest rate suppression act as a subsidy to debt markets, distorting the prices of debt instruments and making credit appear artificially cheap. In general, goods bought on credit will see their prices rise faster than goods which are typically not bought on credit. Buyers who purchase goods on credit will find that they have an advantage over non-credit buyers in the pricing competition of the marketplace.
Wednesday, October 21, 2009
The Origin of Economic Bubbles: The FED and the Business Cycle
Either you believe that money, prices, interest rates and the other phenomena which result from a market system are legitimate and meaningfully related to the real-world of material transactions that make up our economy, or you do not, and you might as well do away with the entire monetary system and arbitrarily erect something else to take its place. Most people have the good sense to reject the latter. But in the true spirit of the Progressivist/fascist movement that spawned it, the FED and its economic apologists try to have it both ways. They know full well that they are playing with fire in attempting to tamper with a system of such unbelievable complexity and upon which every one of us depends for our well-being, but in their arrogance they either think that they are up to the task or they do not care. Further, they know full well that their various tamperings are useful for achieving political ends and routing resources towards favored projects and individuals. The public seems perfectly happy to accept the fictitious storyline that central banking helps to alleviate the business cycle which would otherwise render the economy a disastrous manic-depressive roller-coaster ride. So everyone goes along, ostensibly to everyone's benefit. This thinking, the supposed political modification of reality so typical of statist movements throughout history and so prone to disaster, has led us to where we are today: a banking system that fails at basic accounting, and a money system far detached from the economy it is supposed to represent. Yet the present system has been with us for so long that it has acquired the air of legitimacy simply as a matter of familiarity. Few bother to question it. There are scant few better ways to find yourself lampooned as a crank, a nutcase, and a "conspiracy theorist" than to do so. Mostly it is left to grizzled world-weary soldiers like our own esteemed ΛΕΟΝΙΔΑΣ, political outsiders like Ron Paul, and ambitionless eccentrics like me. But reality intervenes in every system built on lies, the present system not excepted. Expanding the money supply does nothing to expand the resource base. It does, however, do much to distort the way it is put to use. The piper must be paid, and the boom must eventually be followed by the bust. This distortion, the boom followed by the bust, touched off and fed by the accounting lies of the fractional reserve system and central banking, is called the business cycle. Initiating the Business Cycle So far, we have gone through several explanations of the market distorting effects of monetary expansion and interest rate suppression, looking at the phenomena from several points of view. We saw that: