When central planners fail particularly in monetary policy, this is what happens...
|
1
point
When the government (central bank) inflates the currency and credit supply, this is accomplished either by simply printing more money or lowing interest rates. Therefore, businesses invest in the low interest rates where it is described as easy money, and new production is created with an economic boom occurs of new capital goods. However, as time progresses, business costs rise, interest rates must be readjusted upward due to the sudden increase of new money and credit, which squeezes profits. Then, when the easy money is waning, and the central bank fears inflation or contractual periods of growth, the creation of new money and credit is sharply terminated. "One prominent interpretation of the Federal Reserve System's actions prior to 1929 can be found in "America's Great Depression" by economist Murray Rothbard. Using a broad measure that includes currency, demand and time deposits, and other ingredients, he estimated that the Fed bloated the money supply by more than 60 percent from mid-1921 to mid-1929.[3]; Rothbard argued that this expansion of money and credit drove interest rates down, pushed the stock market to dizzy heights, and gave birth to the "Roaring Twenties." Depression Milton contributes the failure of government to the Great Depression. Milton Friedman Side: Government Failure
1
point
Whenever you have too much money being circulated through the economy or when you have too little, an economic crisis occurs. Our Great Depression was caused by too much money being circulated which was disproportionate to the growth of the nation. Germany, in the 20's, had super inflation because of too little money in the system. Side: Government Failure
Milton Friedman also disputes what you put forth there, the idea of malinvestment. Also, right now, here is the graph I made http://preview.tinyurl.com/Fredgraph1
notice the clockwise spiral, that is called deflation, it is incredibly dangerous compared to normal inflation. Also, the natural phenomenon known as the business cycle has been around ever since the industrial revolution, I don't think that is going to change, and, in fact, it hasn't. Side: Government Failure
1
point
Milton Friedman also disputes what you put forth there, the idea of malinvestment. What is your argument? Malinvestment offers a unique perspective on the destructive array of private sector incentives created by central bank manipulations of the supplies of money and credit. http://preview.tinyurl.com/Fredgraph1 Graph doesn't work. Well, I am not going to have the which is worst deflation or inflation debate here. Business cycles are caused by excessive creation of bank credit, which is encouraged by central banks when the bank sets low interest rates, especially when combined with the practice of fractional reserve banking. As already explained in my first post, the expansion of the money supply causes a "boom" in which resources are misallocated due to falsified interest rates, which then leads to the "bust" as the market self-corrects, the malinvestments are liquidated, and the money supply contracts. Business cycles were caused by the emergence of central banks. Side: Government Failure
|
