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IPFS News Link • Federal Reserve

Here We Go Again: The Fed Is Causing Another Recession

• https://www.zerohedge.com by Jon Wolfenberger

This was first explained by Austrian economist Ludwig von Mises over a century ago. His student F.A. Hayek won the 1974 Nobel Prize in economics for his work on this theory, which is now known as Austrian business cycle theory.

The basic outline of Austrian business cycle theory is as follows:

the government "central bank" (in the US, it is the Federal Reserve or "Fed") creates money out of thin air (they effectively "print it," although typically in the form of digital entries now), usually by buying Treasury bills or bonds from commercial banks, which then …

is deposited in commercial banks which, through the process of fractional reserve banking (where banks are legally allowed to keep only a fraction, such as 10 percent, of their deposits in cash reserves), create even more money out of thin air to lend to their customers, which then …

leads to lower interest rates than would prevail in a free market without a central bank and fractional reserve banks legally creating money out of thin air, which then …

causes businesses and consumers to borrow the newly created money to invest in long-term projects such as mines, factories, houses, etc., since the profitability of those investments appears higher now with a lower cost of capital, which then …

leads to the unsustainable "boom" phase of the business cycle where scarce capital is misallocated to unsustainable investments since the real resources of raw materials, equipment and labor needed to finish these long-term projects are not physically available; while paper money may literally grow on trees, the actual scarce resources needed to create goods and services do not (printing money does not create the goods needed for profitable investment—if it did, Zimbabwe would be the wealthiest country in the world and we could all stop working, saving and investing); then …

the higher money supply leads to higher price inflation, which raises production costs and usually causes the central bank to slow the growth rate of money supply and raise interest rates to try to lower inflation (if they do not, it will eventually lead to hyperinflation, which effectively destroys a functioning currency and economy), which then …

leads to the "bust" phase of the business cycle, where the unsustainable investments are proven to be unprofitable and must be liquidated to allocate capital to the most productive uses that meet consumer desires.


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