Indeed we don’t. But we are so conditioned to the idea that the cost of renting money fundamentally should be determined by a central bank that most don’t think anything of monetary policy. When the economy tanks, the Fed’s supposed to ease, when the economy gets too hot it’s supposed to raise rates. This is what we were all taught in our macroeconomics courses. Makes sense…I guess.
Actually not at all. These fluctuations, the business cycle, are created by the world’s central banks.
If interest rates were free, if rates moved with supply and demand instead of the whims of the FOMC, the economy would be more stable.
But that’s not what we are told Nick. We must protect ourselves from another Great Depression.
You mean the Great Depression which was largely triggered and then exacerbated and extended by the Federal Reserve? That Great Depression?
This is what F.A. Hayek meant when he said of inflationary monetary policy that “its stimulus is due to the errors which it produces.” It stimulates activity, all right, but not the kind of activity consumers demand. The more artificial stimulus the Fed creates, the more artificial the economy itself becomes. Ever more production projects come to rely for their profitability not on whether they involve the employment of resources within the latticework of production in such a way as best to serve consumer preferences, but instead on whether the central bank continues to pump in cheap money. The more such interventions the Fed engages in, the larger the sector of the economy whose survival comes to depend on the continuation of those interventions, and the harder the system will crash when the central bank finally decides to scale back or discontinue its activities.
As Jim Grant observes, “My fear is that because interest rates are suppressed, therefore earnings are inflated. So when rates go up … the hall of mirrors is shattered and we look at each other and see what actually is real rather than what the Fed wants us to believe.”
For more from Nick Sorrentino, visit AgainstCronyCapitalism.org