I think I’m going to have to get a copy of Thomas E. Woods, Jr.’s new book, Meltdown. His recent article for American Conservative is excellent stuff on our economy, what got us into this mess, and why the stimulus package is more of the same.
Under fiat money, currency without commodity backing, the central bank can artificially lower interest rates by increasing the supply of money—and thus the funds banks have available to lend—through the banking system. This is supposed to stimulate the economy. What it actually does is mislead investors into embarking on investments that the artificially low rates seem to validate but that cannot be sustained under existing economic conditions. Unprofitable investments are made to seem profitable, and over time the result is the squandering of untold resources in lines of investment that should never have been begun.
If lower interest rates are the result of increased saving by the public, those greater saved resources provide the means with which to see the additional investment through to completion. But the situation is very different when lower interest rates result from the Fed’s creation of new money out of thin air. In that case, lower rates do not reflect an increase in the pool of savings from which investors can draw. Fed tinkering, in other words, does not increase the real stuff in the economy. The additional investment that the lower rates encourage therefore leads the economy down a path that is not sustainable.
That is how the Austrians knew the present bust was coming.
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Just bought the ebook of Meltdown the other day. Have yet to start reading it. Maybe because I get depressed enough when I see what’s going on with the economy.
Finished reading Meltdown last night. Great book. Thoroughly examines how we got to where we are today economically. Dissects the current way of doing things & shows how the current set of politicians, all from the Demopublicans, are doing the very things that have historically failed in solving economic problems. Very depressing, of course, in that regard.