On the biggest threat to our prosperity

From a superb article by Detlev Schlichter, which I recommend in full:

Of course, by printing new money, expanding the central bank balance sheet and artificially lowering interest rates, – something that has been done on a vast scale for decades on end! – extra economic activity can be generated for a period. Lower interest rates fool the public into believing that more savings are available, that the consumer is okay with more resources being diverted from meeting present consumption needs and towards meeting needs in the more remote future. Low interest rates mean that the factor of time is less of an issue when planning resource allocation. That would be okay if low interest rates reflected society’s true time preference and propensity to save – if low interest rates were the result of saving and not money-printing. But in our world of fully elastic state money, interest rates are simply another policy tool. Easy monetary policy thus leads to asset prices and economic structures that are not in line with the true preferences of the consumer. Whenever the supply of new money slows, this becomes evident, the credit-structure begins to unravel and a recession sets in. However, the central bank then quickly lowers rates again, and sets off another artificial boom.

This has been going on, pretty much uninterrupted, for forty years. It is, as I said, the very essence of modern central banking and the paper money economy. All around us, the distortions that a system of fully flexible paper money must generate are increasingly palpable: an inflated and increasingly unstable financial sector, overstretched fractional-reserve banks, asset price bubbles, serial bailouts, excessive debt levels, persistent distortions in income and wealth distribution.

This is not capitalism. In fact, this system gives capitalism a bad name.

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