Wednesday, September 16, 2009

The Boom-Bust Cycle in Few Words

In a review for Ron Paul's latest book End the Fed, David Gordon gives a short and precise description of the boom-bust cycle (or business cycle, or trade cycle):
Far from being a means to maintain monetary stability, as its supporters falsely insist, the Fed through expansion of bank credit bears primary responsibility for the business cycle. The expansion temporarily lowers the money rate of interest below the true market rate, largely determined by people’s time preference, i.e., their preference for present over future goods. Businesses, with money available, expand; but the new projects cannot be sustained. When the monetary expansion ceases (if it doesn’t, we will have hyperinflation, with disastrous consequences), these new investments must be liquidated. The process of doing so is the depression.
Explaining this has been one of the greatest advancements in economic theory over the last century, yet too few understand it. Much more in depth analyses can be found here and here at the Ludwig von Mises Institute.

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