The effects of manipulating political interest
Expansionistii is not deceiving saying that credit expansion brings with it an explosive avant-garde Affairs (booming business). Its wrong but ignoring the fact that such an artificial prosperity may not last and will end inevitably through a steep decline (slump), a generalized depression.
When the interest rate determined by the market is reduced through credit expansion, many projects before they were considered unprofitable semblance of profitability gain. Contractor assumes their execution will have to check though, as soon as it took into account the erroneous data. He counted on the basis of the prices of factors of production corresponding to market data from the underlying loans early. But now, as a result of this expansion, the respective prices have risen. The project no longer seems so promising as before. Human business funds became insufficient for acquiring the necessary production factors. If credit expansion would cease, he would be forced to give up his plans.
On the other hand, as long as banks continue credit expansion, giving entrepreneurs money easily available, "they do not see grounds for concern. They borrow more. Prices and wages are growing explosively. Everyone is happy and convinced that, for now, mankind has surpassed the troublesome condition permanently imposed by rarity, reaching, in fine, everlasting prosperity.
In fact, all this amazing wealth is fragile, a castle built from sand and glamour. She needs to not take. There is no way to substitute capital goods non-existent fictional bank deposits and banknotes, where they are needed. Lord Keynes, in a moment of inspiration lyrics, assures us that credit expansion is the magic wand needed to "miracle"[…] stone bread in transformation "[1]. Unfortunately, this miracle, watched more closely, there is less doubtful than any other trick from the Repertoire of indian fachirului.
There but two alternatives
In the first case, the expansionist banks is cramponeaza all the way, stubbornly, their policies and never ceases to provide the afaceristilor the money they need to continue the projects, despite the production costs subject to inflationary increases. They are determined to cover the permanently growing demand for credit. Prices and wage rates are growing explosively. The quantity of banknotes and bank deposits ´ ¨ grows indefinitely. Ultimately, the public understands what's going on. People realize they won't put an end to the production of an increasing quantity of monetary substitutes and that, therefore, prices will continue to grow in an accelerated pace. People understand that, in this situation, it becomes silly to keep money. In order not to be among the victims of the lack of power of the coin, they fling to buy goods at any price, whether or not they need them. Any good is preferable. Thus arises the phenomenon known in Germany the year 1923, when Reich gave a classic example of the unlimited expansion of credit, under the name Flucht in die Sachwerte, precipitation over the actual values. The whole monetary system is crumbling. Purchasing power of currency to melt until cancellation. People resort to barter or to use another type of currency, foreign or domestic. The crisis occurs.
The second alternative supposes that banks or monetary authorities become aware, before the man, of the dangers involved in an unlimited expansion of credit. They put an end to, voluntarily, additional policies to the quantity of banknotes and bank deposits, unsubscribing satisfy requests for business environments and additional credits. Then it triggers panic. Excessive interest rates reach quotas, due to the acute need of money felt by many companies, threatened with bankruptcy. Prices fall sharply when companies threatened tries to steal funds hurling and stocks on the market, the prices of anything. Productive activities it would inhibit, the workers are disponibilizati.
Credit expansion leads so, inevitably, to a crisis. In both cases, explosive production augmented artificially, has fate sealed smoking. In the long run, it is prone to collapse. The effect in the short term, the period of prosperity, may be extended for several years sometimes in a row. In this decade, authorities, banks and their agencies expansionary public relations defying economists ' warnings are arrogant and proud with the apparent successes of their policies. However, when the impurity comes at her bitter, washed all their hands.
Artificial prosperity may not last since interest rate decreasing, being purely technical nature, without any basis in the real market data, to falsify business calculations, thus creating the illusion that certain projects promise to be profitable, when, in fact, the amount of available production was, from the very beginning, for their completion. Deceived by forged scores, businessmen have extended its activities beyond the limits permitted by the resources of wealth of society. They grossly underestimated the degree of rarity of the factors of production, productive capacities and supraestimandu. In short, they have wasted scarce capital goods, malinvestindu them.
We could compare the entire entrepreneurial class with a constructor that has taken the task to erect a building, providing a limited amount of construction materials. If our man Paul this amount, he will devise a plan for whose execution means at its disposal will prove insufficient. He will supradimensiona the construction works of the land and the foundations and will be revealed later, barely as construction progresses, that lacks the material necessary for completion of the structure. But this is not the origin of the discovery of the moment his troubles. It not only reveals the errors committed in the past. She's mature, offering him illusions Builder in front suffers realities.
I will not dwell on that point never enough, because the audience, always looking for scapegoats, it's usually ready to blame the monetary authorities and the banking system for triggering the crisis. Their fault is that, by putting an end to the expansion of credit, have produced a deflationista pressure over trade. It is of course true that monetary authorities and banks gate orgiilor responsibility and expansionary economic results of artificial explosion here, although public opinion, always ready to approve, with all my heart, inflationary measures, we should not forget that the responsibilities they belong only to others. That being said, the crisis is not a consequence of renouncing their policy expansionista. It is necessary and inevitable upshot of such policies. The only question which then arises is whether it should be continued until the final collapse [49] outside of the entire monetary and credit system or should it end sooner. As i end earlier, less serious will be the damage and losses incurred.
Judge public opinion totally wrong business cycle phases. "The blast" doesn't mean artificial prosperity, good businesses being deceitful just apparent. Prada men are illusions, indusi in error; accumulate malinvestitii and consume the apparent gains but unreal, what basically devolves upon the consumption of real capital. Depression is the process required by the structural readjustment of the productive activities to real market data configuration, i.e., the supply of capital goods and the public's evaluations. This means that the depression is the first step on the path of return to normalcy, the beginning and the Foundation of improving real prosperity, founded on the actual production of goods and not moving sands of the underlying loans.
Additional credits are welcome in a market economy only to the extent that they reflect an increase in the savings of the general public, accompanied by increasing the amount of the credit derivative. Therefore, the conduct of the public is the one that provides the means for additional investment. If the public does not provide such means, then they cannot be created by any magic trick. Interest rate, as determined by market loan funds, nesupusa policy manipularilor "money easily available", expressing the willingness of the population to give up consumption currently part of actual income earned and to allocate this part an expansion of production processes. Is an adequate signal, then guides the business people when they decide how much to expand their investments and what projects they correspond to whether or not the actual volume of savings and accumulated capital. The policy of reducing interest rates, artificial beneath her share of the potential market, entrepreneurs, momeste on alluring them to adopt certain projects that do not enjoy the approval of the public. In a market economy, each Member of the society say their word or in determining the amount of additional investment. There is no means of cheating by manipulating the audience always interest rate. Sooner or later, the public disagreement with the policy of expansion becomes manifest. And then, the structure has suspended air of artificial prosperity is crumbling.
Interest is not the product of the machinations of some ruthless exploiters. Settlement of future goods by comparison with assets present is a category of human action, which cannot be abolished by bureaucratic measures. Cabrera weather there will be people who prefer an Apple an Apple available available today over 25 years, there will be interest. It doesn't matter if the company is organised on the basis of private property over the means of production, capitalist, or on the basis of Socialist public ownership, or Communist. Indeed, for the orientation of a totalitarian Government, business interest, i.e. different evaluation of the goods present the future, play the same role as in capitalism.
Of course, in a socialist economy, people are deprived of the means of expression and imposition of their own judgements of value judgments, and only political power of matter. A dictator doesn't care if you approve or not the masses volume ´ resources ¨ allotted him current consumption or allocated additional investments. If the dictator is investing more, thus reducing the resources available for current consumption, population has to eat less, and to not comment. No crisis occurs not because the subjects they have no means to manifest their dissatisfaction. In a market system, however, with economic democracy that characterizes consumers, have a rule. Buying or abstaining, they decide to buy or entrepreneurial profit losses. Their option is the definitive criterion of productive activities.
The inevitable finale
It is essential to note that what is causing the economic crisis cause the disapproval by the public enterprises, by manipulating the expansionist induced interest rate. The collapse of the building erected from playing cards is a manifestation of the democratic process.
In vain object to those audiences are as cheap money policy. The masses are induced by asertiunile pseudoexpertilor, after which the budget money can assure prosperity without any cost. They don't understand that investments cannot be extended than that accumulates additional capital through saving. They are in error indusi stories invented by kids asleep monetary utopistii (monetary cranks), from John Law to major C.H. Douglas. But the reality is not a story of sleepy children; What matters is the attitude of the people. If the population is not willing to save more, reducing current consumption and then means some substantial expansions of investments are missing. This means that they cannot be provided through the printing of banknotes, or by loans to be covered only by a trait in the departmental bank accounts. […]¨
1. Paper of the British Experts, April 8, 1943.
Note: excerpts from the memo dated April 24, 1946, compiled by Murray n. Rothbard, in an advisory capacity, in English, to a group of business people and published posthumously, under the title "The Trade Cycle and Credit Expansion: The Economic Consequences of Cheap Money", in l. von Mises, On the Manipulation of Money and Credit, p. Greaves, Jr., ed. (Dobbs Ferry , NY: Free Market Books, 1978). In Romanian Gail Cardwell.
