Free Markets and Interest

There are some very great very wise men who have predicted this.  They have explained that government involvement in the banking industry is dangerous!  but no one listens. Some of these wise men have Nobel prizes... these men are the Economists of the Austrian School.  Men like Friedrich Hayek, Ludwig von mises, and Carl Menger.  

The Austrian School scholars have long broadcast the dangers of interference with interest rates by the FED; but they have been ignored so let us look at the validity of this claim that the FED could be the source of our "business cycle" rather than the cure. 

First let us look at Interest rates.  What are interest rates?

Interest Rates are no different than prices or rent if you will.  It is the price of renting money.  When people save they are postponing consumption for later.  This means that there is pent up demand.  To postpone that consumption for later they get the reward of Interest.  Savings is future consumption.  The more savings the greater the supply of loanable funds and thus the lower the interest rate.  Now the borrower in a net sense is the firm who is investing.  Firms consume today to increase future production.  I say that it is only firms because I am referring to net savings which would cancel out consumer savings from my definition of savings.  

So the scenario is this:  Individuals save.  Savings is future consumption.  Firms borrow.  This is present consumption to create future production.  In a perfect free market as savings goes up interest goes down and investment goes up.  This means that the more future consumption there is the cheaper it is for firms to increase future production.  This is good because it allows firms to prepare for the pent up demand of future consumption.  

As individuals consume more in the present and less in the future there are fewer loanable funds and therefore higher interest rates.  The higher interest rates mean it is more costly to increase future production so firms focus on present production but are less likely to invest in future production.  This is good because when individuals are consuming in the present there is no need to increase future production because there is no pent up demand.  

Interest rates in a free market control supply and demand.  So long as interest rates work properly they will equalize present and future supply and demand so that production capacity and consumption are equal.  Interest rates if allowed to move freely will reduce the problems of the business cycle by making the cycle happen with greater frequency but less severity.

What has happened, however, is that the National Bank or FED has prevented the market from working.  The FED controls interest rates.  Artificially low interest rates prevents people from saving while encouraging firms to invest.  This means that in the present the economy heats up because both firms and individuals are consuming in the present but the problem is the pattern increases future supply while decreasing future consumption artificially.  Therefore in the long run we will have too much capacity and/or too little aggregate demand relative to aggregate supply.  This creates a recession or depression.  This would not happen to a significant scale if the interest rates move freely because of the above explanation but if the interest rates don't move the wrong signals are sent.  

The FED continues to try the same failing policy only delaying the inevitable and creating more future problems.  We cannot create wealth through monetary policy!  only through production.  The only real long run impact of the nations controlled monetary system through the FED has been to unfairly redistribute wealth at random and make it harder for both firms and individuals to make informed rational choices.  This makes the economy less efficient and creates market failures.

Its simple.  The FED has created this problem and now asks us to trust them to fix it.  The problem is they are so worried with fixing things right now that they are willing to create more problems in the future.  I say lets deal with it now instead of magnifying it in the future.  Stop fixing things till they are broken!  Listen to the people and stop this economic manipulation.