Basic Economics for Tariff Supporters, part II
The Fed Rate.
How does the fed rate even influence economy? The fed rate nudges the interest rate of loans that one can take from a bank, so a regulation imposed by the central bank. Decreasing the interest rate stimulates people to take more loans and it becomes easier to invest. So high interest rates encourage people to save money because loans are expensive and low interest rates encourage people to invest and take risks. Low interest rates are a consequence of a prosperous economy rather than its cause.
The interest rate is a signal to whether people should be saving money or investing - the equilibrium between the demand for investment and the supply of savings, a natural reflection of the supply and demand on resources.
Economic Crises.
Now, where does a crisis come from? If the interest rate is artificially lowered, the bank basically states that the equilibrium has shifted accordingly to the new supply of savings and resources, therefore the demand on investments has increased. While, in fact, people are not actually saving more. Basically, a lot of fake money appears.
When resources and savings are in a deficit, it makes sense to save money for future investments rather than invest immediately. Investing immediately would be a high time preference choice, i.e. focused on short-term well-being rather than planning for the future.
And a short boom is exactly what happens after such an artificial credit expansion. After the investments, many new jobs get created, a lot of new productions appears but the problem is that supply appears without a real demand. The central bank has disrupted the demand signal and the businesses are ought to fail soon enough due to lack of savings to continue supporting them. As the currency loses its value, the prices respond with inflation. Mises invented a great term for such bad investments - malinvestments.
The Correction.
If no more empty loans are given, the companies will soon close as they never actually has to be opened and resources, including the employees, will be freed. The freed resources will be reallocated to the fields where actual demand exists and there will be a deflation which means that the economy is recovering. The Austrian economic school embraces the spontaneous order by treating crises as a natural self-recovering consequence of bad investments rather than something that has to be aggressively combated using the government power.
The Practice.
Warren Harding’s laissez-faire policy during the 1920-1921 depression - cutting government spending and taxes while letting deflation clear malinvestments - led to a recovery within 18 months. While Roosevelt’s interventions to the 1929 crisis, such as price controls and monetary expansion prolonged the Great Depression to 12 years.
The Perfect Solution.
The Austrian economic school proposes both rightful solutions for a centralized banking system and for an actual free market. The first one is just looking at the rate as a reflection of the savings and investments situation among the currency holders and adjusting it accordingly. The second one is actually eliminating the central bank regulation at all and letting banks control their own currencies by themselves, establishing a competing market of banks that aim at minimizing the possibility of creating crises.
Banks can also temporarily use money of their own clients for giving loans, reserving only a certain percent of their money, so a bank can still kind of avoid the regulation and fuck shit up. Rothbard was a proponent of a 100% reserve rate for a reason; there should be a competition among banks for the best banking policy.
part III on the Keynesian influence on modern U.S. economics and the flaw of protectionism coming soon. will try to address all the support arguments for tariffs I've seen online for the past few days
