The problem with central banks like the Fed is that they distort the markets by setting interest rates at artificial levels. That sends incorrect signals to investors and businesses. For example, low interest rates cause business valuations to rise, so stocks go up. Or apparently cheap money might allow a business to justify a loan or an expansion that wouldn't be possible if rates were higher. That's the boom phase. What happens next is that when the economy gets "overheated" (high inflation), the central banks raise rates. Things then start to unwind: company valuations drop, new loans are no longer affordable, etc. That's the contraction (recession) phase.
[[MORE]]
On a gold standard with full-reserve banking, interest rates are always set at free-market levels -- so businesses and individuals are receiving correct, undistorted information about the economy. Rates also tend to be more consistent. Longer-term planning becomes possible; 99 yr loans again become feasible, for example. The business cycle also goes away: no more booms and busts, because the assumptions underlying investments and other spending don't suddenly turn out to be untrue.
No comments:
Post a Comment