Business Cycles, Debt Bubbles and the Monetary System

This chapter explains Austrian Business Cycle Theory. When central banks “stimulate” the economy with expansionary monetary policy, interest rates are driven below their supply-and-demand levels. Low interest rates tell savers to save less and investors to invest more, causing a spending boom. But the different pieces of the economy no longer fit together; the boom is an empty bubble that will eventually burst. When it does, the economy collapses into recession, which brings business failures and needlessly high unemployment. The boom inevitably ends in a bust. In recent decades central banks have responded to each bust with yet more expansionary monetary policy, creating a dangerous “super bubble.” With each round of the boom-bust cycle the economy grows more distorted, and the economic danger grows greater.