There are many economic collapse blogs and other financial crisis websites providing news and statistics of the dire situation the U.S. economy and other economies around the world are in. Certainly there is plenty of coverage of what effects the economic depression is having on society. What you don’t see a lot of, however, is clear analysis of the root causes and solutions to these economic crises, particularly in mainstream media. While there are various commentators paying lip service to free market principles, the level of understanding of those principles is rather lacking. And with that lack of understanding comes the numerous economic fallacies and superstitions that have been perpetuated by governments and economic illiterates in the media for decades.
Factors That Cause Economic Collapse
Taxes and government regulations are often blamed (justifiably) for economic stagnation, slow growth, and unemployment. But these government imposed barriers miss a glaring and much larger cause for an economic collapse to occur. This cause unfortunately does not even register with mainstream Keynesian economists, the people who the government currently listens to for making economic policy.
The most significant factor in the growth (or lack of) of an economy and how prone it is to an economic collapse, is how interest rates are determined. Interest rates serve a very important function just as all other prices do. They coordinate production and consumption over time. In a true free market economy interest rates are set by the market and are based entirely on supply and demand. Because an interest rate is basically the price of renting money, a lower rate signifies greater savings accumulation in the economy. Conversely, a higher interest rate occurs when there are relatively less savings.
For borrowing to be facilitated there must be savings by some people from which to borrow. Saving occurs when people produce more than they consume. And the presence of savings also indicates that some production must have taken place which released resources into the economy that can be used. All capital comes from savings. For an economy to grow and for productivity to increase there must be savings to be invested into capital.
In essence when one saves he is foregoing current consumption for future consumption. When the amount of savings in an economy increases of course the cost of borrowing goes down because there is more supply available. This lower interest rate stimulates borrowing by investors and producers for long term projects because it is cheaper to borrow over a longer period of time. And this also coincides with the fact that since there are savings people wish to prolong there consumption into the future – at the same time the projects taken on by producers will have completed goods people wish to purchase. It is a very complex process but generally it is in this way that interest rates coordinate production and consumption over time.
The Role Of Central Banking In The Economic Collapse
Now what is the effect on the economy when a central bank such as the Federal Reserve manipulates interest rates to artificially low levels in an attempt to “stimulate” the economy? One serious consequence is that it will cause inflation because in order to lower the interest rate the Fed must print money to increase its supply. But this new money does not represent real wealth or capital. It is only an increase in the money stock, which will eventually lead to higher prices and an economic collapse.
But the consequences get worse than that. The lower interest rate also stimulates people to save less, spend more and borrow more. This causes society to live off its savings and deplete capital rather than accumulate it. That means less jobs will be created and productivity will go down. The economic collapse will get worse from this lowering of productivity.
But it’s even worse still. The artificially low interest rate will also give false signals to investors and producers causing them to undertake projects which are are not viable. An example would be the housing boom which was made possible by the Fed’s inflation combined with government policies that encouraged capital to be diverted to the housing sector. When the mistakes are realized and start to be corrected you get a recession. It’s important to realize that the damage is done during the boom and the necessary correction occurs during a recession. If the Fed and government try to prevent this correction to avoid the short term pain it can only succeed in causing more damage to the economy and eventually an economic collapse the likes of which we are about to experience.
All of the above phenomena are described in the Austrian theory of the business cycle. Check out Mises.org to learn more about the Austrian school of thought in economics.
In short, government intervention and central bank manipulation of interest rates in the economy cause massive miss-allocation of resources, capital depletion, unemployment, and the possibility of a severe economic collapse. There can be a very strong case made for abolishing the Federal Reserve, as it causes massive economic instability and has no place in a free market economy. To learn more about the Fed and its role in causing the economic collapse I highly recommend reading End the Fed by Ron Paul.