Thursday, April 22, 2010

Money finds its own level, just like water, too bad we don't let it.

By Nick Sorrentino

One of the frustrations with being an advocate of Austrian economics is how often it is ignored by the establishment, despite it's obvious use and accuracy.

Austrian economics gives one a prism through which the most recent economic debacle makes sense. At it's core the downturn is the same as every downturn since the beginning of the modern economic era. The central banks did not allow capital to find it's true interest rate and so with time this false reality broke down and the economy had to react. The fall between the central bank established cost of money and the natural cost of money is a disruption, or a recession.

When the economy travels the distance between the established interest rate and the natural interest rate of capital, businesses close, and people lose their jobs and homes, because the cheap money that fueled the pre-contraction "growth" disappears. The more disconnected the two rates of interest are, the worse the recession.

Recessions are not bad. They are just the economy seeking to find it's own level, much like water.

If we want to mitigate the business cycle, and by extension the severity of recessions, we must allow money to seek its own value level. Instead of periodic deluges produced by economic kinetic energy pouring over and bursting through Federal Reserve created economic dams , a free flowing currency would instead rise and fall by smaller amounts and in more predictable ways.

Allowing the Fed to arbitrarily set the value of money (even though it is an illusion and always fails) is pure folly. Allowing interest rates to fluctuate freely makes much more sense.

The problem with a free market in currency is that it increases transparency and accountability. These may not be problems for you and me, but they are for people in power.

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About Me

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Nick Sorrentino is the Editor of The Liberty and Economics Review and CEO of a social media management company.