Have you ever asked yourself why is it that the economy is high and then low, and then high and then low again? Aren’t the entrepreneurs selected supposed to be the best? What is it that they’re doing wrong? Is it because of them or because of something else? All these questions are about to be answered.
Imagine the city you live in right now, and imagine people going into their banks and saving money. Now, because they are saving their money, they won’t be spending it, which means that businesses don’t have to have so many productions going on. When the public starts saving, the interests rates go down, and businesses decide to borrow some money so they can finance long-term projects. Since people are now saving their money, and less production is going on, resources will also go down, such as trucking, labor, and steel. This will leave an open space for businesses, so that they can use these resources for long-term projects.
So we have the public saving, less buying, less production, more resources, more long-term projects. This means there is a smooth coordination of production and consumption, as long as interest rates are allowed to do their job, and not tinkered with.
Let’s go now to the conditions under government intervention. Imagine your government deciding to push interest rates down, just because they think that with that the economy will go higher. This time, the public is not saving money for the future, but spending it as usual, and this doesn’t leave free resources for businesses to use in long-term projects. Businesses are deceived into thinking that the public is saving money for the future, so now they borrow from the bank, and use unfree resources for their long-term projects.
In the end result we have a huge tug of war taking place. One part of the city is pulling to have resources to spend on, and the other part of the city is pulling to have resources for the future. What’s going to happen next? Well, businesses will see that they won’t be able to complete their new projects profitably. They have been misled by false interest rates into making poor decisions, and labor and physical resources have been misallocated. What do we have left? A big recession or a big depression.