Why it failed????

There are some of you that have been wondering how we got into the current mess. The best way is to stay away from the current problem, at least for now, and explain the theoritical structure of the business cycle: boom and bust as said in the streets or the halls of the Harvards of America.



The first part of the normal production cycle, not yet the business cycle, we will call a period of inflation when consumers are buying and spending their money supplies in the present, bidding up prices in the consumption markets. But after a while, investors and savers [i.e. consumers who have slowed their consumption down] postpone consumption in the present and receive interest for greater consumption in the future. They give their present cash away with the understanding of a premium being paid later for waiting. If the interest is high enough many people will join the game. Or there are so many savers that even with these lower rates continue to prefer future consumption. If either of these occur, interest rates will signal entrepreneurs to stop producing consumption goods for the time being and to begin an increase in capital formation: factory expansion, adding additional machines, higher workers to produce these capital of production goods. When workers of the wages, and lenders of capital, and landlords receive their money, they begin to think about spending. When income now exceeds the need to wait, consumption now begins. People start spending instead of saving, this begins to raise the interest rates, slowing capital investment, and producers see the signals to begin conversion to consumer goods. But again interest rates will continue to rise in order to attract savings again, eventually interest rates will be great enough to slow consumption, raise savings and we begin anew. NO Boom and NO BUST!!!



So where do the swings up and down come from???? BANKS!!! Banks increase the amount of money in circulation, and with the big daddy of all banks--a Central Bank, or our Federal Reserve--banks are allowed to loan money they don't have. Under current Fed law, banks are only required to keep 8% of any money it "has" in the actual vaults. The rest is loaned out in a manner to stimulate the economy in either more savings (raising the savings rates) or more spending (lowering the rate) or more borrowing for spending or capital growth. The only problem is that this is a fake version of the above normal production-consumption cycle. When the big boys get scared, they usually contract the money supply causing a recession/depression.....BUST!!!!!!!!!! Or they try to blame the market for not working (even though it has been chained up and teased), then they want more regulations, intervention, ad infinitum....