Many economists believe that the business cycle is inherent to any economy. While there is certainly some truth to this, it is also monetary distortion that affects the economy and enhances the business cycle - for the worse.
Life is dynamic and unpredictable things happen time and time again. Each and every one of us knows this from personal experience. The economy is also cyclical and sometimes "runs" stronger and sometimes weaker. These dynamic ups and downs in the economy are summed up in what is called the business cycles. In the dominant, neoclassical economic theory, however, these cycles are mainly attributed to the irrationality of market participants. According to Keynes, it is the so-called "animal spirits" on the basis of which market players act and thus repeatedly mislead the economic process.
However, the neoclassical view is itself mistaken in two aspects. In fact, economic activity is inherently cyclical. Human economic activity is dynamic and not static. However, this does not necessarily have to do with the irrationality of market participants but is primarily due to the uncertainty they are faced with. Those who focus on the uncertainty that is an integral part of human action see cyclicality rather as the result of incomplete knowledge about the future that has to be "reduced" in a constant process of discovery. The neoclassical view also ignores the role of monetary distortions boosting the business cycle. In the neoclassical view, money is to a certain extent a veil that simply lies over the economy and has little influence on it. The fact that monetary distortions inevitably lead to economic distortions and can thus be one of the causes of increased cyclicality (volatility) is ignored.
In his economic papers and works, Friedrich August von Hayek pointed out the importance of prices. Prices embody objectified, condensed knowledge - knowledge about the subjective preferences of individual market participants. It is only through market prices that these preferences and thus the necessary knowledge come to light. As a unit of account and measurement, prices are therefore indispensable for an economy. Monetary distortions distort these prices relative to each other. The mechanisms behind these monetary distortions are extremely complex, for the sake of simplicity they can be summarized as follows: Through money creation, new liquidity is created. When this liquidity reaches (financial) markets, it affects relative prices and interest rates, which in turn affects the economic actions of economic actors.
Prices of assets (bonds) are inversely related to their interest rates. If the prices of the former rise, the interest rates fall. Of course, the individual parameters within an economy are linked to each other via so-called arbitrage effects. A change in one parameter has an effect on another. There are also self-reinforcing, second, third and N-round effects. The natural interest rate can be regarded as the price of money and is therefore determined by supply and demand like any other price. As such it has an economically relevant coordination function between consumption and investment. As a consequence of manipulation by artificial money creation, interest rates are thus distorted in their coordination function. Interest is like the blood in our body. Manipulation of our blood values leads to distortion of blood circulation.
In concrete terms, a lower interest rate level within an economy at the margin, brought about by monetary intervention, means that previously unprofitable investments and projects appear profitable. At the same time, falling interest rates mean that later investors and entrepreneurs can get into debt on "more favorable" interest rate terms. The result: economic activity is fueled by falling interest rates. An artificially increased money supply or artificially lowered interest rates thus strengthen the economic cycle. Since interest rates coordinate production over time and this coordination is distorted by monetary distortion, misjudgments are made about the future profitability of current investment decisions. Interest rates are no longer in line with the preferences of consumers and investors, which means that there is also a discrepancy between interest rates and the time preference of market participants.
For market participants, this is not obvious at first. In this phase, the economy goes through a boom or bubble. The economy is running at full speed in the non-consumer and consumer-related sectors, while the middle is being undermined to a greater extent. Only the correction will reveal the discrepancy. The reason for this can be an exogenous shock or endogenous trigger. For example, the correction may be due to an excessively abrupt rise in interest rates. Or an overinterpretation of monetary policy decisions can have consequences. Malinvestments are then exposed, market participants become more cautious and liquidity becomes scarcer. In our leveraged times, a crisis often becomes reality more quickly than one would wish. A crisis would bring about a shakeout. Rising interest rates would reveal that previously initiated projects are not sustainable, let alone profitable. A crisis would see to it that resources would be extracted from these unprofitable projects and used elsewhere. However, deflationary clean-up processes are hardly ever allowed. Every imminent correction is reacted to with further interest rate cuts and increased money creation.
Monetary distortions were at the origin of the misguided developments and misallocations. The same "medicine" is being used to try to remedy the problem. However, the flooding of markets with liquidity, as it is happening today on an unprecedented scale, merely papers up deeper problems. Distortions as a result of distortions are less noticeable if they are shifted further into the future. One might think that such an economic cycle would not be so bad. Sometimes an economy just feels a little better and sometimes a little worse. However, this view is simply incorrect. The misallocation of capital destroys assets in real terms, which then have to be rebuilt. This means that not only is there redistribution between generations, but capital and thus wealth is destroyed in real terms. The consequences of this are being plastered with cheap money, i.e. credit.
The sovereignty of consumers and investors is undermined. Ludwig von Mises described the market economy as a "dollar democracy," in which every dollar a consumer spends or saves represents a ballot that is cast to decide on the structure of production. Money creation always implies the distortion of this voting process. It is no longer these actors who decide on the capital and production structure to a predominant extent, but rather the money-creating authorities who keep the actually ailing structures alive with cheap money, i.e. credit. The economy is gradually being diverted from its principles. If customer and investor sovereignty is weakened, the capital structure is no longer geared to their wishes and discretion. The result is a distorted production and ultimately consumption structure. How the economy comes about, what makes it into what it is, and how it is shaped and behaves is less and less derived from the preferences of economic actors.
The individual seems to be overwhelmed by economic processes as they seem to become ever more demanding. As consumers' and investors' ability to make decisions and coordinate is being thwarted by ever more cheap liquidity, powerlessness and frustration are spreading among economic actors, especially when they see themselves as the ones losing out. The economy and financial markets become zombified constructs in which sustainability becomes a real farce and the sense of individual economic actors is quickly lost. The monetary distortions and the economic distortions caused by them mainly are to the disadvantage of human mental states.
An enormous glut of money is now covering up downturns within the economic cycle. However, corrections would have to be allowed and should not be suppressed by ever new money creation. Because in the end, constant evasion and averting go to affect the substance of man, negatively. If there is more liquidity in the system, in a still competitive market system this leads to more resources being created and projects being financed. Especially today, when the world is more and more a service society and resources are more and more often of an intellectual nature, the production of additional "products and services" is even easier. But this creates increased pressure to perform and hits the psyche leading to symptoms of overwork such as burnouts. Economic actors eel increasingly like dead-walking cogs in a system. But they cannot be milked indefinitely, as their creative and vital energy is nevertheless limited.
Business cycles have by no means disappeared today. They are now being suppressed with cheap money. Every crisis was fought with even more liquidity. This may help in the short term, but in a market economy system, artificial boosts have a devastating effect in the long term. The "system" runs at an ever higher pace, although fundamentally nothing is solved. The perpetual attempts to smooth out a crisis is delaying the problems. The risk of an even worse crisis is thus becoming ever greater. The whole system is becoming more and more unstable and the risk of a super disaster more imminent.