An Alternative to Manipulating Markets
Austrian-British economist and political philosopher Friedrich Hayek
Hi Plebs,
The 1923 annual report from the Federal Reserve ushered in a new era of trying to manage the economy through adjusting interest rates. The idea was that by lowering rates and increasing the money supply, it could incentivize borrowing and investment during recessions. Conversely, raising rates would put the brakes on economic activity during expansions.
This perspective found a seminal critic in the Austrian economist Friedrich Hayek. He believed the Fed's artificial suppression of interest rates sent false signals to the market. Low rates encouraged businesses to invest in longer-term projects and expand production. However, Hayek warned this investment was not backed by any real increase in savings and deferred consumption by consumers.
When interest rates inevitably rose and credit tightened, businesses would find themselves overextended. The demand would not match the increased supply resulting from all the artificially-stimulated investment during the preceding boom. This would lead to a painful correction of mass layoffs, defaults and debt deflation.
Nearly a century later, Hayek's critique of interfering with market interest rates rings true. The traditional financial system based on fiat currencies controlled by central banks remains plagued by this business cycle phenomenon. Easy money from low rates causes artificial booms that lead to inevitable busts.
Bitcoin represents an escape from this endless cycle of mispriced money and distorted investment signals. As a truly scarce, hard asset with a predictable issuance schedule, Bitcoin cannot be artificially inflated at will. Its money supply grows slowly at a decreasing rate on a perfectly predictable schedule known to everyone.
In this way, Bitcoin more accurately reflects real savings preferences in the market through its exchange rate rather than being subject to the whims of central bankers. Its interest rate, set by the free market, cannot be manipulated to distort the signals for consumption vs. investment the way that has consistently caused booms and busts under fiat regimes.
Some criticize Bitcoin for its volatility, but this is only reflective of a market constantly repricing the asset's value based on new information. Frequent, small repricing through price volatility is a far healthier state than the violent, wide swings between artificial booms and busts caused by fiat money system built on illusion and manipulation.
Hayek's warnings about the unintended consequences of manipulating interest rates have proven incredibly prescient. Bitcoin finally offers a way to have a truly free market when it comes to money that cannot be distorted by bureaucrats. It is the best hope we have for escaping the boom/bust cycle for good.
Cheers, and onwards with Bitcoin
