Does it stop when the fed increases rates?
how do they increase rates?
i know they sell bonds, but when you sell a bond your promising to give money + interest. Doesn’t this mean in
the long run, the money supply will only increase?
It is not explained well in school, my teacher just brushes the topic aside.
The Fed faces, from an Austrian viewpoint, the following problem: the Fed (or other central bank) has to keep the prices of capital goods higher than the prices of consumers good.
The way to do this is for the Fed to continually increase the rate at which they are inflating, which Hayek called accelerationism (Ludwig van den Hauwe has a paper on this, Huerta de Soto covers it in his treatise).
If the Fed were to inflate, albeit at constant rate, the prices of consumers goods would rise relative to the prices of higher order capital goods setting in motion the “bust”. Producers of higher order goods would begin to suffer entrepreneurial losses, whereas the producers of consumers goods would begin to make profits. Resources would thus be moved to the later stages of production and as projects were being liquidated this would set in motion the proces of establishing a capital structure more in line with consumer’s desires. At the same time this was happening, the Ricardo Effect would occur, producers of consumers goods would subsitute capital goods for labour, thus reinforcing the process and capital restructuring would occur.
Now, if Fed were to continually increase the rate at which they inflated, two things may occur. The first is that due to bottlenecks (IOW, scarcity would assert itself) prices of consumers goods would rise and we would see the same line of events I just described. The alternative is the “crack up boom” as Mises called it, people would realise that the purchasing power of their money is being eroded and a flight into real goods would occur. Hyperinflation would be the result, in which case we’d see the boom come to an end in the ruin of the entire economic system.
Now, it may just happen that the Fed will raise interest rates on its own accord, in which case it’ll be this that causes the boom to end.