"Cheap money policies eventually bring about far more violent oscillations in business than those they are designed to remedy or prevent." Bonus #QotD

"[W]e may define 'savings' and 'investment' as constituting respectively the supply of and demand for new capital. And just as the supply of and demand for any other commodity are equalised by price, so the supply of and demand for capital are equalised by interest rates. The interest rate is merely the special name for the price of loaned capital. It is a price like any other.

    "This whole subject has been so appallingly confused in recent years by complicated sophistries and disastrous governmental policies based upon them that one almost despairs of getting back to common sense and sanity about it. There is a psychopathic fear of 'excessive' interest rates. It is argued that if interest rates are too high it will not be profitable for industry to borrow and invest in new plants and machines. This argument has been so effective that governments everywhere in recent decades have pursued artificial 'cheap money' policies. But the argument, in its concern with increasing the demand for capital, overlooks the effect of these policies on the supply of capital. It is one more example of the fallacy of looking at the effects of a policy only on one group and forgetting the effects on another…

    "The effect of keeping interest rates artificially low, in fact, is eventually the same as that of keeping any other price below the natural market. It increases demand and reduces supply. It increases the demand for capital and reduces the supply of real capital. It brings about a scarcity. It creates economic distortions. It is true, no doubt, that an artificial reduction in the interest rate encourages increased borrowing. It tends, in fact, to encourage highly speculative ventures that cannot continue except under the artificial conditions that gave them birth. On the supply side, the artificial reduction of interest rates discourages normal thrift and saving. It brings about a comparative shortage of real capital.

    "The money rate can, indeed, be kept artificially low only by continuous new injections of currency or bank credit in place of real savings. This can create the illusion of more capital just as the addition of water can create the illusion of more milk. But it is a policy of continuous [monetary and asset-price] inflation. It is obviously a process involving cumulative danger...

    "Cheap money policies, in short, eventually bring about far more violent oscillations in business than those they are designed to remedy or prevent."

~ then NY Times senior economics writer Henry Hazlitt, writing as if yesterday on 'The Assault on Saving,' from his book Economics in One Lesson

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Henry Hazlitt explains the primary lesson contained in his book, "Economics in One Lesson," beginning with the reason the lesson is still needed: "Economics is haunted by more fallacies than any other study known to man..."

A walk through Hazlitt's chapter 'The Assault on Saving' ...