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.The prime premium component is designed to discount changes in the money relation (the supply of anddemand for money) that determines purchasing power.Changes in purchasing power can be either cashinduced(resulting from changes in the money supply), or goods-induced (resulting from changes in the numbers and types ofgoods and services available), or both; and all have effects on the money relation.But in our modern-day setting, mostsignificant changes in the money relation are cash-induced; that is, created by changes in government monetary andfiscal policy.At best, the price premium component is an estimate of the effects of future changes in the money relation thatcan deaden the repercussions of cash-induced changes for the money relation.But as the debt-ridden savings and loans(S&L's) so aptly demonstrate, the loan market usually reacts to, rather than correctly anticipates, the future purchasingpower of36money.As von Mises puts it, "The price premium always lags behind the changes in purchasing power because whatgenerates it is not the change in the supply of money (in the broader sense), but the-necessarily later-occurring-effectsof these changes upon the price structure."10 in fact, as I will demonstrate shortly, the very reason recessions occur islargely the lagged nature of the price premium component; that is, the inability of both lenders and entrepreneurs toaccurately anticipate the effects of cash-induced changes in the money relation.THE NATURE OF THE BUSINESS CYCLEWith all this information in mind, we can now look at the business cycle in relation to von Mises' statementthat booms and busts are caused by  attempts, repeated again and again, to lower the gross market rate of interest bymeans of credit expansion."By the very nature of our banking system, credit expansion begins with an increase in free reserves held bymember banks.Because ours is a fractional reserve system, every dollar of new reserves may be translated into at least$10 of new money that can potentially be created in the form of new loans.11 Increased reserves can come from onlyone source, increased money holdings by individuals and businesses, whether in the form of demand or time deposits.Assuming that, on average, people don't change their cash savings habits, increased reserves come frompayments on performing loans and influxes of cash into the system that occur when the Federal Reserve Board buysgovernment securities in open market operations.In the context of evaluating the cause of the business cycle, the latteris the important item of consideration.The Fed has two principal tools of monetary policy: the control of short-term interest rates, and the ability toalter reserve holdings through open market operations.Prior to a recession bottom, the accepted policy is to makereserves plentiful and to lower short-term rates.Both moves are designed to stimulate banks to lend more, which inturn will stimulate business expansion.But the inevitable result of this form of credit expansion is a boom that will leadto a bust.The length of the boom and the severity of the bust depend on the nature and extent of the credit expansion,as well as the fiscal policy that government imposes on its citizens during the process.37For now, consider the effects of a credit expansion induced by the central bank independently of fiscal policy.At the bottom of a business cycle, on the eve of a credit expansion, the market has put all production processes it deems profitable into operation.According to the market, money is being placed in its best use; while factories that are closed,oil wells that are shut down, coal that is left unmined, and so forth, cannot be economically brought into production.The marginal capital investment remains untouched, waiting for new capital savings to be produced and employedbefore it can come to fruit.Any further capital expansion is possible only if additional capital, made available throughcapital savings, can be brought into production.The government-induced credit expansion, however, makes it appear that the capital savings already exist andare available to bring the marginal investment to fruition.Money, remember, is a claim on unconsumed goods.Sincethe increased money stock is placed in the system as additional bank reserves, the gross market rate of interest islowered (both with lower nominal rates and increased money supply), and banks normally become willing to lendmore.Since entrepreneurs cannot distinguish between existing money and newly created money, they interpret theirnewfound ability to obtain a loan as the ability to claim unconsumed capital and put it to productive use.But actually, the amount of unconsumed goods, including capital goods, remains unchanged.All that haschanged is the money relation, which changes the entrepreneurs' perception of the supply of capital goods available.Eventually, a bidding war ensues for the limited amount of capital available, and the prices of capital goods begin torise.These price changes, however, occur neither instantaneously or uniformly.For the purposes of argument, assume that all the new loans resulting from the credit expansion are made tobusinesses, which would be the ideal goal of the central bankers.Production is expanded.Unemployed workers arebrought into the work force.The nation is better off.right?Wrong! The business expansion is brought about merely by the appearance that new capital is available.Actually, however, existing capital has been diverted from what would have been its former use to a different use.Thecapital that would have been used for production aimed at sustaining consumption at pre-expansion levels is employedfor other purposes.By diverting capital to other uses, the waiting time for the production of replacement goods,consumer goods, and new goods has necessarily been extended.At the same time, the demand for consumer38goods has risen due to increased employment in the labor sector.' Consequently, not only do producer prices rise, butconsumer prices rise, again, not simultaneously or uniformly.Businesses, however, take heart in the rising prices, reading them as increased demand and a reason to furtherexpand production [ Pobierz całość w formacie PDF ]

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