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Chapter 5: The Fed on Steroids

Low-interest rates encourage banks to lend money
to wealthy persons and big corporations where the
volume makes up for the low price. Banks allocate
credit based on the price of credit and the riskiness of
the borrower in a market system. The result of
quantitative easing and artificially low-interest rates is
that the market no longer functions. Artificially low-
interest rates tend to channel money to the safest
borrowers, which are seldom the best job creators.

THE AUSTRIANS
Austrians believe that quantitative easing leads to
malinvestments; investments that only take place with
artificially low-interest rates. Once a market correction
takes place, and price signals normalize, these
investments falter. The easy credit leads to a boom, and
the correction leads to a bust. In the 1940s, Ludwig von
Mises and Friedrich Hayek warned us about the ill
effect of easy credit. Hayek won the Nobel Prize in
economics in 1974 for his work on this boom and bust
theory of easy credit. His work showed that artificially
low-interest rates and excessive credit creation result in
a volatile and unstable imbalance between saving and
investing.
The Fed’s expansionary monetary policy can hurt
foreign nations. When the Fed creates money, dollars
increase globally. The increase in dollars tends to
reduce the dollar’s value, and, in essence, raises the
value of other currencies. For example, when the value
of the Brazil Real increases relative to the American
Dollar, Brazilian products become more expensive for
non-Brazilians, which inhibits Brazilian exports.

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