A market trades means, which are valued by its traders. A currency is a share in that market. It allows access to the means.
The natural interest rate is the estimated value growth of the market. Exchange rates between currencies depend on the estimated value in the future compounded by the time preference.
Currency interest rates signal relative health of the markets. Lending interest rates signal availability of capital, because of the law of supply and demand.
These both interest rates allow investors to plan their action through space and time. They will optimise their investments in order to maximise wealth.
When the nature of money transition from savings to credit, that is, a central bank creates money through lending, its interest rates signal a false availability of capital.
Investments which, so far, appeared uninteresting (because of a yield rate lower than the natural lending rate) become interesting (because of a yield rate higher than the central bank lending rate). It is a prisonner's dilemma: in a competing economy, we have interest in borrowing that low-interest money. Those who do not are out-selected by the market.
Therefore, people who were uninteresting investments become employed. Unemployment rate decreases, the government approval increases; which is why business cycles and political cycles are correlated.
However, creating money does not mean creating wealth. At a given time, the quantity of means is limited. Investing in lower-yielding actions means displacing means from higher-yielding uses to lower ones.
Indeed, there are two types of goods:
- production goods: goods used for further production. They do not improve the uneasiness.
- consumption goods: they improve uneasiness but are destroyed by their use.
Man has some will to improve his uneasiness in the future and will invest correspondingly in production means. He will then use the remaining means to improve his immediate uneasiness and destroy the consumption goods.
Therefore, a crisis occurs when the market adjusts its prices to the reality of availability of capital. But actually, the wealth increase that appears in the beginning of an economic cycle is actually the increased consumption, that is, increased destruction of wealth. Inflation destroys wealth from the very beginning.
What countries call growth is the derivative of the GDP. Increase in spending leads to "growth", but it is deceptive. Why do mainstream governments support inflation, even without political cycles? Because they collect money upon transaction. Taxation. So, even if there is destruction of wealth, there is actually a growth in revenue. Their revenue.
- Next: Law inflation