The Nature of Interest and Interest Rates

To explore the nature of the business cycle and understand why economic crises periodically wipe out people's wealth, we must first clarify a core concept: interest. In the history of economic thought, the search for the true nature of interest has been like peeling back layers of logic—a process filled with strokes of genius, yet heavily entangled with fatal fallacies.

Wicksell and the Glimmer of the "Natural Rate"

The starting point of this intellectual evolution traces back to the Swedish economist Knut Wicksell. In his 1898 treatise, Interest and Prices (Geldzins und Güterpreise), Wicksell made a keen observation: the loan rate charged by banks in the market does not always equal the actual rate of return on capital in the real economy. He termed the former the "Money Rate of Interest" (Geldzins) and the latter the "Natural Rate of Interest" (Natürlicher Zins). Wicksell correctly pointed out that when the banking system expands credit, artificially depressing the money rate below the natural rate, it triggers a general rise in prices and economic fluctuations.

Before Wicksell set pen to paper, the classical economics sphere was dominated by a rather crude "Quantity Theory of Money." Economists of the time mechanically believed that an increase in the money supply would proportionately increase prices, and a decrease would lower them. But how does this newly created money enter the economy? How does it affect individual decision-making? No one could provide a logical explanation at the microeconomic level. Money was treated as if it were dropped uniformly from a helicopter onto everyone’s heads—a lifeless macroeconomic aggregate.

Even more fatally, empirical data of the era slapped classical economists squarely in the face. According to conventional wisdom, a low interest rate indicates easy borrowing, which should lead to rising prices; a high rate means borrowing is difficult, so prices should fall. But in reality (a phenomenon later known as Gibson's Paradox), people often observed the exact opposite: when bank interest rates were extremely low, prices continued to fall; and when bank rates were soaring, prices relentlessly surged.

Faced with this deadlock, Wicksell began dissecting the problem like a true logician. He acutely realized that a single "bank rate" explains absolutely nothing. "High" and "low" are relative terms; without a baseline, discussing the bank rate is meaningless. Where was this baseline? Seeking inspiration, he turned back to David Ricardo's classical theories and finally locked onto a core benchmark: the actual rate of profit on capital in the real economy.

He termed this expected profit rate in the real economy the "Natural Rate," and the price posted at the bank tellers the "Money Rate." Thus, Wicksell's great discovery was born: What determines price fluctuations is never the absolute level of the money rate, but the "differential" between the money rate and the natural rate.

Having discovered this differential, Wicksell did not resort to dry mathematical formulas. Instead, he employed a remarkably rare, pure-logic dynamic deduction process, which he named the "Cumulative Process" (Kumulativer Prozess). This was the very part that Mises later highly praised and absorbed.

Suppose the banking system suddenly lowers the "money rate" for loans, pushing it below the real economy's "natural rate." As purposeful acting agents, entrepreneurs immediately start calculating. They find that the cost of borrowing from the bank is actually lower than the expected profit they can earn by investing in building factories. This is a risk-free arbitrage opportunity. Consequently, entrepreneurs flock to the banks to borrow feverishly.

However, what the banks lend them is not real savings (not the flour and steel saved up by others), but credit created out of thin air. Armed with this newly printed credit, entrepreneurs rush into the market, scrambling for the already scarce labor, raw materials, and land.

This bidding war instantly sets off a chain reaction. Because the total quantity of factors of production has not increased, entrepreneurs can only acquire resources by outbidding each other. Workers' wages rise, and raw material prices soar. The workers, armed with higher wages, go to the consumer goods market to buy food and clothing, causing the prices of consumer goods to skyrocket as well.

Here, Wicksell provided a ruthlessly cold proof: As long as the banks do not hit the brakes, and as long as the "money rate" remains below the "natural rate," entrepreneurs will continuously borrow, and prices will spiral endlessly upwards. This is the inner micro-mechanism of inflation!

Conversely, if banks, panicking over dwindling gold reserves, suddenly hike the "money rate" above the "natural rate," the entrepreneurs' calculations reverse instantly. Investments become unprofitable; they start liquidating assets, laying off workers, and repaying loans. Prices will plummet uncontrollably.

Undeniably, this was an observation of immense penetrative power. Wicksell was the first to reveal how monetary intervention distorts the real economy by disrupting the interest rate mechanism. Yet, he immediately fell into the trap of macroeconomic mechanics. Wicksell mistakenly believed that the "natural rate" was an objective numerical value determined by the physical productivity of material capital. Moreover, he stubbornly held the delusion that as long as the central bank could precisely manipulate the money rate to match this objective natural rate perfectly, the general price level could be kept absolutely stable.

This is a typical interventionist delusion. Wicksell failed to realize that in a free market with advancing productivity and accumulating capital, an increase in the quantity of goods will naturally lead to a continuous decline in the general price level. Attempting to "stabilize prices" through credit manipulation is, inherently, secretly engineering inflation. The more fundamental error lay in viewing interest as the product of machines and physical capital.

Böhm-Bawerk and the Tribunal of Time

To correct Wicksell's fallacy, one must return to human action itself. Prior to this, Eugen von Böhm-Bawerk, a pioneer of the Austrian School, had already laid a solid foundation for a genuine theory of interest. Böhm-Bawerk pointed out that interest is by no means the natural accretion of capital, nor is it a moral compensation for the capitalist's abstinence. The root of interest lies in the a priori law of human action: Time Preference. Because human life and time are scarce, any acting individual always prefers to attain an end sooner rather than later. In people's subjective valuations, present goods are always valued higher than an identical quantity of future goods. To induce someone to forgo present consumption and wait for the future, a premium must be paid. This premium, which reflects the discount in value of future goods against present goods, is the sole source of interest.

In his magnum opus, Capital and Interest (Kapital und Kapitalzins, 1884), his argumentation flows as lucidly as a detective novel. To grasp Böhm-Bawerk's great discovery, we must return to the perilous theoretical battlefield he faced: the late 19th century, when Karl Marx's "Exploitation Theory" was haunting Europe. Using an incredibly crude Labor Theory of Value, Marx posed a fatal question: If all value is created by the labor of workers, on what grounds does the capitalist take a portion of the final sales revenue as "interest" and "profit"? Is this not outright theft? The mainstream economists of the time could only offer feeble defenses, such as "capital is productive" (machines breed money by themselves) or "the reward for capitalist abstinence," which crumbled upon the slightest impact.

We must face head-on the question that made countless left-wing scholars’ blood boil: Where exactly does this massive profit margin come from?

Marx depicted a brutally cold picture of exploitation in Das Kapital, and he could well have used a barrel of "aged wine" to make his case. Marx would point to the wine cellar and indignantly accuse: A worker put in all the labor—picking grapes, pressing the juice, sealing the barrel. Today, the capitalist paid this worker a mere $10 in wages. Yet, ten years later, this barrel of wine sells on the market for an astronomical price of $1000! Where did the staggering difference of $990 go? Marx asserted: This is the capitalist shamelessly stealing the "surplus value" created by the worker, because it is the worker's labor that imbued this barrel with all its value! The worker rightly deserves the "full final product" of his labor.

Facing this seemingly righteous accusation, Böhm-Bawerk used no complex mathematical models; he simply introduced two ironclad laws of human existence, like a cold-blooded judge: Time and Uncertainty.

Böhm-Bawerk incisively cut to the essence of this transaction. He posed a fatal counter-question to the Marxists: What does the worker receive today? And what does the capitalist receive ten years from now? The worker is a living, breathing human being; he needs to eat bread today, and he needs to feed his family today. He absolutely cannot endure a decade of starvation to wait for that wine to be monetized. Therefore, when the capitalist hands the $10 to the worker today, this $10 is a "present good"—it is certain, hard cash that can be immediately exchanged for bread. And what is the capitalist buying? A barrel of liquid that might sell for a high price a decade later. This is a "future good."

Böhm-Bawerk pinpointed the truth: The capitalist did not exploit the worker at all; he was actually doing something incredibly dangerous and generous. Using his own accumulated real savings, he "advanced" future income to the worker. The capitalist used hard cash to buy ten years of waiting time from the worker!

Immediately after, Böhm-Bawerk threw his second heavy punch: The abyss of risk.

In Marx's theory, there lies a highly absurd assumption: that once a product is produced, it will inevitably be sold at some objective "labor value." But the reality is, absolutely no one today knows how much this bottle of wine will be worth in ten years!

That $1000 is merely a retroactive, hindsight hypothesis of Marx. In the real commercial world, after advancing the $10 wage, the capitalist will face ten years of darkness and abyssal uncertainty: the cellar might leak and ruin the batch; a loss of temperature control might turn the entire barrel into worthless vinegar; or perhaps, ten years down the line, consumer tastes completely change, or the government enacts Prohibition, and the wine cannot even be sold for $1!

During these long ten years, the worker has already spent his guaranteed $10 on meat and wine, living a secure life. The worker bears absolutely zero future risk. All the anxiety, all the uncertainty, all the disastrous potential for a total loss of capital are shouldered entirely by the capitalist. Since the capitalist bears 100% of the future risk of failure and pays the ten-year time cost on behalf of the worker, on what grounds should he not acquire that $990 differential as a time discount and risk premium upon his highly contingent future success?

Finally, utilizing a ruthlessly cold reductio ad absurdum, Böhm-Bawerk backed Marx into a total logical dead end. If Marx and union leaders relentlessly insisted that the worker should receive the "full labor value" of ten years later ($1000) today... Böhm-Bawerk would pose the ultimate question: Since the capitalist must pay today for a value that does not yet exist and is entirely unknowable in the future, and since you, Marx, refuse to acknowledge the law of time discounting, then why pay $1000? Why not $10,000, or $100,000?!

If one does not acknowledge the existence of time, if one does not admit that future values must be discounted to be traded today, then any number is utterly absurd and arbitrary. Demanding that a capitalist pay wages today based on a non-existent, hallucinatory price from ten years in the future is sheer, irrational economic schizophrenia.

If the worker truly feels he has been robbed of $990, then please, let the worker refuse the $10 wage. Let the worker go pick the grapes himself, build a cellar himself, and seal the wine himself. Then, let the worker starve for ten years himself, bear the risk of mold and vinegar himself, and having endured to the tenth year, let him go to the market and earn that lucrative $1000 himself! However, the worker cannot, and is unwilling to do so. Because his time preference is extremely high; he urgently needs present survival. When the worker voluntarily accepts that $10 present wage, exploitation ceases to exist. This $990 differential is the absolutely fair price set by the market to reward the entrepreneur who is willing to delay gratification and shoulder future risks in the dark on behalf of others.

Böhm-Bawerk's intellectual strangulation was exceptionally clean. From then on, the "Surplus Value Theory" became a walking corpse in the halls of rigorous economics. Anyone attempting to deny the value of time and the entrepreneur's risk is doomed to bankruptcy on the tribunal of logic. The mystery was solved. The capitalist did not exploit the worker. What takes place between the capitalist and the worker is a fair trade across time. The worker desperately desires "present goods" (current wages to buy today's bread), while the capitalist happens to have savings. The capitalist advances today's flour and gold coins to the worker in exchange for the "future goods" produced by the worker (a steam engine that can only be sold years later). Since future things are worth less than present things, an Agio (Premium/Discount) in value must exist between them. This agio is interest. Interest is not the shameless multiplication of capital; it is the price of time. The Marxist edifice of exploitation collapsed in an instant. Before Marx had even finished Das Kapital, Böhm-Bawerk had entirely defeated him.

Fetter and the Refinement of Pure Time Preference Theory

However, Böhm-Bawerk's formulation was not complete. Within his theoretical edifice remained a minor yet fatal crack. In demonstrating the law of interest, Böhm-Bawerk proposed his famous "Three Reasons." The third reason—the so-called "technical superiority of present goods"—was essentially an unconscious compromise with the productivity theory of capital. Without completely severing the link between interest and physical productivity, the ghost of macroeconomic mechanics could never be dispelled.

It was the American economist Frank Fetter who, wielding a ruthless logical razor, completed this purification. Fetter mercilessly excised Böhm-Bawerk's third reason and established the "Pure Time Preference Theory." Fetter irrefutably proved that no matter how high the physical productivity of capital is, or how many physical goods a machine can churn out, if there is no subjective discounting of time value in the human mind, interest simply does not exist. Time preference is not merely one of many factors determining interest; it is the sole, absolute, and exhaustive root. (Capital, Interest and Rent: Essays in the theory of distribution, 1897).

Fetter began his pure logical deduction. He posed a highly destructive counter-question to mainstream economics: If interest truly arises because machines and roundabout production can manufacture more physical products, then suppose there is an extremely expensive machine, but it produces something nobody wants (for instance, a highly efficient snowplow built in the middle of the Sahara desert). Does the so-called "technical superiority" of this machine yield any interest?

The answer is obviously zero. Fetter irrefutably pointed out that a physical increment in matter absolutely does not equate to an increment in value. How many items a machine can produce is a matter for engineers and physicists; but how much those items are worth depends entirely on the subjective valuations of consumers in the future.

Fetter mercilessly wielded the Austrian School's "Imputation Theory" (Zurechnung), severing Böhm-Bawerk's third reason completely. He proved that the flow of value is unidirectional and irreversible: It is the consumer's subjective valuation of the final bread that determines the value of the flour, which in turn determines the value of the mill, and finally determines the value of the machine that manufactured the mill.

Since value is imputed backward from the future (the consumption end) to the present (the production end), the only factor that can apply a discount during this long waiting process is the pure "time preference" existing in the human mind. Fetter established the "Pure Time Preference Theory." He pushed it to the absolute extreme: even in a primitive society with no capital goods, no machines, where everyone survives by picking wild fruits with their bare hands, as long as people feel that "eating fruit today" is more satisfying than "eating fruit tomorrow," interest still exists!

Fetter's discovery was coldly brutal yet infinitely solid: The nature of interest has nothing to do with production technology, nor does it have anything to do with physical increments. It is a 100% subjective category; it is the inevitable valuation humans place on the passage of time due to the brevity of life. With this, macroeconomic physics and mathematical formulas were entirely banished from the theory of interest.

Mises and the Ultimate Cleansing of "Originary Interest"

When Frank Fetter thoroughly reduced interest to "time preference" in the human mind, the micro-edifice of value theory was completed. However, in the early 20th-century economic circles, a highly absurd "schizophrenia" still persisted: when discussing apples and shoes, economists used the micro-calculations of individuals; but the moment they touched upon "money" and the "overall economy," they immediately donned mechanical macroeconomic glasses, playing with ethereal aggregate data like "velocity of circulation," "aggregate demand," and "the general price level."

The aforementioned Wicksell was a classic victim of this macroeconomic schizophrenia. Wicksell keenly discovered that a "bank rate" lower than the "real rate" would trigger economic fluctuations, but he drew a fatally flawed conclusion: As long as the central bank can precisely manipulate credit to maintain the price level (CPI) on an absolutely flat line, economic crises will be eradicated forever.

In 1912, Ludwig von Mises, in his earth-shattering masterpiece The Theory of Money and Credit (Theorie des Geldes und der Umlaufsmittel), burned this macroeconomic mechanistic view to ashes.

Mises first undertook an ultimate conceptual cleansing. He discarded Wicksell's label of the "natural rate," which carried physical residues, and directly inherited Fetter's thought. He named the foundational benchmark, formed by the convergence of the time preferences of all consumers in society, "Originary Interest" (Urzins). Originary interest is by no means a macroeconomic statistic that bureaucrats can measure; it is an invisible law formed by the genuine compromises made by millions of individuals between present consumption and future waiting.

Next, Mises turned his gaze to the "stable price level" idolized by Wicksell. He proved that in a free market with continuous capital accumulation and technological advancement, productivity is constantly rising. Goods become more abundant, and costs become lower; therefore, prices in a free market should inherently be falling continuously!

If prices are naturally dropping due to technological progress, and the central bank, in pursuit of that illusory "price stability," forcibly turns on the printing presses to inject massive amounts of unbacked fiduciary media (Umlaufsmittel) into the market, what happens? Macroeconomists, looking at a stable price index, would pop champagne, thinking all is well. But Mises pointed into the depths of the market and issued a terrifying warning: The central bank is executing a grand fraud of unprecedented scale.

Mises meticulously deduced the process of this fraud (and thus, the Austrian Business Cycle Theory, ABCT, was born): When the central bank conjures credit out of thin air and lowers the bank loan rate, it is essentially forcing the market rate below the public's real "originary interest." This is not just injecting superfluous paper money into the economy; more lethally, it tampers with the most sacred traffic light in the free market. As entrepreneurs engage in economic calculation, looking at the artificially cheapened interest rates engineered by the government, their brains receive a highly erroneous and false signal. They mistakenly believe that the low interest rates are because the general public has suddenly become extremely frugal, depositing vast amounts of real resources (bricks, steel, grain) into banks. Deceived by this illusion, entrepreneurs commence a carnival. They launch extremely lengthy and massive "roundabout production" projects—building cross-sea bridges, skyscrapers, or investing in high-tech industries that will only yield results a decade later. Society plunges into a profoundly euphoric investment boom.

However, Mises coldly pointed out: Paper money cannot print real bricks. The public's real "time preference" has not changed at all! They have not tightened their belts; they still urgently demand present consumption. The so-called "funds" entrepreneurs use to build skyscrapers are merely numbers typed out of thin air on the central bank's balance sheet.

The lie eventually crashes into the iron wall of reality. As massive projects proceed, the severe scarcity of real resources begins to manifest. Entrepreneurs discover that there are simply not enough bricks and labor to finish all concurrently initiated projects. To compete for limited resources, the prices of the means of production begin to skyrocket madly. Concurrently, as the newly printed money flows into consumer markets, the public begins panic-buying consumer goods, sparking full-blown inflation.

At this point, interest rates inevitably mount a vindictive rebound. Entrepreneurs abruptly awaken, realizing that the money they borrowed is nowhere near enough to complete their projects. Those magnificent skyscrapers turn into unfinished ghost buildings, and long-term investment projects turn into black holes swallowing wealth. This is what Mises called Malinvestment.

The boom instantly shatters, and the economy faces a brutal grand liquidation—this is the Bust.

Mises's deduction was like a blade of ultimate counter-attack, entirely subverting humanity's understanding of economic crises. Mainstream economics believes that a depression is the terminal illness of capitalism and must be rescued by government money-printing. But Mises proved: The boom is the hallucination caused by the central bank's poisoning, and the depression is precisely the free market undergoing a highly painful detoxification! The depression is the market ruthlessly liquidating those unfinished projects induced by low interest rates, forcibly restoring the production structure to a healthy state conforming to the public's true "originary interest."

Originary interest is not a number dictated by a central bank, but the resultant outcome converging from the saving and consumption decisions of millions of consumers in the market. When the public leans toward frugality and is willing to delay gratification, originary interest falls, signaling that society has accumulated real capital to support longer, more complex production processes. Conversely, when the public rushes to consume, originary interest rises, declaring a scarcity of resources. Originary interest is the core traffic light of the free market; it directs entrepreneurs at every moment, telling them exactly how many real resources society possesses for future investments.

Through this battle, Mises not only thoroughly buried Wicksell's myth of price stability but also handed down the ultimate verdict to all central banks: Any government attempting to intervene in the economy through money-printing and interest-rate cuts is not saving the market, but forging the entire society's system of economic calculation; they are the sole and absolute culprits of every great depression.

Rothbard and the Grand "Time Market"

When Mises absorbed Fetter's pure time preference into Human Action (1949) and established "Originary Interest," the skeleton of the theoretical edifice was complete. However, mainstream economists (especially Keynesians) still mounted stubborn resistance. They retreated to their last stronghold: the banking system. Keynes arrogantly declared that interest is merely the reward demanded in the loan market for parting with liquidity (holding cash); therefore, as long as the central bank runs the printing presses to inject infinite liquidity into the loan market, it could keep interest rates depressed forever, even to zero.

Murray Rothbard, in his monumental Man, Economy, and State (1962), delivered a fatal, dimension-reducing strike to this financial myopia. The core question Rothbard sought to answer was: Where exactly is interest hidden within the economy? Does it truly only exist at Wall Street bank counters and in loan contracts?

Utilizing fiercely rigorous logic, Rothbard constructed an "Evenly Rotating Economy" (ERE) model devoid of unpredictable changes, thereby seeing through the fog of prices. He guided us to look at the extremely long production structure within the real economy.

Suppose an iron ore magnate sells ore to a steel mill and makes $100; the steel mill sells steel to an auto factory and makes $100; the auto factory sells cars to consumers and makes another $100. Mainstream economists would simply label this price difference at every stage as "profit."

Rothbard coldly corrected this illusion. He pointed out that in free competition, pure, highly lucrative "entrepreneurial profit" only exists in precise forecasts of the future, and it will eventually be wiped out by competition. When the dust settles, an immovable price differential (a price scissors) remains between the various stages of production. What is this price difference?

This is the Pure Rate of Interest!

Rothbard revealed an immensely grand and shocking truth: The entire production structure of capitalist society is one massive "Time Market." The iron ore boss is actually "buying" present cash from the steel mill; the steel mill is "buying" cash from the auto factory. Every upstream entrepreneur is using their produced "future goods" to exchange for downstream "present goods" at a discount.

The bank's loan market is merely an insignificant branch within this overwhelmingly vast time market. What determines the fundamental level of interest is not the bankers, but the time-discounting calculations performed by countless entrepreneurs and consumers across society—in mines, factories, and on store shelves.

The lethality of this discovery is devastating. When the central bank attempts to artificially suppress the "loan rate" by printing paper money, it is essentially declaring war on the highly complex production structure of the entire society. The central bank can temporarily manipulate the valves of one or two financial markets, but it can absolutely never alter the time preference deep within the hearts of millions of consumers. Central bank money-printing will only temporarily distort surface interest rates in financial markets, luring entrepreneurs into building factories in the wrong places. But the unshakable "pure rate of interest" in the real production structure will eventually exact ruthless vengeance through skyrocketing prices and ruptured supply chains, tearing those false booms completely to shreds.

Rothbard's deduction declared an iron law: The interest rate is not a dial that bureaucrats can arbitrarily adjust. Any government action attempting to intervene in interest rates by manipulating money is, in essence, an anti-intellectual act of economic suicide.

The Anatomy of Boom and Bust

Now, the logical chain is complete. When we place the phenomenon of interest rate deviation discovered by Wicksell into the "law of time preference" purified by Böhm-Bawerk and Fetter, the praxeological framework of Mises, and the grand "time market" revealed by Rothbard, the true face of the business cycle—this phantom that has haunted capitalism for centuries—is completely exposed.

In a pure free market, Rothbard's "pure rate of interest" ruthlessly commands the entire production structure. It perfectly and honestly mirrors Mises's "originary interest"—that is, the true savings and time preference of all society. Here, the length of entrepreneurs' roundabout production flawlessly matches the time the general public is willing to wait and forgo present consumption.

However, the seeds of disaster are always sown by the intervention of state power.

When the central bank colludes with the fractional-reserve banking system, forcefully injecting massive "fiduciary media" (Umlaufsmittel) into the loan market through credit expansion created out of nothing, they have actually executed a systemic sabotage of the economic calculation nerve center of the whole society. They artificially and violently depress the loan rate in the financial market below the true "originary interest."

This is absolutely not wealth creation, but a fatal signal tampering. When calculating costs and benefits, entrepreneurs are deceived by this falsely cheap interest rate. They mistakenly believe that the public's time preference has suddenly dropped, and that society's pool of real savings has accumulated sufficient bricks, steel, and flour. Based on this illusory premise, entrepreneurs race to launch incredibly lengthy and massive capital goods production projects that were originally utterly unprofitable. Factories rise from the ground; machines roar day and night.

In the macroeconomics statistics bureaus, this is hailed as a "Boom." But under the cold scrutiny of the Austrian School, this is merely a mirage built on paper money; it is a highly dangerous "Malinvestment" of society's capital.

But the laws of time cannot be deceived, and physical reality brooks no tampering. The ledger numbers spat out by the printing press cannot conjure a single real grain of wheat. The public's "pure time preference" has not changed at all; they still urgently crave present consumption. As the newly printed money flows into the final consumer goods market through workers' wages, true resource scarcity begins to ruthlessly bite back at this illusory production structure.

The various stages of production begin a desperate scramble for highly limited raw materials and labor. To maintain those massive half-finished projects, entrepreneurs are forced to pay ever-higher costs. Concurrently, to protect themselves from the erosion of inflation, lenders will inevitably demand higher price premiums. The loan rate that was artificially suppressed will eventually mount an unstoppable vindictive rebound, viciously surging towards, and even exceeding, the true "originary interest."

The illusory boom abruptly comes to a halt here. When the valve of credit expansion is forced shut, or simply when the speed of money-printing can no longer keep up with the pace of rising costs, the truth is laid bare for all to see. Entrepreneurs despairingly find that the money they borrowed is nowhere near enough to see their projects to completion. The magnificent blueprints calculated based on false interest rates instantly dissolve into a landscape of unfinished ghost buildings and scrap metal; enterprises go bankrupt in droves, and armies of the unemployed flood the streets. This, of course, is the so-called "Bust."

A depression is by no means an endogenous pathology of the free market, nor is it a crisis of capitalism. On the contrary, a depression is a highly painful, yet absolutely necessary mandatory detoxification surgery being performed by the free market after enduring government credit poisoning. It is objective reality re-establishing the absolute authority of "time preference," mercilessly liquidating, stripping, and restructuring the scarce capital that was misguided by the central bank.

Any government intervention attempting to "save the market" by turning the printing presses back on and lowering rates again is nothing but injecting a dying addict with a more lethal dose of poison. It might mask today's birth pangs, but it will inevitably be paid for tomorrow by a fiercer, more thorough, ultimate collapse capable of destroying the entire monetary system. Mainstream economics defines inflation as "rising prices," thereby dressing the government up as an innocent firefighter; but rising prices are merely a symptom. The sole essence of inflation is the government's insane watering down of the money supply. The government is not putting out fires at all; the government is the sole arsonist running around with the printing press.

Conclusion

At this moment, the collapse of AI stocks is right before our eyes, an unprecedented great economic depression lies ahead, countless people will lose their jobs or even become homeless, commercial buildings will shut their doors one after another, banks will gradually go bankrupt, the credit system and central banks will collapse, and it may even trigger wars...

While Keynesian macroeconomists sat in their opulent conference rooms, using highly complex mathematical models and calculus to debate how to 'manage' inflation through fine-tuning fiscal policy and monetary tools, someone posed the question of the century to Mises: "Professor, how exactly should we stop inflation?"

Mises did not write a single formula on the blackboard. He gave an answer so ruthlessly cold that it drives all politicians and central bank governors to despair: "Stop printing money immediately!"

Frank
2026-02-26
Vancouver