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Saturday, July 25, 2009

Why recessions are recurrent

The reason for this is that the central bank's ongoing policies are aimed at fixing the unintended consequences arising from its earlier attempts to stabilize the economy — or rather, what it believes to be the measure of the economy: the GDP. On account of the time lag between changes in money supply to changes in GDP, the central bank is forced to respond to the effects of its own previous monetary policies. These responses to the effects of past policies give rise to fluctuations in the rate of growth of the money supply and, in turn, lead to recurrent boom-bust cycles.
-- from "Is the US Economy Close to Hitting Bottom?" by Frank Shostak

Every intervention is designed to cure the ill effects of previous interventions and creates undesirable side effects of its own, leading to additional interventions, which are designed to cure . . . .

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