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It's not uncommon to hear someone lamenting the woes of consumption and consumerism when looking for something on which to blame the world's problems. However, consumption isn't bad in and of itself. In fact, you'll literally die if you stop consuming. 

If nothing else, everyone needs to eat.

Nonetheless, many people express that they feel like they're being encouraged to consume more than they otherwise would. They aren't wrong for feeling this way. <strong>They ARE being encouraged to consume more than they otherwise would.</strong> And there's a reason for that. Contrary to popular opinion, that reason is not "greedy business owners"; it's the distortion of incentives created by fractional reserve central banking and artificial interest rate manipulation.

<h2>The Federal Reserve</h2>

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The Federal Reserve is the largest pyramid scheme of all time. It's also the most successful socialist experiment of all time. In accordance with the socialist doctrines of central banking and centralized control of credit expansion, price controls were imposed by the Federal Reserve on interest rates. Interest rates have an extremely important market function: they are the price one pays for borrowing money.

<h2>The market function of interest rates.</h2>

Why should borrowing have a price? Because people have <a href="https://wiki.mises.org/wiki/Time_preference">time preference</a>, and because resources are finite. Time is a scarce, rivalrous means that must always be taken into consideration. All uses of time come with <a href="https://en.wikipedia.org/wiki/Opportunity_cost">opportunity costs</a>. <strong>It is impossible to remain indifferent with regard to the passing of time</strong>. People use money because they expect to be able to exchange it for scarce resources, thereby bidding those resources away from others. In order for someone to lend money, they have to forego consumption in the present in order to be able to consume more later. When someone borrows money, they have to forego consumption in the future in order to be able to consume more in the present. All other things being equal, interest rates are the point at which a lender's willingness to forego present consumption intersects with a borrower's time preference for consumption in the present.

Again, all other things being equal, the higher the lender's time preference for future consumption, the higher the asking interest rate. Likewise, the higher the borrower's time preference for consumption, the higher the interest rate he'll be willing to pay. The imposition of an artificially high universal <a href="https://en.wikipedia.org/wiki/Price_floor">price floor</a> on interest rates would therefore result in less consumption than would occur otherwise. Likewise, the imposition of an artificially low universal <a href="https://en.wikipedia.org/wiki/Price_ceiling">price ceiling</a> on interest rates would result in more consumption than would occur otherwise.

<h2>The distortion of market incentives.</h2>

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When the price of borrowing money is kept artificially low by the Federal Reserve (as prescribed by leftists and Keynesians of all flavors) instead of being determined by the choices of individual lenders and borrowers, it forces lenders to make loans which wouldn't have occurred otherwise and which don't reflect their actual time preference, which results in an inflationary expansion of credit, which results in increased consumption. The individuals closest to the nodes where this new credit enters the market are the ones who benefit the most from it. The individuals closest to this first set of individuals are who benefit second most from this expansion of credit. And so on, and so forth. As you can imagine, having access to so much purchasing power at such low cost can be <em>extremely addictive</em>. 

As this new credit makes its way through the market, it causes decentralized, localized price inflation that ripples through the entire economy in a slow motion phenomenon called the <a href="https://azizonomics.com/2012/08/07/the-cantillon-effect/">Cantillon effect</a>. The Cantillon effect creates disparities in exchange rates between different goods and commodities in different geographical areas, thereby creating opportunities for <a href="https://wiki.mises.org/wiki/Arbitrage">arbitrage</a>, which allows speculators and traders to profit without actually producing anything. This can become as addictive as having access to low or no interest fiat currency. Such an addiction en masse leads to what leftists call "reckless speculative investing".

<h2>"Unforeseen" consequences.</h2>

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Artificial inflation and interest rate manipulation has several unintended and unforeseen consequences. Unforeseen by leftists and Keynesians, anyway. One problem is that the creation of credit is also the creation of debt. When a portion of the debt is repaid, it's like matter meeting anti-matter. The corresponding credit is obliterated, and the currency supply deflates. 

However, the interest owed on the debt is never created or circulated. This means that <em>there is never enough credit in circulation to repay existing debts</em>.

As a result, the easy credit enjoyed by those at market nodes closest to the central bank only lends itself to a short, euphoric high which gives way to panic and desperation when it is realized that some borrowers will have to default. This is essentially why the "trickle down effect" lambasted  by many left-leaning politicians ultimately fails. There will always be more debt and therefore more demand for fiat currency than there is currency in supply to repay the debt. Any attempts to create even more fiat currency with which to repay the debt simultaneously creates more debt, which means the debt only goes up and never down. Leftists blame both this failure and the failure of speculative investing on the greed of market actors when, in reality, <strong>these failures are caused by the very interest rate manipulation that leftists prescribe</strong>. 

<h2>Inflation punishes people who save money.</h2>

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The other problem is that resources are scarce and rivalrous. When credit is created from nothing and circulated as currency, it can be used to bid away real resources from other people. As supply of an available resource goes down relative to demand, price increases. This means that people who save their currency are able to buy more with it in the present than they will be able to buy in the future. This defeats the point of saving, thereby incentivizing spending. 

<h2>Conclusion</h2>

The debasement of the currency supply through the artificial manipulation of interest rates and the resulting expansion of credit destroys all incentive to forego present consumption in favor of future consumption. This is not a failure of markets or of economics; <strong>it is a failure of econometrics and socialist, market intervention</strong>. The existing mixed market economy exists as a spread over a monopolized currency supply, artificial interest rates, and myriad regulations and micro-interventions, each of which was introduced to address problems created by the last. 

To blame the market for the failures of market intervention is to throw the baby out with the bathwater. People aren't being encouraged to consume because of the market; they're being encouraged to consume because of the ways in which the people calling themselves "government" intervene with the market through the initiation of force.

The bad news is that you wasted your money if your degree in economics is from a school that doesn't teach Mises or Rothbard. 

The good news is that <a href="https://mises.org/library/human-action-0/html/pp/868">Laissez-faire</a> is all that is required to fix these problems. 

<h2>About the Author</h2>

<em>I'm <a href="http://www.facebook.com/therealjaredhowe">Jared Howe</a>! I'm a <a href="http://www.facebook.com/j3443one">Voluntaryist hip hop artist</a> and professional technical editor/writer with a passion for Austrian economics and universal ethics. You can catch my podcast every Friday on the <a href="http://www.theseedsofliberty.com/">Seeds of Liberty Podcast Network</a>.</em>

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