Now we have heard that the Fed is going to cut interest rates, this from The USA Today:
“The Federal Reserve slashed interest rates a half-percentage point to the lowest level in more than four years Wednesday as policymakers try to limit the pain of an economic downturn.
Lower interest rates should eventually encourage consumers and businesses to borrow money once the crisis in credit markets eases. That will help the economy recover as people buy homes, machinery, cars and other items, PMI Group chief economist David Berson says.”
Of course, what happened around four years ago? The housing boom. If you look at the graph you will see that the interest rate was low for people to buy these housing. It went up and people couldn’t afford them. The natural rate of interest went up even more than that.
So this is the final step and the connector of the Austrian Business Cycle. If the Austrian theory is true then we should expect these moves to start another boom to pull us out of this recession and in about 7 years we will have another bust. We will then do it all over again.