Artur Marion Ceolin*
Since at least 2008, the financial world has been caught in a financial spiral driven by the rising financial impression of central banks. As a result, important economic concepts (e.g. business cycles are caused by credit expansion, price increases are caused by financial expansion) are simply seen as “old ideas” and proponents of the apocalypse. Now Some economists, especially Modern Monetary Theory (MMT) advocates, have tried to replace these ideas with new ones. Their new analytical framework has spawned countless companies claiming to be part of the new economic era.
MMT stories are beautiful and can excite the most unsuspecting people, but reality always fills in impossible dreams in the end. Market processes that deal with scarce resources and inexhaustible ends have filters that select practices that generate the greatest profit over time.
And how did you get here? Men respond to incentives, and incentives over the past decade have distorted economic and social processes. The Austrian school has long noted the importance of time preference in market processes and the impact of currency manipulation on individuals. People become more present-oriented and immediacy.
That’s not all. Massive monetary impressions distort our understanding of means and ends. When financial resources are readily available, risk perceptions and opportunity costs are distorted, eliminating the need to efficiently create value for shareholders.
For example, start-ups that promise to transform the economy with new technological revolutions that improve coordination and benefit society as a whole are receiving huge capital investments. Some companies have gone even further, burying “old management” practices and even promising to implement employee satisfaction policies. Negative or artificially low interest rates and lower opportunity costs for shareholders have given these companies the opportunity to use their shareholders’ capital investment with less scrutiny.
Most of the time, these companies tried to increase their market share. They used the pretext of “expected future earnings” to acquire new customers with a capital burn. But this future in general never became a reality.
How can a company that started by burning capital eventually raise its prices and make a profit? Is it as easy as snapping your fingers? Were their customers unable to find new business, new products, or services?
The financial world, which believed in fairy tales, was paralyzed by financial impressions. Its risk parameters were skewed. It was as if the Fed had superpowers and could easily solve the world’s financial turmoil. . But finance is still subject to the same moral hazards that caused these crises.
Economic analysis was not trusted. Even price increases were treated as part of the past. The old adage “more money, higher price” was considered an outdated economist’s folly. Nevertheless, reality always annihilates illusions. It should come as no surprise that one day a bubble will create all the inflationary conditions we live in today.
Ultimately, this dream of a new financial world, where entrepreneurs think more about global issues and society as a whole than about their own business, will be disrupted by the current inflation and rising interest rates, and the economy will recover. To a more “normal” place. Higher interest rates reduce time preference, investors look more to the future, opportunity costs are higher, and the sandcastle crumbles with another financial burst.
It’s no surprise that thousands of start-up employees have been laid off recently. The financial resources of these companies will be exhausted and the majority will go bankrupt. Instead of focusing on making a profit for their investors, these companies burned their investors’ money and treated competitive capitalism as a bad joke, focusing more on environmental and social concerns than on profit. A teenager’s dreams may surpass it.
These companies didn’t realize (or ignore) that all financial expansion is artificial and that one day bankruptcy will bring the least competitive companies to their knees. They were not prepared for a competitive market process in which only profitable companies survive. They forgot that profit isn’t just an ugly “disgusting” word.
Luckily, the market will eventually choose the best-suited company to sustain itself, but the uncompetitive will go out of business. While the economy boosts productivity, stimulates better use of resources, and creates profits and value, in the twisted scenarios we live in, every beautiful story is eager for fear of missing out on opportunities. It has attracted millions of dollars from investors. It becomes just a part of the past.
*About the author: Artur Marion Ceolin holds a Ph.D. He is a Candidate in Economics at Rey Juan Carlos University and a Summer Fellow at the Mises Institute in 2022.
Source: This article was published by the MIDES Institute.