Former Congressman Ron Paul recently reminded our economic “experts” of what truly causes recessions—the Federal Reserve.
Unfortunately, the free market always gets the blame during these circumstances.
Stocks have been falling lately after news that the yield curve on Treasury notes had inverted. In other words, a short-term Treasury note was paying higher interest rates than a long-term treasury note. Generally speaking, an inverted yield curve is a sign that an economic recession is around the corner.
In typical fashion, economic commentators claimed that recessions are inevitable characteristics of a free-market economy. Thus, the negative effects brought about by free markets must be corrected by institutions like the Federal Reserve.
However, as Paul notes, “the idea that recessions are caused by the free market and cured by the Federal Reserve is the exact opposite of the truth.”
At the end of the day, interest rates are the price of money. Just like any other price, they are best set under market conditions in order to accurately provide signals about economic conditions. However, when the Fed gets in the mix, it distorts those price signals. This causes investors and businesses to misallocate resources because they do not have an accurate picture of the economy.
This type of meddling in the interest rate can generate artificial booms, which eventually burst and create recession like conditions. At the end of the day, the Fed is the main culprit behind economic downturns.
Tax and regulatory policies also play a role in undermining the economy. From the minimum wage to tariffs on foreign goods, government policies can create distortions and unintended consequences that stifle business formation and innovation.
The current tariff war with China has raised prices on imported goods which consumers normally purchase at affordable rates. In the same token, export-dependent businesses who rely on imported inputs to build their products are also hit hard by these policies.
The trade war could potentially put America into a recession, but they would not be the primary factor behind America’s recession. That title belongs to the Federal Reserve.
Paul correctly concludes “The only way to end the boom-and-bust cycle and restore peace, prosperity, and liberty is to end the welfare-warfare state, repeal the Sixteenth Amendment, and audit then end the Fed.”