Businesses go up and down; businesses go into business and out of business. Sometimes businesses seem to drop and increase at the same time. That is what the “business cycle” is referring to. The Austrian theory of the business cycle gives a great example of why up and down cycle occurs.
First, when the public (consumers) save their money and put it in the bank they are saving for something in the future. When there is more money saved the bank the interest loan rates go down. With the rates down businessmen see an opportunity to begin a project that they have been waiting to do, but haven’t done it because it would be too costly to take a loan out. Then, once the project is done there is a new product for the public to buy. The public, who have been saving their money, can now buy the new product since they have enough money to do so.
Occasionally governments may decide to force banks’ interest rates down to a lower cost. When this happens businesses often see that as a signal to take out a loan. Once the businesses’ project is complete a new product goes on the market- yet not many people buy it because they do not have money saved to spend. So the businesses take a huge economic loss and sometimes have to go out of business entirely because of the loss.
When governments force interest rates down it is not doing the society a favor- it is misleading society with those false interest rates. The result of forcibly lowering interest rates will most likely lead to recession or depression for the economy.
Photo Credit: Me. This is another picture from my orange flower photo shoot.