Capital Formation

In a free market economy, capital is formed through savings.

  • When people produce more than they consume, they create savings
  • Savings is capital that can be invested or loaned out to others
  • Savings/Capital are scare, so investors invest wiselfy

Capital Formation Under Modern Central Banks

  • Central banks have distorted how Capital is created
  • Instead of through savings, Central Banks can create currency out of nothing
  • Doing this distorts free markets - causing inflation and stealing value from existing real savings
  • Fake money makes capital less rare - leads to bad decisions, squandering, malinvestment, etc
    • Many enterprises only work because money is cheap
    • Concern is that when money becomes less cheap, many businesses who rely on cheap money will fail