Dear Businessperson,

I hope this message finds you well and in good health. I write to you on this occasion with the purpose of trying to help you make sense of what is going on in the world at present. In the past few months you may have noticed there has been a lot of talk in the media about an impending recession, and as any sensible person you might be asking yourself and your trusted advisors “why?”. In this letter I set out to explain in simple terms the causes of a recession, the reason the looming one is at this stage inevitable, and what you can do about it. I hope it is of some service to you and your family.

It may have happened to you that demand for your product or service has recently stopped growing, or that you were expecting to be able to continue raising your prices without losing sales based on the trends you had observed in recent years. Everything was going so well, and now, all of a sudden, it isn’t. It might be easy to think you did something wrong or to blame it on weird political events, but I can assure you, these are not the causes of a recession.

Recessions are more often than not a monetary phenomenon; the only other options are a catastrophic amount of destruction, as in war or a natural disaster, or that your country has fallen into a regime with a planned economy, in which case there would be no businesspeople to talk to. The looming one is indeed a monetary phenomenon; it has everything to do with those who control the amount of what we accept in exchange for our products and services: a central bank.

It wasn’t always this way, but the amount of dollars (or any other currency at present) is completely flexible and those who decide how much to ‘print’ (or rather create) are called a central bank. In the United States, the central bank is the Federal Reserve System. They are able to manipulate the interest rate by manipulating the amount of dollars because the new dollars enter into circulation through the financial sector.  The reason they claim to do this is to “boost demand” and to “lower unemployment”, which does happen in the short-term but is not sustainable in the long-run because of effects not apparent at first.

There are very serious consequences to this manipulation. It causes the unit of the dollar to lose purchasing power, because creating more units does not create more products and services to purchase per se; this is called inflation. It also causes a redistributive effect, because those who get the new dollars first are able to use them before the prices adjust to the new amount; this is known as the cantillon effect. But perhaps the most alarming effects are those related to the business cycle and the capital structure.

The business cycle has two stages: the boom and the bust. The boom is caused by the boost in demand, which is caused by an artificially low interest rate. The interest rate goes lower because the new dollars are loaned automatically, thus making the price of credit lower because the supply is higher; the interest rate is the price of credit. The more dollars there are, the more new dollars it takes to maintain the interest rate artificially low, which is why the central bank has a choice between letting the interest rate adjust or producing inflation.

When the interest rate is artificially low, you, my dear businessperson, will have an incentive to take a loan to expand your operation or to start a new venture, because the artificially low rate works as a signal indicating there to be more available capital (as in any of your inputs) than there actually is, and at the same time your supplier and your consumer will be expanding operations for the same reason, so it will feel like business is going great. But remember, just as creating more dollars doesn’t create more products and services, using more capital doesn’t create more capital.

For this boom to be maintained, not only does it take more and more new dollars to maintain the interest rate at a certain level, but it is necessary for the interest rate to go lower and lower. This is so because demand can only continue to grow at the same rate if new ventures are undertaken, and new ventures can only be undertaken if the incentive for such is sufficient.

So at this point the central bank is faced with two options: stop inflating (which would trigger the bust) or risk a hyperinflation and serious damage to the capital structure. A hyperinflation would render the dollar worthless (or rather worth the paper it is printed on), but the damage to the capital structure is the more important matter.

The interest rate has price properties but is not only a price, like that of an orange. If the price of oranges is manipulated, it only affects the orange industry. But if the price of credit is manipulated, it affects the whole market, because it coordinates the difference between present and future. The proper function of the interest rate, when left alone, is building and maintaining the capital structure. For capital to be created, saving is necessary. The interest rate as a market price is supposed to ensure there are enough savings so that enough capital is produced to replace that which is used at present and even more so that there can be an exponential growth in real output.

The interest rate adjusted for inflation is called the real interest rate. When the real interest rate is lower than it would be under pure market conditions, the capital structure grows at a suboptimal rate and the growth in real output can become more linear than exponential. When the real interest rate gets to zero, the capital structure is maintained at a constant level; only enough capital is produced to replace that which is consumed. When the real interest rate becomes negative, the capital structure shrinks; not enough capital is produced to replace that which is consumed. This is what I call the böhm-bawerk effect.

Real interest rates at zero or negative are impossible in pure market conditions, but the central bank can artificially generate them and maintain them for as long as the capital structure isn’t completely consumed and the currency they control continues to be the common medium of exchange. A long-term bond having a lower interest rate than a short-term bond is an indication of a shrinking capital structure.

The bust of the business cycle comes when the central bank decides not to risk a hyperinflation and to spare further damage to the capital structure, i.e., when they stop inflating at the rate necessary to continue to lower the real interest rate. By that point, it is only a matter of time until some ventures start failing because demand stops growing at the same pace, which subsequently triggers a chain reaction which ultimately results in a panic, which is when the recession formally starts.

The recession, which is set to hit in or about 2020, will be a global one, and at this point there is no question it will take place. Central banks all around the world manipulated their currencies and their interest rates. They decided to make us have a future loss so that they could have a present gain.

Central banks could decide to continue to kick the can down the road, but the moment one of the major or medium players decides to stop, it will have a domino effect which will result in the global recession. This may sound pessimistic, but the recession is in fact the healthy part of the process: it is when capital is reallocated to serve its most productive purpose and the capital structures starts growing at the optimal rate again.

What you, my dear businessperson, may do to end up on top is to act as a speculator. You may hedge on your knowledge of how the world works (at your own risk) in order to serve the market and make a buck in the process. If I were to advise on speculation techniques for when a recession is coming, I would urge the speculator to stop growing their venture or to stop investing and to start accumulating liquidity in a form which would not lose purchasing power over time; this is generally possible through precious metals, which are not an investment in themselves. I would advise them to wait until the panic hits, at which point I would suggest to buy capital at a discount and employ it in the most profitable way they could find.

We can’t know exactly when the panic will hit, for it is on such matter that the geopolitical factors and the moods of the investors come into play. The only certain thing is recession will come sooner or later. I pray it is sooner rather than later.

I hope this message has been of some service to you and I hope you the best for the coming period.

Best regards,


For further reference, see Human Action and Theory of Money and Credit by Ludwig von Mises, and The Positive Theory of Capital by Eugen von Böhm-Bawerk.


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