As the Austrian economists Ludwig von Mises and Friedrich Hayek have amply shown, creating money out of thin air, flooding the economy with cheap credit, and keeping interest rates artificially low – as Western banking systems have been doing more or less continuously for decades, and particularly so in the years following the dot-com bust and the 9/11 attacks – does not lead to economic growth. On the contrary, it leads to malinvestments – and to inflation. In short: loose monetary policy creates bubbles.
It would go too far here to delve deeply into the capital theory of the “Austrian” school of Mises and Hayek. Suffice it to say that cheap or fiat money that is injected into the economy by banks (on the back of the central banks’ monetary policy) either leads to overinvestment in (more often than not) the capital goods sector, driving up prices of machinery and commodities, or (as is more frequent nowadays) is channeled into speculative activities, in particular investments in stocks, bonds, mortgages and commodities, leading to price bubbles in these sectors.
Source link: http://archive.mises.org/12290/sound-in-turkey/