I wrote the following as a broadside reply to a post on one of the blogs, but a) it's really too long for that, and b) it deserves to stand on its own. I'll leave the last word to the last commenter over there.
The continuing fascination among freshwater economists, and non-economist commentators, with currency as determinative of an economy's function is macabre. Hayek, and his gang, are totally batshit. When I was in graduate school, his stuff was au courant. It's still batshit. No one, as yet, has cited an historical occurrence of prosperity through austerity, the Austrians' panacea. I infer that the thrust of some arguments is to pump up the Austrians. My intent is to emasculate them.
The fundamental problem with financial analyses, of late, is lack of understanding that the US dollar is New Gold. One sees what happens when Europe or Asia gets a sniffle: Treasuries fly out the door. Bretton-Woods gave the US an absolute upper hand, but also explicit benefits in international trade; until the oil embargoes, and the abrogation of B-W, the world was our oyster. We're now the currency of record, but have none of the benefits. If we were to manipulate the dollar as profligately as other countries do their currencies, the world would be as a rusted out Yugo in a Big MAC.
Both Japan from ~1990 and the USofA today suffer from the twin evils of shifting to high income inequality and the resulting collapse of demand; it's the shift that causes the problem. It's just that simple. Recessions and depressions through history have the same cause, and the refusal to deal with it is why Japan remains mired in muck. And so will we if the Austrians get their way. I think they actually enjoy destruction of societies.
Currency, as Hume pointed out, is merely the grease that lubricates barter; it is not the raison d'etre of any economy. Goldfinger was a fictional character. The Bass brothers were real, and look how that turned out. I suppose that a shift to a "service economy" meant that currency would come to be viewed as real goods, but that doesn't mean it's an intelligent course of action.
Interest rates, in the real world, are determined by physics and engineering: more efficient real capital drives more efficient production by some delta. This delta is the real rate of return on physical investment. That is the maximum time value of money, the interest rate. While clever people may attempt to flummox reality, it never works out. The underlying reason for The Great Recession is that there is no real rate of return on home mortgages (or any purely fiduciary instrument, a fact happily ignored by many in the financial industry). There is no productive justification for interest earning on residential (or commercial, but that's another episode) housing. The value of residential housing can only increase (or decrease) with median income, since housing is merely serial consumption. Since I started this piece, I posted on eating crow, in which I marveled that a Fed board member voiced the view that housing "investment" really wasn't. I was/am genuinely surprised, since until those notes came out I read nothing from mainstream policy makers to show such an understanding.
When median income couldn't keep up with interest rate re-sets, the cry went up far and wide, "I'm melting!!!". And the financial community was flabbergasted. "We couldn't see it coming." And so forth. They had all been busy looking at yield curves and ignored the controlling ratio: median income / median house price. You can find graphs of that ratio around the interTubes now. Including my Viagra graph, by the way.
Over the course of the USofA, long term interest have been lower than short term for considerable lengths of time. There is no a priori justification for long term and short term interest rates having some magnitude differential. The risk of long term real investment is not necessarily greater than short term; it all depends on the risk inherent in the use of the funds, not the duration. One can argue the opposite, in fact: an effective use of physical capital will be both long term in its value stream (a better mouse trap) and lower in risk (a better mouse trap). 19th century was characterized by: specie money, deflation, recession, and lower long term interest rates. With today's technological march, one can argue that "long term" productivity streams don't last as long as they used to. There may not be any long term.
Another characteristic of 19th century America: capital flight to states, and when they weren't sufficiently groveling, countries, which were autocratic towards labor. The only reason that worked, for a while, was the expansion of population and the country's control of vast amounts of territory and resources.
If a picture is worth a thousand words, here's a couple:
Apple Chinese factory.