On July 16, 2025, two major developments captured national attention and were welcomed by most economic analysts. First, Bank Indonesia (BI) once again reduced its benchmark interest rate to 5.25%. Second, Indonesia signed a trade tariff agreement with the United States at a rate of 19%, making it the second lowest in Southeast Asia after Singapore, which applies a 10% rate.

To the public and mainstream media, these events were seen as signals of an economic revival. The stock market soared. Domestic economists voiced their optimism. However, for those who view the economy through the lens of the Austrian School, this euphoria may actually signal the quiet emergence of something dangerous.

For many, lowering interest rates seems logical when credit growth is stagnant. The narrative is simple: if borrowing costs are too high, credit demand remains weak. The solution? Make money cheaper, and demand will rise. Yet this logic—which has underpinned global monetary policy for decades—overlooks the true nature of what interest rates represent.

In Austrian economic theory, interest rates are not tools to stimulate aggregate demand. Instead, they are price signals that reflect society’s time preferences—how much people value consumption today versus in the future. When central banks intervene in setting interest rates, they effectively mute these natural signals.

This creates an illusion. Entrepreneurs no longer see the true cost of capital but rather an artificially lowered one. The result is what Austrian economists have long warned about: malinvestment—misdirected investment driven by distorted price signals.

Projects that appear profitable due to manipulated interest rates get greenlit, even if they are fundamentally unviable. The economy starts to grow not on real foundations, but on a fabricated sense of optimism.

In practice, we see businesses—attracted by cheap credit—begin to expand. Manufacturers buy new machinery, developers launch property projects, and investors pour money into ventures previously deemed too risky.

Consumers also get swept up in the moment—spending more on credit cards, taking on personal loans, and living slightly beyond their real means. For a while, everyone feels prosperous. But this isn’t real growth. It doesn’t stem from rising productivity or sound capital accumulation. It is merely the initial boom phase of an unsustainable economic cycle.

In recent years, Indonesia has shown clear signs of such a false boom. Despite increasingly loose monetary policy, on-the-ground indicators tell a different story: layoffs are rising, purchasing power is being eroded by inflation, and many businesses—especially in the manufacturing and B2B sectors—are realizing that consumer demand is falling short of expectations.

The textile industry is a case in point. Many blame cheap Chinese imports, but a deeper issue is that numerous domestic textile firms expanded their production and capital investments based on false demand projections—projections born out of low interest rates.

This is not a market failure; it is a planning failure—specifically, a failure of central planning. Like many other central banks, BI believes it can steer the economy by adjusting interest rates. But when interest rates no longer reflect real savings and time preferences, investment decisions lose their economic rationality.

What results is distortion. Cheap credit fuels speculation by the boldest risk-takers, not the most productive actors. Meanwhile, savers—the true backbone of capital accumulation—are sidelined and penalized.

At its root, the problem also lies in a misunderstanding of money. Too often, money is seen as a neutral medium of exchange. But in reality, money is a commodity subject to the laws of supply and demand.

When a central bank injects liquidity into the system, that money does not spread evenly. It flows through specific channels: major banks, financial institutions, and government contractors. Those closest to the source benefit first—before prices rise. This is known as the Cantillon Effect, and its impact is tangible: widening inequality, a squeezed middle class, and increasingly uneven wealth distribution.

Examining the Trump Tariff What about the trade tariff agreement with the United States? On paper, it marks progress toward trade liberalization. President Prabowo Subianto deserves credit for removing protectionist policies such as local content requirements and for opening strategic sectors like manufacturing and healthcare to foreign competition.

However, it’s important to acknowledge that this reform was not driven by ideological principle but by diplomatic and economic pressure. It wasn’t the result of market spontaneity but a political compromise. Without genuine institutional reform—legal certainty, streamlined bureaucracy, and secure property rights—its benefits will remain short-lived.

Indonesia has fallen behind Vietnam and India not due to a lack of potential, but because of excessive bureaucracy and inconsistent policymaking. Investors need certainty. They look for systems that promote entrepreneurial freedom, not state intervention. And they will not wait forever.

If we want to integrate with the global capital market, we must also embrace the rules of the free market—where prices, including those of money and capital, are determined by millions of voluntary exchanges, not by technocrats in central bank boardrooms.

So the critical question is: is Indonesia truly on a path to sustainable growth, or are we once again caught in the illusion of short-term stimulus?

Interest rate cuts, trade deals, and market optimism may look encouraging. But they are no substitute for solid economic foundations. In the Austrian School's view, true growth stems from real savings—not debt-driven consumption, not cheap credit, and not monetary intervention.

If we genuinely seek long-term growth, we must allow interest rates to rise when dictated by real market conditions. We must be willing to let bad investments fail. We must reward savers, not speculators.

Most importantly, we must allow prices—including the price of capital—to emerge from free market processes. The economy is not a machine to be fine-tuned from above; it is a living system, driven by individuals, time preferences, and the freedom to choose.

At present, Indonesia has been handed a lifeboat. But if that lifeboat is built on phantom credit, choking bureaucracy, and fiat money without real value, then the cracks are already forming before we even reach the rapids.

There is still time to change course. But that will only happen if we dare to abandon the technocratic mindset and return to the most basic principle of economic freedom: that a free society, when left to choose for itself, will always be wiser than any planner who claims to know what’s best from above.