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Source link: http://archive.mises.org/10071/bad-news-for-our-money/

Bad News for Our Money

June 4, 2009 by

Suppressing market interest rates to the lowest level possible seems to have become a key objective for central banks around the world as they respond to the turmoil in financial markets, the decline in output and the deterioration in the labor market.However, it is a fatal policy: it amounts to fighting the correction of the debacle which has been caused by central banks’ downward manipulation of interest rates through a relentless increase in bank circulation credit and the money supply. FULL ARTICLE

{ 15 comments }

Curious June 4, 2009 at 11:35 am

I am having hard time understanding why is it bad to drive down interest rates. If it is bad to drive it down, what should it be?

Wayne June 4, 2009 at 12:09 pm

Curious,

No one can say what the interest rate should be. It is (or at least should be) determined in the market by the supply of loanable funds and the demand for those funds. Absent government intervention, the interest rate will adjust to bring both the supply and demand for loanable funds into equilibrium.

simik June 4, 2009 at 1:50 pm

Curious,
interest rate is supposed to be indicating the volume of savings in the economy. More savings means lower interest rate. Savings is good for the economy, but as the Fed cannot really produce savings, they mess with savings indicator… which is a bad idea, as wrong indicator readings lead to a cluster of wrong investment decisions which inevitably end with a correction (recession/depression) when the true scarcity of savings is revealed.

Steve Clay June 4, 2009 at 2:10 pm

My dad forwarded me this article asking “How do we fix it?” A very good question. mises.org seems to have plenty of dire predictions of our fiat/fed ways, but is anyone writing about how a return to hard currency could occur, or the potentially undesirable implications it could have?

Is there hope for at least incremental progress in the right direction?

Curious June 4, 2009 at 2:29 pm

Thanks for your answers, they brought up a few more questions. :-)

Wayne,

can you define what are loanable funds?

Simik,

why is interest rate supposed to be indicating the volume of savings?

gene June 4, 2009 at 2:52 pm

curious,

loanable funds are simply funds available to be loaned. In a “real” economy, this is the amount of savings that is available to be loaned for whatever use debtors have for funds, whether a company or individual. the more that people save, the more funds are available and the lower the interest rate which is dependent on supply and demand of the funds themselves.

If people aren’t saving and funds aren’t available, interest rates will rise to compensate for less available funds. this is an automatic “governor” on the economy, and can prevent the high highs and the low lows.

In our “pretend” economy, the fed fabricates the “funding” end of things by manipulating the amount of money in the economy and setting the basic rate they loan funds at. It is difficult to determine a “real” interest rate in this environment and the economy cannot react to what is actually going on under the deluge of pretend financing. So, what happens is anyone’s guess but it always involves inflation.

Just as importantly, the “power” of capital is taken out of the hands of the producers and given to the fed and its buddies, the banking cartel. This is similar to when Kings would call in the people’s gold and cheapen it, keeping the change. it is really the difference between a free economy and one that is not.

greg June 4, 2009 at 4:00 pm

I find it interesting that the recession years dropped by 75% when the money supply increased at a greater rate. Could there be a relationship here? Also the years where the CPI was higher than the bond rates seem to decrease as well.

I agree that the Fed is buying Treasuries at levels never matched before. But it isn’t stopping others from buying them too. The fact is, US Treasuries are a safer investment than most other countries t-bills.

What you need to pay careful attention to is the spread from the 1 year to the 10 year. As as this spread grows, the bond market is more concerned about future inflation. While the spread is growing, it is showing signs of stabilization.

But if you believe inflation is going to explode, buy commodities. Be prepared to have your ass handed to you unless you can take delivery of your contracts. Which brings me back to the majority of investors wanting to play it safe, they buy Treasuries.

Or you can buy gold. The only problem is as the price of gold increases, countries that have gold reserves will sell them to raise cash. Increased supplies in the market will cause the price to fall. This fear in the market has kept a lid on gold.

Matt June 4, 2009 at 5:15 pm

It must be remembered that we are now at a stage of monetary inflation that is no longer tied to Gold.
Government (Washington) can now at will increase the money supply via the Federal Reserve this is also known as Counterfeiting, which in George Washington’s time was outlawed via the Constitution.

Having money tied to Gold keeps Government spending honest.
Let’s not be fooled: the Federal Reserve was created to bypass honest money dealings between Government and its citizens.

In the present scenario of endless deficit spending via the increase of the Nation Debt, favors politicians’ cronies and the Banks gain via Fractional Reserve lending policies i.e. loaning money that doesn’t exist except on their books and collecting real (blood, sweat and tears) wealth from the borrowers. The game is fixed.
Anyone else trying this scheme would in Honest Times be locked-up for thievery.

BioTube June 4, 2009 at 6:16 pm

@greg:
Sure, the number of downturns decrease, but the severity and length skyrocketed. Before the gold standard was effectively abandoned, a fifteen-year depression was completely impossible, yet we’ve already had at least two that have lasted over a decade since then and are likely headed into another; in fact, there seems to be about twenty-five years from the end of one megadownturn and the beginning of the next – and we’re due.

billwald June 4, 2009 at 6:18 pm

Checked the exchange rates recently? US vs Canadian dollar, pound, and euro? The international market has already corrected for the messing with the American dollar.

low warranty June 5, 2009 at 7:19 am

I always find gregs comments on gold interesting. He seems to always know that gold should be priced higher right now except for the fact that other countries always sell it in to the market. Greg, how do you know this?

ganpalou June 5, 2009 at 7:51 am

The article makes the assumption that the Fed will enforce the policy of continued “excess liquidity” of the Bushama administrations.

On June 4, Ben Bernanke stated flatly, publicly, that the Fed was not going to monetize the national deficit. I dont know if Benny has the kind of power to make such a statement, or if the statement was merely an opening bid in a negotiation with the President, Congress and the Treasury. Does anybody know?

I had always believed that it was the job of Congress, especially the “great deliberative body,” the Senate, to give away the public wealth, and the Fed was merely one vehicle for doing so. I had also believed that the public wealth was embodied in the Treasury, and generally represented two classes of assets: 1. Federal lands, most of the U.S. west of the Mississippi (Federal businesses, like Amtrac and now GM could be assets if they had value) and 2. the present value of the future tax stream.

Congress has done an outstanding job of giving away the public wealth, by failing to put together an energy policy, by making the U.S. a tax haven for passive foreign investment, by doing the social engineering for the housing bubble, and now proposing to expand the national health care to all Americans, among other things. Is Bernanke telling Congress that they are a sub-prime investment?

I am retired, and live on a mix of fixed income and return on investments. I dont see that it makes much difference to me, stategically, whether the transfer of wealth from the U.S. over the last 30 years, and continuing at an accelerated rate, is funded by inflation or increased taxation. It may make some difference to me tactically, though, so I’d be interested in understanding Bernanke’s proclaimations.

Steve Ziniti June 5, 2009 at 9:22 am

Is it possible to build a cartoon-like flow chart of the various ways the US gonernment increases the money supply so that the general public can “see” at a glance?

gooddebate June 5, 2009 at 12:20 pm

I wonder if we can get the same public outcry from this hockey stick chart as from the temperature hockey stick chart. Guess it shows how many have forgotten what is really important.

Curious June 5, 2009 at 1:13 pm

gene said:

“…loanable funds are simply … the amount of savings that is available to be loaned..”

To me, savings is wealth created in the past, loan is wealth to be created in the future. I don’t see any relation between these 2, why limit the amount of loans by the amount of savings? Can anybody shed some light on this please?

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