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Source link: http://archive.mises.org/16362/the-cure-low-interest-rates-is-the-disease/

The Cure (Low Interest Rates) Is the Disease

April 5, 2011 by

The artificial lowering of the interest rate causes malinvestment and the ensuing financial and economic “crisis.” FULL ARTICLE by Thorsten Polleit

{ 4 comments }

Patrick Barron April 5, 2011 at 2:57 pm

An excellent article that ties together three main Austrian themes–time preference, interest, and the business cycle. This comes at an opportune time for me…my class at the University of Iowa is studying time preference right now as a prelude to studying interest and the ABCT, so I will use this article. It cannot be said any better or any more clearly. Thank you.

Bala April 5, 2011 at 8:05 pm

“For instance, a child typically has a relatively high time preference”

I love this. It’s amazing how spot on this statement is. In fact, one of the important things a good education should teach children is to understand their time preference and thus make wiser choices. I keep trying to get my 3 year old daughter to choose something she likes more in the future over something she normally likes less right now and consistently fail. Every time that happens, I laugh and tell her that she needs to learn to lower her time preference :)

RTB April 5, 2011 at 10:32 pm

What a fantastic article. So clearly explains it’s points. I especially want to praise this passage:


This interpretation basically says that it is the interest rate that determines savings and investment. And so the policy conclusion is that the higher the interest rate is, the higher will be savings and the smaller will be investment. And because investment — rather than savings — is nowadays seen as being conducive for growth, the lowering of the interest rate is perceived as advancing economic prosperity.

This so clearly points out how the mainstream always puts the cart before the horse. In a sane world interest rates should naturally follow people’s time preference.

As noted in the article:

“However, it is not the interest rate that determines savings and investment — as suggested by mainstream economics. The interest rate is expressive of peoples’ valuation of present goods relative to future goods. It is, so to speak, a resulting variable rather than a forcing variable.

Mises explained it the following way: “People do not save and accumulate capital because there is interest. Interest is neither the impetus to saving nor the reward or the compensation granted for abstaining from immediate consumption. It is the ratio in the mutual valuation of present goods as against future goods.”

Thank you Mr. Polleit.

Allen Weingarten April 6, 2011 at 3:53 am

Perhaps a simplified form would be that goods and services have a true value (depending upon how much they are worth to people). The same holds for the interest that is due to loaning resources. Consequently, when there is a departure from the true value, there are losses, such as a business cycle.

This approach of allowing a natural unfolding (or spontaneous order) has commonsensical analogs such as the way people walk, talk, and play.

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