Posted tagged ‘Artificially Low Interest Rates’

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Some Econ Homework

July 16, 2019

Austrian Business Cycle Theory, Explained, by Murry N. Rothbard, at mises.org. This is a short explanation of the boom-bust cycle that is created by monetary intervention into the free market via bank credit expansion. Excerpt from the article:

“…bank credit expansion sets into motion the business cycle in all its phases: the inflationary boom, marked by expansion of the money supply and by malinvestment; the crisis, which arrives when credit expansion ceases and malinvestments become evident; and the depression recovery, the necessary adjustment process by which the economy returns to the most efficient ways of satisfying consumer desires.”

Keynesian Fake News In The Wall Street Journal, by Daniel J. Mitchell, at mises.org. Government spending will not stimulate the economy. Government can only spend what it takes from the private sector. There is only a transfer of how the private sector would allocate its production, to government politicians and bureaucrats who will allocate their newly confiscated production according to what they value. Government doesn’t produce anything that it can exchange for money. It can only confiscate private sector production. The transfer via taxes is a transfer of something for nothing. It is not only theft, it is a reduction of wealth.

Why Socialism Must Fail, by Hans Hermann Hoppe, at mises.org. Excerpt from the article:

“Socialism and capitalism offer radically different solutions to the problem posed by scarcity: everybody can’t have everything they want when they want it, so how can we effectively decide who will own and control the resources we have? The chosen solution has profound implications. It can mean the difference between prosperity and impoverishment,”

“The United States is not fully socialized, but already we see the disastrous effects of a politicized society as our own politicians continue to encroach on the rights of private property owners. All the impoverishing effects of socialism are with us in the U.S.: reduced levels of investment and saving, the misallocation of resources, the overutilization and vandalization of factors of production, and the inferior quality of products and services. And these are only tastes of life under total socialism.”

When Will The Stock Market Respond to 2016’s Liquidity Collapse? by Frank Shostak, at mises.org. Intervention into the free market via lower interest rates and an increase of the money supply leads to artificial booms and all to real busts. If the Fed is to keep the Stock Market from correcting the Feds previous monetary expansion, it has to lower interest rates.

Social Pressure vs. Consumer Preferences, by Joakim Book, at mises.org. Excerpt from the article:

“Indeed, on a more fundamental economic level, this is the logical conclusion of division of labor. Taking information from others is how we survive in large-scale complex market societies. This is easy to see when discussing a broken car or leaking pipes: you could probably learn how to fix those pipes yourself and develop your car mechanic skills to be able to repair the car, but it would likely take much more time, effort and money than you’re willing to part with — hiring a specialist makes economic sense. Similarly, you can think of relying on others’ tastes when it comes to music or food flavors or TV shows to be a trove of useful information, deflated appropriately by how much you tend to like what others like.”

What’s Up With The Obsession About Low Interest Rates, by Mark J. Perry, at carpediemblog. Excerpt from the article:

“Raising/lowering prices, wages, or interest rates can only benefit one half of the market (buyers or sellers, workers or employers, borrowers or savers, but not both) and those benefits come at the direct expense of the other half of the market (buyers/sellers, workers/employers, borrowers/savers). In other words, it’s is zero-sum outcome that redistributes gains and losses, but without any net gains, similar to the Keynesian stimulus fallacy illustrated below.”

“So what’s with the obsession, especially the political obsession, with lower interest rates that are guaranteed to do great harm to savers while benefiting borrowers?”

“The answer must be that there’s a much greater political short-run payoff from lower interest rates than from higher interest rates. That is, borrowers (including corporations) must have a louder and more organized political influence than disorganized savers. In that case, aren’t lower interest rates a form of legal plunder and crony capitalism that allow borrowers to take advantage of savers enabled by easy monetary policy by the Fed?”

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Must Reads For The Week 2/10/18

February 11, 2018

 

THE FED AND THE STOCK MARKET

Is The 9-Year Dead Cat Bounce Finally Ending? By Charles Hugh Smith, at oftwominds.com. The Feds double edged sword of artificially low interest rates and money printing have created bubbles in the financial markets. No one knows what is and is not a bubble activity. We just know printed money went into the financial markets. As Jim Grant has said, “It is money in search of mischief”. In other words, artificially low interest rates and printed money misallocates scarce resources to activities that would not exist under free market interest rates and stable money.

When the Fed raises interest rates and takes money out of the system by unwinding its balance sheet, the bubble activities will be revealed. Could this be what is happening to the stock market now. The Fed’s QE Unwind Accelerates Sharply, at zerohedge.com. The Fed created the financial bubble in the first lace and is now trying to figure out how to gradually let the air out, instead of popping it. They hope a stronger economy can help release the air slowly over time.

Former Fed Chairman Alan Greenspan Warns: “We Have A Stock Market Bubble, at zerohedge.com. No kidding! You helped cause it by lowering interest rates and printing money.

The worlds Central Banks Holding Steady, But Promise More Rate Hikes, at mises.org. I scratch my head when I hear central banks talk about price inflation without mentioning that their policies are the cause of inflation. Prices will go up and down because of supply and demand. But this is not inflation. Money printing is the definition of inflation.

DEBT

Pentagon Auditor Can’t Account For $800 Million In Spending, at zerohedge.com. No shock here. There is waste, theft and fraud everywhere tax payer money is spent.

Credit Card, Student and Auto Debt All Hit Record Highs In December, at zerohedge.com. Borrowing money means you bring your future consumption into the present. How much more do you have to produce in order to be able to pay off the interest and inflated cost of present consumption and to also be able to consume when the future becomes the present?

Republican Fiscal Hawks Revolt Against Budget Deal, Suspension Of Debt Ceiling, at zerohedge.com. How can the Republicans in Congress say they are for small government when they pass a budget that increases the yearly budget debt by $400 billion? Only fiscally responsible Republicans stood against this budget. With the Fed saying they are going to increase interest rates, the $20 plus trillion national could increase exponentially.

Student-Loan Crisis Worsens; Looming Defaults Strain Govt Bailout Program, at zerohedge.com. Since the Government took over student loans it has become a bubble activity. The rise in the cost of college tuition is being caused by borrowed money being used to pay for college. When students get out of college and have more debt than income there will be defaults. These defaults will eventually be paid by you and me the tax payer. What a scam!

The Cure, at ericpetersautos.com. Excerpt from the article: “Imagine how different cars would be if people had to pay for them – as opposed to financing them. Debt – which is what financing is – allows people to buy more car than they can afford. It hides the actual cost of the car. It enables the government to impose costs in the forms of mandates which would otherwise be unaffordable – and so, objectionable. People would complain in the one language the government understands. They would not comply – because they could not buy.”

OTHER STUFF

“We Say Peoplekind”: Trudeau Mansplains To woman That “Mankind” Is Not an Appropriate Term, at zerohedge.com. This is the the idiocy of political correctness. Everyone with a brain knows what mankind means.

Lawmakers Want To Ban Tide-Pods From Looking So Delicious…. Seriously, at zerohedge.com. Who in their right mind would think eating laundry pods is a good idea? What kind of ego does it take to think it is your job to protect these idiots from themselves?

The Greatest Public Health Mistake Of The 20th Century, at mercola.com. We have been told for decades to stay out of the sun or wear sunscreen when you have to be out in it. But staying out of the sun causes a vitamin D deficiency. The study says that vitamin D may prevent 30 deaths for each death caused by skin cancer. Thomas Sowell is right again when he said, “There are no solutions in life. There are only trade offs.” We were sold a bill of goods on a bad trade off.

The Fragile Generation, at zerohedge.com. Excerpt from the article: “Bad policy and paranoid parenting are making kids too safe to succeed…..This generation of kids must be protected like none other. They can’t use tools, they can’t play on grass, and they certainly can’t be expected to work through a spat with a friend.”

 

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Some Econ Homework

June 20, 2017

Jean-Baptiste Say And The “Law Of Markets“, by Richard Ebeling, at fff.org. Say’s ‘Law Of Markets’ states: “A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value.”…..As each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.”

You can’t consume what has not been produced. Production creates the ability to consume. The more you produce the more you can consume.

Say: “It is not the abundance of money but the abundance of other products in general that facilitates sales….Money performs no more than the role of a conduit in this double exchange. When the exchanges have been completed, it will be fount that one has paid for products with products….Should a tradesman say, ‘I don not want other commodities for my woolens, I want money,’ there could be little difficulty in convincing him, that his customers cannot pay him money, without having first procured it by the sale of some other  commodities of their own….”

Counterfeiting money creates an exchange of an actual produced good for dollars that are not backed by corresponding production. This is theft. Even if the counterfeiting is done ‘legally’ by The Federal Reserve, it is still an exchange of something for nothing (aka theft).

There are always imbalances with supply and demand in the market, but they are usually corrected rather quickly. Monetary intervention by the Fed creates imbalances that last much longer and are only corrected by stopping the monetary intervention or an eventual bursting of the bubble.

Federal Reserve monetary manipulation has been going on for about a decade. Does anyone know what is real and what is fake in our economy right now? All we can say is there are major imbalances in our economy that will eventually be liquidated, and it won’t be pretty.

“Priming The Pump” Won’t Create Real Wealth, by Frank Shostak, at mises.org. When a recession happens labor and capital become idle. ‘Experts’ think the way out of the recession is to increase demand for goods and services so these idle labor and capital will become employed once again. Ignoring how the over-supply of labor and capital happened in the first place can lead to the same Government and Fed policy solutions which created the problem in the first place. Idle resources are not the problem. Idle resources are the symptom of the problem. The problem is the initial intervention into the market using the policies of below market interest rates and injecting electronically printing counterfeit money into the economy.

Excerpt from the article: “Commentators are correct in believing that what prevents the expansion of the production and the utilization of idle resources is the lack of credit. There is, however, the need to emphasize that the credit that is lacking is the productive credit – the one that is fully backed by real wealth (real savings). The fact that this type of credit is scarce is the outcome of previous episodes of expansionary monetary mischief by the central bank, which resulted in the diversion of wealth from wealth producers to non – wealth producers.”

“What most commentators advocate is the expansion of credit out of “thin air,” via central bank…. direct monetary injections or via intervention in the money markets to maintain a lower target interest rate……This expansion of unbacked credit not only cannot revitalize the economy but, on the contrary, will set in motion a further weakening of the process of wealth generation.”

Fed Officials Can’t See What’s Right In Front Of Them, Jonathan Newman, at mises.org. Fed officials can’t see the forest for the trees.

Here is an excerpt from the article:”Minnesota District Bank president, Neel Kashkari recently wrote…..the Fed faces a dilemma regarding asset bubbles and whether of not they should be met with raising interest. He summarizes in five points.”

-“It is really hard to spot bubbles with any confidence before they burst.”

-“The fed has limited policy tools to stop a bubble from growing, even if we thought we spotted one.”

-“The costs of making policy mistakes can be very high, so we must proceed with caution.”

-“What we can and must do is ensure that the financial system is strong enough to withstand the inevitable bursting of a bubble.”

-“Monetary policy should be used only as a last resort to address asset prices, because the costs of the economy of such policy response are potentially so large.”

“Then he admits that it is possible artificially low-interest rates increase the probability of asset bubbles forming: “Low rates…could make bubbles more likely to form in the first place.” He laments that there is no economic theory to back this up….”

It is hard to believe that with his myriad of  ‘credentialed ignorance’ he has never heard of the Austrian Business Cycle Theory.  Excerpt from the article:

“For Mises and Hayek, the policy mistake involves any creation of credit out of thin air…….If any central bank increases the money supply through the financial system, it means that borrowers have the privilege of being the first to bid up prices as the new money ripples through the economy.”

“It means that nominal incomes, employment, consumption, the prices of capital goods, and other asset prices will increase. It means that capital will be directed into new, longer, and riskier lines of production, beyond what would have happened at the prevailing levels of real saving. These lines of production will turn out to be unprofitable as the increasing scarcity of capital becomes apparent and the costs of production become prohibitively high. Incomes, employment, consumption, and stock prices plummet as laborers and capital owners seek productive and profitable employment. The bust is made up of all of the necessary corrections for the errors made during the boom. Additional artificial credit will only delay this process and make it more painful when the day comes.”

Mr. Kashkari, you said: ” Monetary policy should be used only as a last resort to address asset prices, because the cost to the economy of such policy responses are potentially so large.” Mr. Kashkari, do you know that the Fed monetary policies “of last resort” have been in effect since before 2000? These policies caused the tech and housing bubbles. What have been the costs to the economy after 20 years of these policies? They are incalculable. The only way to stop this waste is to allow interest rates to be set by the market and stop the money printing. This will bring about a recession which will correct all the dislocations of resources, capital and labor that were brought about by these policies. All thought the losses will be high, they won’t come close to the losses that will be incur the longer these monetary policies are allowed to continue.

Related Article – Interest Rates Set By The Market vs. Interest Rates Set By The Fed, at austrianaddict.com.

Related Article – Real Savings = True Credit. Printed Savings = False Credit, at austrianaddict.com.

Related Article – Thomas Woods Explains The Austrian Business Cycle, at austrianaddict.com.

Related Article – The Fed has Proved The Lefts “Trickle down Straw Man” Doesn’t Work. at austrianaddict.com.

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Some Econ. Homework

June 22, 2016

The Fed Has Whiffed Again: Massive Monetary Stimulus Has Not Helped Labor, by David Stockman, at davidstockmanscontracorner.com. The Feds injection of 4 Trillion electronically printed dollars into the economy hasn’t produced a return worth that kind of “investment”. Fewer workers working fewer hours means less is being produced. Just because you print money doesn’t mean goods and services are being produced. It only means goods and services are being demanded by using money not backed by any production. Say’s law is being shown to be true.

“Say’s Law can be explained in the following terms:”

1) “The way that a buyer demands a good is by supplying a different good.”

2) “The supply of one type of good constitutes the demand for other, different goods.”

3) “The source of demand is production, not money. Money is only a temporary parking place for past production.”

“In the modern economy with division of labor, most of us demand goods when we supply our labor. I work as a software engineer. I supply my labor writing computer software. And from that supply I am able to demand other goods, such as coffee.”

Pity The Poor Central Bankers: Playing Masters Of The Universe Is No Longer Fun, by Charles Hugh Smith, at oftwominds.com. Here is an excerpt from the article: “Central Banks can create free money for financiers, but they can’t move the needle of the real economy, except to distort and cripple it with perverse incentives to gamble borrowed money on malinvestments and skimming operations…….as former Master of the Universe Ben Bernanke noted: “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending (that) will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

I guess former Master of the Universe Ben Bernanke has never read Say’s Law: “The Source of demand is production, not money. Money is only a temporary parking place for past production.”

Printing money distorts the pricing system. Market discovery of prices (not Fed manipulated prices) is how information about how much to produce and consume is transmitted to producers and consumers in a free market. The interest rate is the most important of these discoveries, because interest rates coordinates production across time. We live in a world where resources and capital have misallocated for the last decade plus. The cure is to quit printing money and allow the market to set interest rates. What are the odds?

The Fed Pours Water On The Job-Growth Hype, by Ryan McMaken, at mises.org. The administration and the media has been telling us how good the economy has been doing. I guess the Fed hasn’t received the memo. The Fed would normally raise interest rates if the economy is doing well because it would be afraid of it overheating.  The Fed will adjust its monetary policy to weather they think the economy is too hot, or too cold, or just right. The fact that the Fed has raised the interest rate once by a 1/4 point since they lowered it to near zero in 2008 tells us everything about what the Fed thinks of the economy. So where has most of the $4 trillion in printed money ended up? If you say in the financial markets to prop up asset prices, in order to help banks, go to the head of the class. Do you think these false stock prices can stay afloat without more printed money???

Central Banks Are Wrong About Inflation and Deflation, by Frank Shostak, at mises.org. Let’s go to Murray Rothbard writing in Man Economy And State for the definition of inflation and deflation.

ROTHBARD: “The process of issuing money beyond any increase in the stock of specie, may be called inflation. A contraction in the money supply outstanding over any period, (aside from a possible net decrease in specie) may be called deflation. Clearly, inflation is the primary event and the primary purpose of monetary intervention. There can be no deflation without an inflation having occurred in some previous period of time.”

“Movements in the  supply-of-goods and in the demand-for-money schedules are all the results of voluntary changes of preferences on the market. The same is true for increases in the supply of gold or silver. But increases in fiduciary or fiat media (printed money) are acts of fraudulent intervention in the market, distorting voluntary preferences and voluntarily determined pattern of income and wealth. Therefore, the most expedient definition of inflation is one we have set forth above: an increase in the supply of money beyond any increase in specie.”

“The absurdity of the various governmental programs for “fighting inflation” now becomes evident. Most people believe that government officials must constantly pace the ramparts, armed with a huge variety of “control” programs designed to combat the inflation enemy. Yet all that is really necessary is the government and the banks (nowadays controlled almost completely by the government) cease inflating. The absurdity of the term “inflationary pressure” also becomes clear. either the government and banks are inflating or they are not; there is no such thing as “inflationary pressure”.”

CONCLUSION

Let’s not be fooled by the “Masters of the Universe’ when it comes to monetary policy and interest rates. With a little bit of reading on the topic, you could come up with the policy for fixing our economic problems. That policy would be to quit electronically printing counterfeit money and allow the market to set the interest rates. The solution is very simple but it is not easy. Why?  Because of the Fed’s previous inflationary policy, the resulting recession that would occur when we implement the cure would be politically difficult for politicians and the Fed to let happen. They have been trying to keep the correction from happening since 08, but at some point economic reality will correct all the Feds previous money printing, and it won’t be pretty.

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Federal Reserve Policies Cause Booms And Busts, by Richard M. Ebeling

September 26, 2014

In God (or money) we trust - making money on the hand printing press - stock photo

Federal Reserve Policies Cause Booms And Busts (read here at mises.org), is a fantastic article by Richard M. Ebeling, explaining what happens when central banks, like the Fed, intervene in the economy. Electronically printing counterfeit money and artificially lowering interest rates are the tools the Fed uses to “improve” the economy. The Fed may pay lip service to the free market, but the policy makers at the Fed truly don’t like the outcome resulting from the voluntary decisions individuals make in the free market. If they did, they wouldn’t intervene after the fact to try to exchange what they want the economy to look like, for what actually exists as a result of what each individual decides to produce, consume, save, and exchange.

Their tools of intervention, electronically printing counterfeit money and artificially lowering interest rates, send false information through the market. People in the market start to make decisions on what to produce, consume, save, and exchange based on this false information. The structure of the production process has no anchor to reality and the result is distortions and malinvestment. Scarce resources are allocated to areas of the economy that can’t be sustained unless ever-increasing amounts of electronically printed counterfeit money is pushed into the economy. The economic forces of supply and demand are always trying to reach equilibrium (balance). These economic forces, that are trying to correct the interventions of the central planners, will eventually win.

HERE ARE SOME EXCERPTS FROM THE ARTICLE

“In the free market, interest rates perform the same functions as all other prices: to provide information to market participants; to serve as an incentive mechanism for buyers and sellers; and to bring market supply and demand into balance. Market prices convey information about what goods consumers want and what it would cost for producers to bring those goods to the market.”

“Market rates of interest balance the actions and decisions of borrowers (investors) and lenders (savers) just as the prices of shoes, hats, or bananas balance the activities of the suppliers and demanders of those goods...”

“…There is one crucial difference, however, between the price of any other good that is pushed below that balancing point and interest rates being set below that point. If the price of hats, for example, is below the balancing point, the result is a shortage;”

“…In contrast, in the market for borrowing and lending the Federal Reserve pushes interest rates below the point at which the market would have set them by increasing the supply of money on the loan market. Even though savers are not willing to supply more of their income for investors to borrow, the central bank provides the required funds by creating them out of thin air and making them available to banks for loans to investors. Investment spending now exceeds the amount of savings available to support the projects undertaken”

“…The twin result of the Federal Reserve’s increase in the money supply……is an emerging price inflation and an initial investment boom…”

“…The boom is unsustainable because the imbalance between savings and investment will eventually necessitate a market correction when it is discovered that the resources available are not enough to produce all the consumer goods people want to buy, as well as all the investment projects borrowers have begun.”

“Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way.“

Related Article – The Role Of Interest Rates In A Market Economy, by austrianaddict.com.

Related Article – Thomas Woods Explains The Austrian Business Cycle Theory, by austrianaddict.com.

Related Article – Counterfeiting By The Federal Reserve, Although Legal, Still Results In Theft, by austrianaddict.com.

 

 

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Charles Hugh Smith: Devotion To The Keynesian Religion.

April 2, 2014

Charles Hugh Smith at oftwominds.com always makes me think. This article titled, Dear Keynesians: Your Failed Devotion To Your Sad Religion Hasn’t Conjured Up A Recovery – Here’s Why, is a great analysis of why borrowing electronically printed counterfeit money at low interest rates hasn’t made things better. Actually the underlying structure of production is weaker because of these policies by the Federal Reserve. At some point counterfeiting more money has a diminishing return. Here are some excerpts from the article.

“That any schoolkid could predict eliminating feedback and consequences will lead to a series of disastrously poor choices by speculators and imprudent borrowers doesn’t register with the Keynesian Cargo Cult.”

“It turns out that prudent people have no interest in borrowing more money, even at low rates of interest, and imprudent people are happy to do so but will stop paying the loan as soon as something untoward occurs in their finances.”

“Corporations, meanwhile, look at the real risks of expanding business in a debt-saturated economy distorted by Keynesian Cargo Cult policies and realize that gambling capital on the possibility that waving dead chickens and chanting “humba-humba” will actually increase profits is a truly stupid bet, so they borrow the nearly-free money and invest it in various carry trades overseas that return a virtually risk-free return, thanks to the nearly-free cost of borrowing mountains of money from the Cargo Cult.”

“…Diminishing returns result when a system’s ability to produce an economically valuable output declines.”

“The cruel stupidity and immorality of the Keynesian Cargo Cult knows no bounds because they refuse to accept the reality that diminishing returns cannot be fixed by more debt and more squandering of good money after bad.”

“If a speculator borrows money and loses it in a high-risk gamble, the Keynesian Cargo Cult’s solution is to force the taxpayer to make good the gambler’s losses and then give the speculator more nearly-free money to continue gambling.”

“This “solution” works the first time around, less well the second time around, and triggers a collapse the third time around. This lifecycle is called the S-Curve:”

 

Related Article – The Incompetence Of The Federal Reserve And The Deep State Is Unavoidable, by Charles Hugh Smith, at oftwominds.com.

 

 

 

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