Posted tagged ‘The Role Of Interest Rates’

0% Interest Rate x Eight Years = The Fed’s ZIRP Doesn’t Work

September 18, 2015

High above us in its ivory tower the Fed claims the ability to see what lies over the horizon, allowing it to dial-up just the right interest rate to steer our economy to a safe harbor. For eight years the Fed has dialed up the same interest rate of 0% and we are no closer to safe harbor than when we started. Which begs the question. Is the Fed actually in an ivory tower; or is it wandering around in a desert, riding its 0% interest rate camel toward the mirage of a robust economy that’s always disappearing right in front of its eyes?

I think the second scenario is what is actually happening. If the geniuses at The Fed don’t think our economy can handle a quarter point increase in the interest rate, what does that tell us about the strength of our economy. If they want to see what is causing our economic problems they need to look no farther than their zero percent interest rate policy. It is the cause and the effect of the problem.

JEFF DEIST: IN THRALL OF THE FEDERAL RESERVE

In his short article titled, In Thrall Of The Federal Reserve, Jeff Deist covers a lot of ground about the economic reality concerning the Feds zero percent interest rate policy. Here are some excerpts.

“Perhaps no economic pronouncement in history has been anticipated, discussed, predicted, dissected, and reported like the Federal Reserve’s momentous decision today not to raise interest rates..”

“This is not to say the hype is unwarranted. On the contrary, the decision to raise interest rates even just 25 basis points would have represented nothing less than the end of an era…”

“After so many years of the “new normal”, we have to be reminded just how extraordinary – and unprecedented – the Fed’s actions since 2008 have been…..these actions have set America on a hopelessly dangerous and unsustainable path…… placing so much economic power in the hands of a select few might not end well.”

In The Theory of Money and Credit, Ludwig von Mises made the case more than 100 years ago – before the Fed ever existed – that monetary interventions cannot create prosperity:”

Mises -“Attempts to carry our economic reforms from the monetary side can never amount to anything but an artificial stimulation of economic activity by an expansion of the circulation, and this , as must constantly be emphasized, must necessarily lead to crises and depression. Recurring economic crises are nothing but the consequences of attempts, despite all the teachings of experience and all the warnings of the economists, to stimulate economic activity by means of additional credit.

 

Related ArticleIf The Fed Is Always Wrong, How Can It’s Policies Ever Be Right? at zerohedge.com.

Related ArticleThe Role Of Interest Rates In A Market Economy, at austrianaddict.com.

Related ArticleA Tornado vs. The Fed, Which Is More Destructive, at austrianaddict.com.

 

 

 

 

 

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‚Äôs 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 ArticleThe Role Of Interest Rates In A Market Economy, by austrianaddict.com.

Related ArticleThomas Woods Explains The Austrian Business Cycle Theory, by austrianaddict.com.

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