Posted tagged ‘ZIRP’

Some Econ Homework

October 6, 2016

Government Medical “Insurance“, by Murray Rothbard, at misesca. This article, written in the 90’s, tells why prices go up when third-party payers step in between demanders and suppliers. Government decrees about health care insurance won’t stop economic forces from trying to correct the intervention by Government. Excerpt from the article: “In economic terms…..the demand curve for physicians and hospitals can rise without limit…..the suppliers can literally create their own demand through  unlimited service. In order to stanch the flow of taxes or subsidies…the government and other third-party insurers have felt obliged to restrict somewhat the flow of goodies: by increasing deductibles, or by putting caps on Medicare payments….this has been met by howls of anguish from medical customers who have come to think of unlimited third-party payments as some sort of divine right, and from physicians and hospitals who charge the government with “socialistic price controls” – for trying to stem its own largesse to the healthcare industry!”

The Market And The State, by Ludwig von Mises, at misesca. Mises tells us the different outcomes when people make voluntarily exchanges in the market vs. what happens when people are forced to make exchanges because of Government intervention into the market. Excerpt from the article: “The total enslavement of all members of society is not a merely accidental attendant phenomenon of the socialist management. It is rather the essential feature of the socialist system, the very effect of any thinkable kind of socialist conduct of business. It is precisely this that the socialist authors had in mind when they stigmatized capitalism as “anarchy of production” and asked for the transfer of all authority and power to “society.” Either a man is free to live according to his own plan or he is forced to submit unconditionally to the plan of the great god state”.

Keynes: The Crackpot Economist Of ZIRP, by Gary North, at misesca. Excerpt from the article: “….the universal phenomenon of the rate of interest  has been explained by Austrian School economics in terms of what Mises called time preference: the discount applied by acting men to future goods and services when compared with the same goods and services in the present…. Until you come to grips with the fact that the economics profession, central bankers, and hedge fund analysts are crackpots, you will not understand the modern economic world. When the marginal efficiency of anything is zero, it is a free good. It is not scarce. it commands no price..”

The Donald Nailed It: “We Are In A Big Fat Ugly Bubble“, at davidstockmanscontracorner.com. Excerpt from the article: “…the utterly unnatural interest rates engineered by the Fed have fueled an egregious inflation of the financial asset prices and that “some very bad things” are going to happen when the Fed’s market rigging operation is finally halted…….after 94 months on the zero bound the Fed has executed the most massive income and wealth transfer in American history. Upwards of $2.5 trillion has been extracted from the hides of main street savers and retirees over the eight year period (@ $300 billion per year). all of that and then some was gifted to the banks and Wall Street speculators….if the Congress were to enact anything remotely similar to the Fed’s savage and relentless attack on savers and wage-earners, they would be on the Receiving end of the torches and pitchforks that would descend on the Imperial City.”

The Great Debt Unwind Beneath The Surface: US Commercial Bankruptcies Soar, by Wolf Richter, at wolfstreet.com. Excerpt from the article: “Bankruptcies – and defaults, which precede them – are indicators of the “credit cycle.” The Fed’s policy of easy credit with record low-interest rates has encouraged businesses to borrow. And borrow they did. In Oct. 2008, as the prior credit bubble was beginning to implode, there were $1.59 trillion commercial and industrial loans outstanding at all US banks. Then the Financial Crisis hit, and loans outstanding plunged, many of them wiped out or restructured in bankruptcies. But then the Fed solved a credit problem with even more credit, and as of July 2016, there were $2.064 trillion of C&I loans outstanding, a 30% jump from the peak of the prior credit bubble that blew up so spectacularly…..Now the hangover is setting in from the Fed’s efforts to solve a debt problem with even more debt, to gain very little economic growth. And there is a leading indicator of big trouble already fermenting in the banks.”

What Makes Mises.org Different, by Ryan McMaken.  Mises.org (About Mises) is the place to go when you want to understand economics. It is your one stop shopping place for all things related to economics. Excerpt from the article: “In a typical month, mises.org receives more than a million page views, which is pretty remarkable for a site where writers regularly talk about things like the “subjective theory of value” and “fractional reserve banking….most of our traffic continues to be people looking for real, genuine economics. they want to gain a better understanding of prices, government intervention in the market, and especially business cycles…..When people look for answers beyond the mainstream, they usually find us.

Stumbling across mises.org  in 2008 is what started me on an intellectual journey that will never end. There are moments when I think it would be better to be blissfully ignorant about economic realities, and listening Hillary’s and Trump’s talk about “the economy” are some of those moments. Their economic pronouncements drive me crazy……. Is ignorance better than insanity?

 

Related ArticleHere Is Some Econ Homework, at austrianaddict.com.

Related ArticleYour economic Homework, at austrianaddict.com.

Must Reads For The Week 10/23/15

October 24, 2015

A Challenge To The GOP From Bernie Sanders: Put Up Our Shut Up On Capitalism, by Dan Mitchell, at freedomandprosperity.org. Sanders is correct for wanting reporters to ask Republicans: ‘are you a capitalist’. Socialism is government ownership of the means of production. Sanders and Hillary don’t want socialism. They want government intervention, redistribution and crony socialism. Capitalism is private ownership of the means of production. Republicans candidates think they want capitalism. But what they propose is varying degrees of government intervention, redistribution, and crony capitalism. It’s going to take decades of elections to replace politicians who have this mindset with people who understand free markets and liberty. Inch by inch.

Sanders, Trump, and John Maynard Keynes, by Hunter Lewis, mises.org. Sanders thinks our current Keynesian crony capitalist system is capitalism. Trump thinks our current Keynesian crony capitalist system is socialism. Their cure is more government intervention in different ways. Sanders wants redistribution of wealth, and Trump wants a mercantilist attitude about trade.

Donald Trump’s Contempt For The Free Market, at economicpolicyjournal.com. Trump wants to stop Ford from building an auto plant in Mexico by putting a tariff on the goods Ford will bring in from Mexico. Government regulations and taxes incentivized Ford to move the plant. So instead of using more Government force to create different incentives, why not get rid of the regulations and taxes that produced the original incentives?

My Letter To The NY Times re: My Advice To The ECB And The Fed, by Patrick Barron, at patrickbarronblog.blogspot.com. Excerpt from the article. “If the Fed wishes to prevent financial crises, it only needs to stop initiating them. The Fed’s hubris that it can fathom the proper interest rate for our vast and complex economy must rank among the greatest fallacies of all time. The Fed sees the world through the completely discredited Keynesian lens which posits that aggregate demand–what the rest of us know simply as spending–is the path to prosperity. Anyone who believes this nonsense need ask himself why he has not liquidated his own savings on frivolous consumption…

Global Stocks Soar On Surprise China Rate Cut, by David Gaffen, at reuters.com. Is anyone shocked that global stock markets soared when China’s central bank cut interest rates and the European central bank said they will increase the size of its quantitative easing (electronically printing counterfeit money) program? How strong is the world economy when the central banks of China, Europe, and the U.S. have to lower interest rates and print money to keep it afloat?

The Cronies: Half Of All Export-Import Bank Benefits Go To 10 Companies, at economicpolicyjournal.com. The Exim Bank, backed by your tax dollars, finances transactions so foreign customers can buy from American companies. These are transactions that private banks wouldn’t make because of the commercial and political risks inherent in these deals. It’s easier to be risky when it isn’t your money. By the way, does this seem like a money laundering scheme?

A Tax I Can Support, by Per Byland, at mises.org. This just might work. Unfortunately politicians would never pass it.

Justin Trudeau Elected Canada’s Prime Minister; Young Liberal Star Compared To Obama, at mercurynews.com. How could this happen? Were Canadian citizens not aware of what has been going on South of their border over the last seven years? Oh wait! What about this article? Obama Campaign Team Hands Canada Over To Lib-Left, at canacafreepress.com.

Is The New Higher Seattle Minimum Wage Destroying Restaurant Jobs In Seattle? at economicpolicyjournal.com. The answer is yes. Because the law of supply and demand states: Less is demanded at a higher price. This includes labor.

Actors In Los Angeles File Lawsuit Against Actors’ Equity Over Wage Hike, at latimes.com. I guess a minimum wage increase is only cool when it doesn’t affect you.

Michigan Governor Signs Bills Reforming Civil Asset Forfeiture, theoaklandpress.com. Some good news for liberty.

Rhonda Rousey Shuts Down Feminist.

There’s a difference between merit and value. You don’t get payed for how hard you work. You get paid for the value you produce. Who works harder; a man with a shovel digging a ditch, or a man on a backhoe digging a ditch? It doesn’t matter. The real question is; who produces the most value?

 

Interest Rates Set By The Market vs. Interest Rates Set By The Fed

September 29, 2015

The Fed has kept interest rates at near zero since the 08 economic crash. For the last year the Fed has floated the trial balloon that they would raise interest rates this September by a mere quarter of a point. The Fed huffed and puffed and failed to follow through with this increase. To understand if the original lowering of the interest rate and the failure to raise the interest rate is good or bad, a few questions have to be answered.

What is an interest rate? How is an interest rate determined? What is its purpose? What happens if the interest rate is set artificially?

We will attempt to answer these questions with some excerpts from these articles, Central Banks Don’t Dictate Interest Rates, Frank Shostak, and Low Interest Rates Cant Save A House Of Cards, by Richard Ebeling. These articles give great explanations about interest rates, central banks, and the Austrian business cycle theory. Take time to read them.

WHAT IS AN INTEREST RATE

Individuals place a higher value on a good possessed in the present than a good possessed at some point in the future. The interest rate is the difference in time preference made by each individual between possessing a good in the present as opposed to the future. Put differently, the premium we place on present goods compared to future goods, or the discount we place on future goods compared to present goods is the interest rate.

Shostak –“…… a lender or an investor gives up some benefits at present. Hence the essence of the phenomenon of interest is the cost that a lender or an investor endures.”

“……For instance, an individual who has just enough resources to keep himself alive is unlikely to lend or invest his paltry means. The cost of lending, or investing, to him is likely to be very high — it might even cost him his life if he were to consider lending part of his means. So under this condition he is unlikely to lend, or invest even if offered a very high interest rate.”

“Once his wealth starts to expand, the cost of lending — or investing — starts to diminish. Allocating some of his wealth toward lending or investment is going to undermine, to a lesser extent, our individual’s life and well being at present. From this we can infer that anything that leads to an expansion in the real wealth of individuals gives rise to a decline in the interest rate (i.e., the lowering of the premium of present goods versus future goods). Conversely, factors that undermine real wealth expansion lead to a higher rate of interest.

HOW INTEREST RATES ARE DETERMINED

The time preference of all individuals determines the interest rate. As savings by individuals accumulate the interest rate decreases. As savings by individuals diminish the interest rate increases. The amount of savings determines the interest rate, the interest rate doesn’t determine the amount of savings. When the interest rate is falling we are saving more and consuming less, which means resources are being saved for future consumption. When the interest rate is rising we are consuming more and saving less, which means resources are being used for present consumption.

Shostak – “In the money economy, individuals’ time preferences are realized through the supply and the demand for money. The lowering of time preferences (i.e., lowering the premium of present goods versus future goods) on account of real wealth expansion, will become manifest in a greater eagerness to lend and invest money and thus lowering of the demand for money.”

“This means that for a given stock of money, there will be now a monetary surplus.”

“To get rid of this monetary surplus people start buying various assets and in the process raise asset prices and lower their yields. Hence, the increase in the pool of real wealth will be associated with a lowering in the interest rate structure.”

“The converse will take place with a fall in real wealth. People will be less eager to lend and invest, thus raising their demand for money relative to the previous situation. This, for a given money supply, reduces monetary liquidity — a decline in monetary surplus. Consequently, this lowers the demand for assets and thus lowers their prices and raises their yields.”

PURPOSE OF INTEREST RATES

Resources are scarce and have alternative uses. Low interest rates send a signal to producers that resources are being freed up for use in future lines of production. But all they need to know is the lower interest rate makes expanding for future production affordable. Higher interest rates send a signal to producers that resources are being used for present consumption. The higher interest rate makes their plans to expand unaffordable and that is all they need to know.

Each individuals unlimited desire for specific goods, their time preference for specific goods, all of which are constrained by the scarcity of resources, their different uses, and the desire of individuals to produce specific goods based on whether they think it’s profitable is coordinated by interest rates. Interest rates coordinate production across time as long as they are determined by the market i.e. individuals time preferences. If set arbitrarily, interest rates distort the production process.

Ebeling – “Investment requires the availability and application of real resources and the distribution of raw materials and the use of a portion of the existing workforce to manufacture and at least maintain the capital goods – tools, machines, equipment, machinery and factory structures – finished and final goods and services produced and made available on the market that consumers want.”

“But all this takes time, repeated periods of production, through which goods are not to be done only once or even twice, but ever-so-every day, every week, every month, every year, there is a constant flow of them…..”

“If the resources, capital, equipment, and the work is not allocated and maintained, over and over again, to begin the process for the assembly of the next device, the output would shortly come to an end….”

“It must be the necessary savings in the economy to buy, implement and use the necessary raw materials, capital, equipment and workers so that each of the goods that are going on in the partially completed sequence can be brought to its final, usable form that is ready to be sold to consumers on the market.”

“Goods and services of all kinds are bought and sold with the help of money. But pieces of paper money, or even minted coins of gold or silver, can’t make the lack of real raw materials, capital, equipment, work or services disappear or less limited. Print out pieces of paper currency does not create out of thin air more coal, iron, or platinum. such paper money does not lead to a capital equipment miraculously falling from the sky. Nor do they materialize more working – age workers ready to be assigned to the desired job.”

THE ARTIFICIAL BOOM AND THE REALITY OF THE BUST

What happens when the Federal Reserve intervenes into this complex process? Fed policies usually result in artificially low-interest rates, and the injecting of electronically printed money into the system. The policy sends mixed signals through the market. The artificially low interest rate is a false signal that says there are more resources for expansion. Unfortunately people are still consuming at their present rate and haven’t started saving more for future production. The economy is being pulled in two different directions. The counterfeit money is demanding scarce resources for future production, but the structure of production is set up to meet people’s desires for present consumption. This is what happened with the housing bubble. The prices for scarce resources, labor, capital, and time were being bid up because they were being demanded for the expansion of new processes of production for future consumption. And at the same time these resources were being demanded for present consumption patterns that hadn’t changed. At some point there weren’t enough resources to go around and they were wasted when the bubble became unsustainable and collapsed.

Ebeling – “This balancing and coordinating function of the interest rates on the financial markets is undermined and distorted by central banking “activist” monetary policy that pushes for more money in the banking system. Since money is the medium through which the savings and investments carried out further amounts of money being made available for lending purposes creates a false impression that there are more savings to support longer and more time-consuming projects for investment than is actually the case. And artificially lower interest rates makes it seem as if these new or expanded investments in projects that are more profitable than they seem as if the higher market interest rates that prevailed in the financial markets.”

“….the investment boom stage of the business cycle will come to an end, and investment projects that can not be implemented or can not be profitably maintained if they are brought online. The downturn in the economy sets in. The imbalance between savings options and investment decision-making and the allocation and use of resources, capital and labor between the shorter and longer production processes become visible.”

“There  must be a balance between supply and demand, prices, and wages, resources, capital and labor use between different sectors of the economy in order to more accurately reflect the post-boom realistic conditions on the market and profitabilities.”

“Jobs are temporarily lost, unsustainable and unprofitable investment projects must be written down or written out, and the illusory wealth positions will prove to be not as good or as high as they appeared in the previous boom phase of the business cycle.”

“What has happened over the last decade is the home, the stock market and the investment boom that was driven by the Federal Reserve easy money policies beginning in the year 2003 finally came crashing down in 2008-2009. Then, in the name of preventing the decline it mutates into a fearsome new deflation-driven “great depression”, the Federal Reserve has opened the monetary spigots for the last six years, setting up and running the same type of rise in the stock market, capital malinvestments, and the work of the misallocations that its monetary intervention had caused earlier in our century.”

“Now the Fed authorities want to rein in monetary expansion and “push” the interest rates up……. But if they do, this threatens to shake out the imbalance market relationships their own monetary policies have created.”

“This is how and why the roller coaster of the economic cycle continues to repeat itself, but each phase of the cycle varies in duration, and many special properties, depending on specific historical circumstances. The Federal Reserve’s own expansionary monetary policy, wets out for the boom that finally turns into a recession from which it is Fed authorities consider themselves as responsible to prevent or mitigate, that just sets in motion the next unsustainable boom of a new offset the monetary expansion.”

“So while the Federal Reserve has decided to keep its key interest rate near zero, it is only delaying the inevitable result of its own monetary policy, another needed economic correction that its actions will have generated but it will no doubt blame on the supposed  “failures” of the market economy.”

CONSLUSION

The Federal Reserve and all Government bureaucrats don’t have a fraction of the knowledge that the market can bring to bear on any decision, but they have enough arrogance to think they do. As Hayek says their “pretense of knowledge” makes them think they can bring about results that aren’t possible because they fly in the face of the most basic economic principles.

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

Related ArticleReal Savings = True Credit, Printed Savings = False Credit, at austrianaddict.com.

Related ArticleFederal Reserve Policies Cause Booms And Busts, at austrianaddict.com.

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

 

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.