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Mises Institute - Mises Wire, March, 21,
2019, 4 pgs, at
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Reviewer Comment:
The author correctly describes the adverse and ultimately unsustainable results
of modern governments' financial policies. But he places blame on the causes
and results on central banks and fiat money. The real culprit is governments
themselves. The central banks are merely the executors of faulty government
policy and action. And it is not 'fiat' money itself but the persistnt
govenment policy of creating more and more of it in the form of credit and then
exchanging that for the real goods and services produced by the private sector,
leaving less of that for the public to obtain.
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Summary:
The author provides an example to demonstrate the economic concept of the
'value' of present versus future ownership of goods or services. This is called
'time preference', a typical result of human action. Individuals prefer to have
or use, and thus to 'value', a good or service NOW rather than wait for it at
some future point. He notes that this is an inherent aspect of the fact that
individuals 'act' in time. Action requires time, results of action occur at
some point future to the present.
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Summary:
Thus what is termed 'normal interest rate' that is the un-manipulated interest
rate that is called the 'market rate' reflects the 'time preference' of
individuals collectively to have or use anything NOW and to demand a premium
(interest) for their willingness to postpone this into the future.
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Summary:
Expression of this condition in terms of 'money', such as the dollar in market
transactions, we find that there will be this 'time preference' expressed in
the market interest rate, such as 5%, demanded by individual for the delay of
his receiving that dollar next year rather than today, or for his willingness
to loan his existing dollar out for a year's time.
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Summary:
When individuals collectively increase their 'value' for the present use of
goods and services over future use they will demand a greater interest rate.
The opposite occurs if individuals' preference for present over future use
decreases, thus the demanded market interest rate will decrease. This can occur
when individuals prefer to hold their 'money' and consume less of their current
income.
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Summary: Interest rate and central banking -
In recent times the market rate of interest is NOT set by the 'time preference'
of individuals but by central banks that establish the prevailing short-term
interest rates in the markets by providing commercial banks with the credit
instruments (based on government securities) needed to generate bank loans, and
also by manipulating long -term interest rates by shifting in purchases or
sales of government bonds. Moreover, governments continue to supply increasing
quantities of credit which banks can use as reserves for loans and this creates
more 'money' in the market. The author believes the 'purpose' for increasing
the money supply via credit expansion is to lower the interest rates below the
normal 'market rate'.
I believe that, while this purpose is based on Keynesian theory to increase
demand, there is another reason, purpose.
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Summary:
Skipping this question, the author focuses on the actual consequences of
central bank lowering interest rates via expansion of credit. He points out
that artificially reduced interest rates encourage individuals and companies to
save less, consume more, or invest in otherwise unproductive activities, which
increases market activity, a false 'boom' and a false increase in asset prices.
And he asserts that this false expansion will inevitably end with a 'bust'
which is termed a 'recession'.
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Summary:
The author describes this theory of 'boom and bust' as the Austrian Business
Cycle Theory (ABCT) - The name is not related to the Austrian government or
society today, but because the early original economists who developed it were
Austrians.
He continues: The ABCT theory also addresses other results of central bank
manipulation of interest rates. The results also include individual's
fundamental beliefs about 'value' and their 'time preferences' which then
influence their actual behavior. Individuals come to 'value' present
consumption more than future consumption, thus to retain less current income
and spend it. Retaining current income for future needs are discouraged, and
worse, they are encouraged actually to borrow more (incurring debt) in order to
consume more now.
He then uses the typical economist's idea that they 'run into credit to bring
forward future consumption to the present'.
I maintain that what they are doing is promising to produce an additional
something of future 'value' in order to complete the current exchange, which is
what is required to erase the debt. Since this is impossible, that is the
ultimate cause of the credit=debt crisis. When the mass of individuals (and
companies) cannot produce the promised extra goods and services over what is
required for current life, the debt=credit structure collapses.
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Summary:
The author describes some of the other results of forced low interest rates,
including valuations of education, family life, manners, cultural ideas and
more. He notes that it becomes less attractive for people to spend time in
increased education, they are prevented from forming family units, and social
relations are disrupted. He uses Nietzsche's term 'Revaluation of all Values'
as a summary condition.
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Summary:
The author traces all these anti-social results to the activities (hence
existence) of the central banks.
This is a case of blaming the messenger. The central banks are the money
creating - monetary policy - executors of the governments - they are arms of
the Treasuries. The fundamental cause and problem is that governments are
confiscating an increasing quantity of the goods and services produced by the
private sector and instead of exchanging production for production are
exchanging credit (that is an unfulfillable promise to provide some future
production) and entering on its balance sheet ledger a 'debt'.
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Summary:
Naturally, and as expected, the author's solution is to abolish central banks.
Let's quote: "By pushing down the market interest rate below its natural
level- which becomes chronic if and when the money supply is increased through
bank credit expansion not backed by real savings central banks inevitably coax
investors into becoming overly high-spirited. In that sense, central banks are
to be held responsible for aggravating, or even inducing, speculative bubbles.
To make it even worse: Once the speculative bubble pops, people be come
dispirited. They blame the free market or capitalism for their plight. They do
not see -- often misguided by mainstream economics -- that the root cause of
the trouble is central banks' downward manipulation of market interest rates in
the first place, which is made possible by central banks running an unbacked
paper money system.
Ha, now he adds the other ABCT boggy man, fiat currency. But his description of
the results is quite right. It is his identification of the culprit that is
wrong, decidedly wrong. The actual culprit is the Government Treasury which, in
turn, is the executor of Congressional policy and action. Many governments
today are using their central banks as the conduit for their Treasuries to
finance government consumption (which of course is enabled by government taking
of the production of private creators, but without exchanging production.
Instead exchanging a promise to provide a comparable product in the future.)
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Thorseten Polleit - Central Banks Are
Propping Up Stock Prices
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