the_austrian

how to choose which career to follow: whichever profession has the least suicides ;-)

Hain says "Share City bonuses with the poor" http://*******.com/2wggfn (also http://www.thisismoney.co.uk/news/article....p;in_page_id=2) Hain is attacking the symptom but not the cause. The cause is the monetary policy of the Bank of England and all central banks around the world. By making interest rates low they force people to accumulate property which they can lend out at above-market rates which creates an accumulation of wealth held by fewer and fewer people. To find out more visit http://www.economicsreform.blogspot.com/

i think we all agree but here is where the trouble comes. What is to be done about it? We all agree that the status quo is untenable but the problem is that people are wedded to the idea that the central bank is needed to keep the economy active. I can't see why this is necessary but I would concede that to get from where we are (with great discrepancies in wealth) to a place where things were more equitable a dynamic economy would be desirable. The question is what is the best way to make this happen? The current method with low interest rates is absolutely the worst thing to be doing now in my opinion. The problem is that without an alternative people are wedded to the idea that for a buoyant economy there needs to be a mechanism to introduce currency. What should that mechanism be? An open question.

Bernanke warns on inequality http://www.federalreserve.gov/boarddocs/sp...206/default.htm (http://*******.com/2gbnkw) Inequality is actually caused in part by the actions of the Fed. How can this be so when the Fed acts in a benign manner and makes interest rates cheap for those hard-working industrialists and first-time-buyers who just want a piece of the American dream? Well the problem is that by making interest rates cheap it does not leave all the rest of us unaffected. Does anyone remember something about robbing Peter to pay Paul? By making interest rates cheap it weakens the value of money relative to other assets. Because more and more money needs to get into the system to make it possible for people to pay off their debt there is continued pressure for low rates. Inequality will be at its most pronounced when the system reaches saturation. For more see http://www.economicsreform.blogspot.com/

Bernanke warns on inequality http://www.federalreserve.gov/boarddocs/sp...206/default.htm (http://*******.com/2gbnkw) Inequality is actually caused in part by the actions of the Fed. How can this be so when the Fed acts in a benign manner and makes interest rates cheap for those hard-working industrialists and first-time-buyers who just want a piece of the American dream? Well the problem is that by making interest rates cheap it does not leave all the rest of us unaffected. Does anyone remember something about robbing Peter to pay Paul? By making interest rates cheap it weakens the value of money relative to other assets. Because more and more money needs to get into the system to make it possible for people to pay off their debt there is continued pressure for low rates. Inequality will be at its most pronounced when the system reaches saturation. For more see http://www.economicsreform.blogspot.com/

http://austrian-finance.googlegroups.com/w...elivermoney.pdf The reason prices will continue to go up is that the cause of the problem has not gone away. The increase in property prices and of asset prices in general is caused by the monetary policy of central banks. Central banks around the world hold interest rates down which means that it is very cheap to get into debt and to buy assets which can then be leased out to others. http://www.economicsreform.blogspot.com/

http://www.mises.org/fullstory.aspx?control=1579 what a great article

interesting to see that Mervyn King feels that his hands are tied in not being able to counter house prices due to the "Brussels-based experts" who devised CPI whereas the ECB chairman Trichet feels no compunction about targeting real estate http://www.theherald.co.uk/business/news/d...1130076.0.0.php At the beginning of November, an exasperated King told a House of Lords committee that, although the Brussels-based experts who devised CPI had plans to include a measure of house price inflation, actual proposals had been delayed so often he did not expect to see them bear fruit "in my lifetime". http://www.bloomberg.com/apps/news?pid=206...&refer=home "Economic indicators justify the steps we have taken in the past," Trichet said in an interview with France's RTL Radio and LCI Television. He said central bankers were "closely" monitoring data on loans, real estate prices and energy costs. http://www.economicsreform.blogspot.com/

...and they're still doing it http://www.boj.or.jp/en/ 'uncollateralized overnight call rate' 0.25% http://www.economicsreform.blogspot.com/

New ways for central banks to deliver money http://*******.com/2gw63l also available here http://economicsreform.blogspot.com/

link didn't work... let's try this http://*******.com/33qrsp alternatively assetpriceinflation.pdf assetpriceinflation.pdf

a race to the bottom might not be so bad as you think: http://*******.com/2zhbhf

I don't know if the markets have got wind of the scam but if they have they should keep their mouths shut!

Are there any alternatives to the current monetary policy? What is the best way to increase the money supply (if it is absolutely necessary)? Suggestions: i) Increase the money supply by giving to each citizen an amount of money at the start of the year. Advantages: Would seem to be equitable in that relative wealth discrepancies would be reduced. Disadvantages: The identity check which would be required could be a threat to civil liberties. ii) Reduce the tax burden by paying off a large portion of government taxes with new money. Advantages: Would seem to be simple and easily implemented. Disadvantages: Could lead to an increase in government spending due to the ease with which new taxes could be collected.

Monetary policy causes asset price inflation What is the relationship between income and value? If something has the capacity to generate income it has monetary value. Equally if something has value it has the capacity to generate income. Think of a house. A house that has value may be rented out. If it is not possible to find a person who is willing to pay an amount of money to live in it for a fixed period of time then from an economic perspective the house has no value. Similarly with a work of art the value is not just in the resale price, but also in the pleasure to be derived from ownership of the piece through time. Further still a cargo ship has value to the extent that it can make an income transporting cargo around the world. So a question we might ask is what should that value be? What should the rate of income be on any such asset in relation to its price? In 1898 a Swedish economist called Knut Wicksell attempted to address questions concerning this issue in his book Interest and Prices. Essentially he made the claim that there is a natural level of interest rate for which the price of commodities neither goes up or down: “There is a certain rate of interest on loans which is neutral in respect to commodity prices, and tend neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods. It comes to much the same thing to describe it as the current value of the natural rate of interest on capital”. Knut Wicksell - Interest and Prices, 1898. That is, if the interest rate on money is set according to the natural level of interest rates then commodity prices will remain stable. r(nominal) > r(real) => deflation r(nominal) < r(real) => inflation The only way to ensure that the market rate reflects a natural level of interest rates is by the law of supply and demand. This would mean that if interest rates went too high then fewer borrowers would want to get into debt and similarly if interest rates went too low then lenders would not want to come to the market. So returning to our example of a ship, if the income to be earned from ownership of the ship exceeds the natural level of interest rates on the value of the ship then the ship represents a good investment and its price should go up. So too for all freely-traded commodities. Let's examine what would happen if an external body were to decide that a particular cargo ship had no right to earn more than a set quota per year. It is hard to imagine why this would be so but lets just say that it is - for some reason it can only sail 8 months in the year. The value of that ship would surely go down. Likely it would go down to about two thirds of its original value. What would happen if we were to do a similar thing with regard to money? If there were a law which said that it is not possible to earn more than a particular amount on the sum of any money that you hold? Of course the value of money would go down. People would want to exchange their cash for other assets and we would see asset price inflation. What would happen if you could use that cheap money to fund a business concern? Consider the situation of a landlord and tenant. One might expect that the landlord would charge roughly the natural level of interest on the value of a home - that would seem a fair deal. But what if the landlord had only to pay an amount of interest on the house very much lower than that being charged to the tenant? For instance if the landlord were able to purchase ownership of the property at 5% per annum from a central bank whereas the tenant has to pay as much as 15%? Then the landlord is making 10% on the face value of the home just for being able to get funding. Why would anyone want to be a tenant in this situation? Whenever assets can be funded at a central bank funding rate which is less than the natural rate of interest then tenants of all goods would be inclined to dispose of the landlord and buy the commodity themselves. So the question arises what would the natural level of interest rates be? Irving Fisher devised a rule to determine to what extent the interest to be paid on a sum of money represents the real interest and to what extent it is inflation: "It is perfectly true, as is often pointed out, that when a man lends $100 this year in order to obtain $105 next year, he is really sacrificing not $100 in literal money but one hundred dollars' worth of other goods such as food, clothing, shelter, or pleasure trips, in order to obtain, next year, not $105 in literal money, but one hundred and five dollars' worth of other goods". Irving Fisher - The Theory of Interest, 1930. "In so far as the appreciation is foreseen, any increased burden to the debtor in the principal may be somewhat offset by a reduction in the rate of interest... Thus, in order to compensate for every one per cent of appreciation or depreciation, one point would be subtracted from, or added to, the rate of interest; that is, an interest rate of 5 per cent would become 4 per cent, or 6 per cent, respectively". Irving Fisher - The Theory of Interest, 1930. r(nominal) = r(real) + inflation The problem with applying this formula to interest rates as we see them today is that current rates do not represent expected inflation they represent only expectations of future central bank monetary policy. Fisher was describing a world where it was not expected that the central bank would make interest rates any different than those dictated by the quantity of loanable funds. So we cannot apply his equation and we are left only to speculate as to what the natural rate might be. Central banks keep interest rates low by printing money to create cheap debt for borrowers. They do this to increase economic activity but the problem is that by doing so they increase the gap between rich and poor. To take advantage of the low rates it is necessary to have either good collateral or a reliable stream of income against which to secure the debt.

So now we know that we are going the close the year out at 5%. The question is: What is the free market price for short-term interest rates? http://www.yourfreepoll.com/gkafvdcbsp.html At what level would the free market place short-term interest rates if they were not artificially held down by the central banks? 0-4% 4-8% 8-12% 12-16% 16-20% 20-24% 24%+

How to get to a Gold Standard: i) Recognise that all of the ills that you talk about are in fact due to the way the Federal Reserve controls interest rates. ii) The Fed prints money in order to keep interest rates low. iii) We must slowly raise interest rates so that they are freely traded on the open market. Now banks are free to borrow from each other instead of the central bank. iv) The money supply is now stable. v) Pick a date at which to fix the prevailing price of gold for all time. Dollars are now redeemable at that rate forever.

It is becoming pretty evident that all of the ills of the modern economy are due to the intervention of central banks, specifically the way they intervene in the the debt markets. By forcing interest rates down they produce huge pressure to borrow which leads to asset price inflation (most clearly seen in the housing market) and increased leverage across the economy which is also a bad thing. Of course low interest rates were introduced to boost the economy but as some people have said, it is the medicine which kills you in the end. I call for a restrained and cautioned move to a free market for interest rates, where the borrowing rate floats freely depending on supply and demand. This is not a big ask. Act now before it is too late. They no longer need to be the monopoly lender, they no longer need to undercut the market with our cash, we should be allowed to save.