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Good Thoughts - Kill The Boe

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Jamie Whyte is a philosopher, previously banker and author of a book called "Bad Thoughts"

His most recent guest column just appeared in The Times. He does as good a job of demolishing the idea that central banks are part of a free market economy as anyone over here has done.

Enjoy

Now return to interest rates. Suppose the demand for borrowing rose, perhaps because technological advance leads to entirely new products, and investment in businesses making them. This would increase competition for access to the limited supply of savings and drive up interest rates. Saving — that is, deferring consumption — would now be more rewarding. So more people would do it, and the supply of savings would rise in response to the increased demand for borrowing.

At least, it would if we had a free market in interest rates. When interest rates are set by a central bank, demand for borrowing can increase without interest rates increasing and hence without the price signal that would cause people to save more. When dictated, interest rates stop playing their market role of optimally allocating resources between current consumption and investment that will deliver future consumption.

Central banks control interest rates by their “open market operationsâ€. They enter the capital markets as buyers or sellers of debt, thereby increasing the demand or the supply of it until they have shifted the interest rate to their target. When they aim to lower interest rates, these open market operations increase the amount of money held in bank deposits, and so increase the funds that banks have available to lend. This is what would happen if the savings rate had increased, if people had deferred consumption to make resources available for investment. But no such thing has happened. The central bank has merely created the illusion of increased savings.

This illusion creates waste, because it makes people overestimate the available resources. Ventures that would have been unprofitable if interest rates were not artificially low are now embarked upon, drawing scarce resources away from better uses. According to Friedrich von Hayek and other advocates of the Austrian theory of the business cycle, it is this interference with interest rates and the money supply that causes an unsustainable combination of consumption and investment — a boom that inevitably leads to a bust.

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Excellent article, but what seems to be missing is any mention of risk. I appreciate that the interest rate on money that is lent reflects the risk involved in lending it and in turn, rewards the saver for incurring a higher level of risk. The article seems to focus on the resource allocation aspect of saving as deferred consumption. This is regarded as "leakage" by Keynes.

We are very much addicted to the Keynsian model where risk and reward are decoupled. Savers no longer need worry about the loss of their savings and borrowers have no appreciation of the true value of the endeavours they find themselves investing in. This applies to property as much as it does to business investment.

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Excellent article, but what seems to be missing is any mention of risk. I appreciate that the interest rate on money that is lent reflects the risk involved in lending it and in turn, rewards the saver for incurring a higher level of risk. The article seems to focus on the resource allocation aspect of saving as deferred consumption. This is regarded as "leakage" by Keynes.

We are very much addicted to the Keynsian model where risk and reward are decoupled. Savers no longer need worry about the loss of their savings and borrowers have no appreciation of the true value of the endeavours they find themselves investing in. This applies to property as much as it does to business investment.

Aye.

Also the power of the central bank isn't interest rates - it's forcing us to use it's worthless crappy paper as money.

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Aye.

Also the power of the central bank isn't interest rates - it's forcing us to use it's worthless crappy paper as money.

Tell me, is it possible to bypass payment of taxes if you only accept favours or other goods in return for your efforts?

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