I agree that a 0% interest rate may lead to hyper inflation but things would have to dramatically change. Ever since the 1980’s economic activity has pretty much experienced weaker growth relative to the prior post war boom. Thus I think our economy would have to get a lot stronger in order for their to be any chance of hyper inflation.
what do you mean by in the Long Run?
I just used it with general application. The short-run would be excess reserves, while the long-run would see those excess reserves lent out.
What prices? The ones you happen to probe in the other side of town? Do you think you can really measure the distortion he’s talking about?
The price increases you’re talking about that can be measured in the aggregate and perhaps indicate a trend in increase or decrease in overall prices, are only consequences that show up (if at all) much later, after the price structure has already been entirely altered.
Money is not neutral. The distotions we are talking about occur at the micro-level and not at the macro level. The micro-effects of the increase inthe money supply are completely absent from your analysis.
So simple and beautiful! I wonder why they didn’t issue 40k pounds, or 400k pounds sterling to multiply the good effects x10 (x100). Even better, forget the government, why not allow anyone to issue legally acceptable notes (exact copies of the government issued notes) at will under the promise that they publicly burn the same issued amount in notes ten years later? They can invest them in even more butcher shops and charge them rent just like the government did. I think you might have just discovered Nirvana. [N]
Z.
Indeed, inflation ex-stocks, ex-real estate, ex-oil, ex-gold, ex-metals, ex-agri commodities, ex-bread, ex-milk has been pretty low over the last couple of decades.
Z.
There’s a difference between price inflation and relative price distortions. You’re right when you say that a 0% interest rate doesn’t automatically cause price inflation–printing money and then hiding it in a cave wont lower the objective exchange value of money. The structure of our “banking system” means that the FED can suppress interest rates and temporarily (key word) prevent it from flowing into the economy. But there is no exit strategy for the FED, and when the economy experiences a quasi-recovery, the 3 trillion dollar increase in the monetary base will mean 30,50 maybe a 70 trillion dollar increase in the money supply.This is why Bernanke is paying interest on reserves; he doesn’t want banks to lend. But this can only delay the crises–it can’t prevent it.
Either way, some of the liquidity injections have flown into the economy, and credit is being pyramided on top of bank reserves, causing a steady rise in prices. The FED is artificially keeping insolvent banks solvent, and they’re using the newly created money to speculate in the security and commodity markets causing illusory bull runs (propping up the demand for the dollar). All while the FED’s programs are preventing the necessary corrections in the housing market, and their regulations are propping up the book-value of MBS and CDO’s.
They’re are trying to prevent the necessary correction by propping up the malformed capital structure, and keeping dead banks alive. This will turn a sharp and dramatic deflationary contraction into a hyper-inflationary depression. The latter is much worse–it’s basically the end of a nation and the destruction of all wealth. But it’s far more likely that the government will nationalize the banking system and basically the entire economy. When this happens, markets will exist only nominally. The government will control every single aspect of the market economy. This may happen on an international scale, that is, they may create some super-bank which controls the interest rates for every single central bank (turn the BIS into a real international central bank), and they may start using computerized electric money which can be deleted (my professor writes about this stuff a lot–he supports it).
Also, inflationary induced booms don’t necessarily mean dramatic and instantaneous price inflation. There is extreme relative price distortions, causing capital and labor to flow into unproductive/unwarranted sectors, dragging vital resources away from truly profitable ventures. As production increases, the general price level is prevented from running away. But low interest rates, and a steady rise in prices turns every single saver, who wishes to protect his/her wealth, into a speculator. The interest earned on savings at your bank is far below the inflation rate. This is why savers have turned away from loans, and ventured into securities (pension funds, hedge funds, mutual funds, private equity funds, and sovereign wealth funds). Also, ad hoc bank regulations force banks to create extremely complex and opaque financial instruments in order to avoid government interference. But the perpetual flow of money into the banking system during the boom turns derivatives (which are made to avoid risk) into destructive financial abominations.
The point is simple: Government regulation, monetary central planning (central banks), and perpetual inflation, turns the banking system and financial sector into an unstable time bomb. The inflation will always find a channel into the economy; regulations can’t stop this process. Low interest rates push the economy in all directions, promotes capital consumption, and distorts asset values. Lowering/increasing taxes, regulation/deregulation, free trade/protectionism, are all meaningless when our monetary system is centrally planned.
Your religion hinders you
The quote is from Thomas Edison (who might have just discovered nirvana).
The New York Times
1921 December 6
Florence, Alabama, December 5.,
[Thomas Edison speaking:–]
"Now here is [Henry, an other discoverer of nirvana, who in 1914 January 5 overnight doubled the wages in his factory] Ford proposing to finance Muscle Shoals by an issue of currency. Very well, let us suppose for a moment that Congress follows his proposal. Personally, I don’t think Congress has imagination enough to do it, but let us suppose that it does. The required sum is authorized – say $30,000,000. The bill are issued directly by theGovernment, as all money ought to be. When the workmen are paid off they receive these United States bills. When the material is bought it is paid in these United States bills. Except that perhaps the bills may have the engraving of a water dam, insted of a railroad train and a ship, as some of the Federal Reserve notes have. They will be the same as any other currency put out by the Government; that is, they will be money. They will be based on the public wealth already in Muscle Shoals, and their circulation will increase that public wealth, not only the public money but the public wealth – real wealth.
“When these bills have answered the purpose of building and completing Muscle Shoals, they w ill be retired by the earnings of the power dam. That is, the people of the United States will have all that they put into Muscle Shoals and all that they can take out for centuries – the endless wealth-making water power of that great Tennessee River – with no tax and no increase of the national debt.”
" But suppose Congress does not see this, what then ?" Mr. Edison was asked.
" Well, Congress must fall back on the old way of doing business. It must authorize an issue of bonds. That is, it must go out to the money brokers and borrow enough of our own national currency to complete great national resources, and we then must pay interest to the money brokers for the use of our own money.
“But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good, also. The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 per cent., whereas the currency pays nobody but those who directly contribute to Muscle Shoals in some useful way . " If the Government issues bonds, it simply induces the money brokers to draw $30,000,000 out of the other channels of trade and turn it into Muscle Shoals; if the Government issues currency, it provides itself with enough money to increase the national wealth at Muscle Shoals without disturbing the business of the rest of the country. And in doing this it increases its income without adding a penny to its debt. " It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who country the fictitious values of gold.”
Here is my take on this, after giving it some thought.
The Fed through a credit expansion, in this case $1,000,000, introduces a disequilibrium within the economy. This disequilibrium creates a profit opportunity, which the firm (the “banana stand”) exploits. The moment the market equilibrium returns back to normal, the profit opportunity disappears, and the firm is run out of business.
For the firm to remain in business, the Fed has to reintroduce the disequilibrium through a credit expansion beyond the original principal. But once this stops, the market returns back to normal, and the firm becomes unprofitable. The profit is therefore transitory, and will disappear once the intervention stops.
. . .
However, let’s say the market equilibrium, instead of returning back to the previous normal, were to permanently shift in the firm’s favor. This can happen because of one of two possibilities:
Either way, the firm remains profitable, and would be terribly lucky indeed!
. . .
My sense is the Fed could get away with this, since $1,000,000 is like throwing a pebble into an ocean. Let the Fed try this on a much larger scale, with whole industries, and I suspect the market would not react so favorably.
Instead of a ripple, the Fed would find itself with a tsunami.
The FED purchased some paper and printed those US Bonds and other security instruments that they occasionally auction off to get US dollars back from the Industrialized countries that US importers paid with US dollars to manufacture the consumer goods that US citizens purchased and consumed.
Any interest that accrues on the US Bonds and other security instruments that the FED holds is fiction because those US Bonds and other security instruments are not worth the paper that they are written onto. The paper was worth more before the US Bonds and other security instruments were printed onto the paper.
These US Bonds and other security instruments have no value, except that they are redeemable for title to privately owned businesses, factories, casinos, hotels, farms, land, ports, breweries, refineries, forests, ports, breweries, refineries, and other privately owned assets located in the USA that were created by previous US generations instead of Gold. The US Government only has $11B of gold left in Ft. Knox according to the AP Dec. 21, 2009, 3:44PM.
Real wealth and real monetary value is created and/or acquired ONLY when the members of a family (or a nation, tribe, city-state, etc.) plant, grow and/or harvest something of commercial value from the earth, extract something of commercial value from the earth, provide professional services (medical, legal, dental, engineering, architecture, accounting, land surveying, technology, etc.) to others outside of that family, and/or manufactures or constructs something of commercial value that is consumable (or permanently useful for income or rent) and then SELLS, LEASES OR RENTS these items and/or services to parties outside of their family, IN RETURN FOR A NET TRANSFER OF GOLD, CURRENCY OR COMMODITIES from other parties outside of their family into their own family. The members of that family can reflect their real wealth with the accumulation of grain, gold, cattle, jewels, land, buildings, commodities and/or other marketable products for reserve use in times of emergency and/or also to raise the standard of living for the members of that family.