You have to elaborate on this one. It sounds a little Keynesian.
If the consequential factors on interest such as inflation would be greater then that of the actual money supply increase, then no credit expansion would take place. Let me put in another way: If the bank is to be fully loaned up (no excess reserves), which is usually the case during a boom, then interest rates must have been lower then the “natural” rate, that is if you expect the aw of supply and demand to still hold.
If banks do not lower interest rates below the natural rate, because they are cautious (as they are now!), then banks maintain excess reserves as they do now. But what is this debate about? I thought it was about when credit expansion does take place, not when it doesn’t. When it doesn’t there is no boom anyway.
He may have used interest rates as the transmission mechanism, but this was because he was working within a Wicksellian natural rate framework. Interest rates are not at the core of the theory.
If we are in a recession, increasing the supply of money can lead to growth expectations which can cause the rate to rise.
The natural rate refers to the intersection of desired investment and desired saving. Banks could have no reserves and still be at the natural rate.
This debate was oringinally about whether the Austrian theory always holds. I think it has an effect but it isn’t entireley responsible for the current crises.
No, they are. You are making half-hearted excuses to eliminate interest rates from the theory. You said you are taking Mises’ theory, as opposed to Hayek’s, but when presented with Mises’ theory you have nothing to say other than “he was working within a Wicksellian natural rate framework”.
Many theories can be based off multiple transmission mechanisms. Does that make these mechanisms “the heart of the theory?” I say it doesn’t. I’m not a historian of economic thought so maybe Mises really, really thought interest rates were the culprit. It doesn’t matter to me. As far as I can tell, interest rates are a bad indicator. An increase in the supply of money can lead to both an increase in credit and in increase in demand for investment. This would leave the interest rate at its initial level but there would still be malinvestment.
Elaborate! Not rewrite the same thing. I suspect you are attacking the problem with a Keynesian framework. You are confusing money growth and real growth. Elaborate!
The natural rate refers to real demand and real supply. My desire to save does not add anything to the supply of savings until I actually save. Real savings means real goods that have been already produced are not consumed by the saver, but instead are channeled to higher order production stages for investment.
Increased growth expectations can lead to increased demand for investment. This will cause the demand for loanable funds to shift to the right, raising interest rates. Increased nominal growth can lead to increased real growth; I’m not confusing anything here and its not Keynesian.
Desired saving means ex ante saving. The best example I can give you is in the paradox of thrift. In the paradox, desired saving increases but real saving stays the same. The natural rate falls but the market rate stays the same. This is what I mean by natural rate.
The demand for something is the curve itself. If the supply curve shifts right there will be an increase in the quantity demanded, not an increase in demand.
You are confusing the actual market demand and the demand curve.
According to your logic, when shoes are increased in supply (supply curve shifts to the right), the demand curve may shift to the right also to offset any lowering in price. Does this sound logical to you? The demand curve is determined by the subjective valuations of the consumers. This subjective valuation is not subject to our economic analysis. What we can say is that for a given demand curve, when the supply curve shifts to the right, the price must be lowered for the market to clear.
The increase in the supply of money raises growth expectations which automatically raises the price of investment goods. The price of consumption good, however, remains at the inital level. This is a change in relative prices meaning that resources will be drawn into the investment sector in the short run. This raises the demand for investment but since there has also been an increase in the supply of money, the supply curve also shifts to the right.
This occurs because the increase in the money supply has a disproprtionate effect on different prices in the short run. The example with shoes doesn’t correspond at all.
Where is the “automatic” raise in prices of investment goods now that the monetary base has been doubled? The above is total nonesense!
The only way for the interest rate not to fall due to your hypotheical increase in supply is if the demand curve also shifts to the right so as to offset the supply curve shift to the right. But there is an infinite amount of causal elements that can be responsible for shifting the demand curve to the right, or left, or whatever. The curve is a mental construct anyway. It doesn’t follow that an increase in money supply must somehow shift the curve to the right (or left). There is nothing that you can say about how and when it moves.
The example is very appropriate. People don’t suddely value shoes higher on their marginal value scale just because the supply was increased. If the supply of shoes is increased, then the demand for shoes also increases, but because the price was lowered! Not becasuse the demand curve shifted to the right. In the same way, people don’t suddenly value credit more, just because more people save. The demand for credit is increased because the supply curve shifted to the right, the interest rate was lowered, the market was cleared.
You don’t get that the demand curve is just the mental construct of the aggregate demand schedule of individuals. That schedule is at the heart of the subjective theory of value.
The monetary base has doubled. This does not mean that the supply of money has doubled. Banks have not been lending most of it out because they are being paid by the Fed to keep it as reserves.
THAT IS WHAT I AM SAYING. I said it many times. The demand curve shifts to the right along with the supply curve.
Well then there is nothing you can say about how the supply of loanable funds shifts after an increase in the supply of money. All I am saying is that there are a number of different ways the interest rate could respond to an increase in the supply of money.
You don’t seem to get that nominal changes in the money supply can affect demand. I’m not talking about an increase in saving. I’m talking about a nominal increase in the money supply.
Quantity demanded refers to changes along the demand curve, while an increase or decrease in demand suggest a shift in the curve, not a movement along the curve.
I think it is more precise to say that it is a change in the demand schedule that shifts the curve. The actual demand for goods will always depend on the given supply. The price then changes for a given demand curve so as to clear the market.
Jake somehow sees a direct causal relationship between the demand curve itself and the supply. This is absurd! Why would people value something more just because it is more abundant?
I don’t know what’s more precise, but any textbook explicetly says that a change in demand is represented by a shift of the curve, while a change in quantity demanded is a movement along the curve. I was simply referring to his above post. A change in demand can come from several different options, including an increase in purchasing power, a change in aggregate taste, et cetera.
I never said there was a causal relationship between supply and demand. I said inflation affects both the supply and demand for loanable funds by affecting expectations. It is not the increase in the supply which triggers the increase in demand. The excess supply of money raises both. In the long run, neither should be affected.
Your level of obfuscation over a simple supply & demand curve analysis is almost making me walk away from this. But perhaps this is a misunderstanding. I will give it one last try:
Your are not taking into consideration the temporal structure of production. This is the mistake of the mainstream economists. They are not familiar with he temporal structure of production so they are blind by the obvious. Once you take the temporal structure of production into account, and you start inserting time lags into your analysis between the supply, demand, and expectations, perhaps it will be more clear.
Perhaps the misunderstanding is that you are not making a distinction between the unrealistic money supply increase that is dropped from a helicopter, and the one that is injected through the banking system. The Austrian Business Cycle specifically blames the increase in credit as the means to increase the money supply. This causes a temporal distortion in the structure of production. It is precisely the fact that there is a time lag between the effect of the new money in the credit market and the consumers market that creates the misallocation of resources. When credit is first created, the money is first available in the loans market. Credit first has to be loaned out before prices begin to rise. At the current price levels, interest rate must drop in order to induce more investment.