Interest Rates

Miscellaneous Newbies
1

I am new to the site and was hoping someone could answer the following question:

Why is it that market participants do not take into account the likely debasement of the US$ and adjust the inflation premium embedded in long term interest rates? If this were to occur, than the government/banking system would not be able to engineer an unnatural long-term interest rate and the cycle would be broken.

I can understand how the markets can be fooled on occasion. Kings can cause inflation and an unnatural interest rate by their taking of gold through coin weight adjustment, fractional reserve banking when first introduced can catch participants by surprise, even the Federal Reserve printing press can surprise people when first used. But, why, after repeated examples of monetary debasement, does the market not recognize what is occurring and take matters into their own hands by pushing up on rates?

For example, currently, the difference between nominal treasury rates and inflation protected treasury securities implies a market based inflation expectation of less than 2% over the next 10 years. Is part of Austrian theory an assumption of inefficient interest rate pricing due to the lack of understanding by market participants?

Thanks.

Robert

2

Partially because it’s not quite possible to predict how much debasement will happen, partially because all the banks have essentially been nationalized since 1913 (a central bank with a requirement that all banks accept the money is de facto nationalization), and partially because of the screams of “predatory lending” which would ensue.

3

Yes, but I am referring to the world of dollar lenders including all institutional investors such as pension funds, insurance companies, investment funds, foreign governments. Why do they not get it?

4

My guess would be that there’s a lack of incentive, seeing as it hasn’t been done. It’s not always about what government prohibits, it’s sometimes about what they subsidize and thus make alternatives unprofitable.