Newbie-simple questions.

[pauldomonique]

Hi All,

I am reading End the Fed and have enjoyed the book very much but I have a couple of very simple questions that I am hoping someone will answer.

Lets say there is no Fed setting the interest rates.Would the interest rate be determined by the supply of savings and the demand of borrowers?This is presuming that we have say a Gold Standard.

Do the banks around the world operate in the same way as The Fed?Is say ,The Bank of Canada the equivalent of The Fed-in Canada?

Thanks.

[Esuric]

@pauldomonique

Lets say there is no Fed setting the interest rates.Would the interest rate be determined by the supply of savings and the demand of borrowers?This is presuming that we have say a Gold Standard.

It depends, if there’s still fractional reserve banking, than no (enter Giles). Achieving equilibrium, in the loanable funds market, requires a 100% reserve rate; only then does the interest rate serve its purpose, namely, accurately reflecting the price of time (and even then it may not).

@pauldomonique

Do the banks around the world operate in the same way as The Fed?Is say ,The Bank of Canada the equivalent of The Fed-in Canada?

No, the ECB uses a different monetary approach, but essentially it’s all the same. Central banks cause inflation.

[liberty_student]

@pauldomonique

Do the banks around the world operate in the same way as The Fed?Is say ,The Bank of Canada the equivalent of The Fed-in Canada?

Yes and no. The FED is in charge of the world’s reserve currency. But all other central banks perform similar oversight and money creation (FRB) as the FED does, with their own domestic currencies.

AFAIK, no country has a market system for setting interest rates. All banks are cartelized under their domestic central banks, which are then implicitly cartelized under the Federal Reserve due to the reserve currency status.

[pauldomonique]

Thanks for the replies. I have been a big fan of the LVM Institute for some time now but had no idea that the forums were so active.Lots of reading to do here too.

[socialdtk]

@pauldomonique

Would the interest rate be determined by the supply of savings and the demand of borrowers?

Interest rates would be determined by the time preference of the people. If there is a high savings rate in the economy (the majority of the people have a low time preference) interest rates will be set at a lower rate. If the majority of the people are engaged in a spending spree (their time preference is high) interest rates will be driven upward.