ok..i will have to look at that more closely.
one issue that confuses me however…when the original poster speaks of injecting money into the economy. can injecting also just be an increase of the money not based on interest rates.
does new money entering the economy via interest rate manipulation only stay there temporarily where as newly created money finds a more permanant existence.
thanks
If everyone’s money savings suddenly doubled overnight, there would be no effect on real interest rates, and likely little effect on relative prices, which is all that is important. However, rising prices might drive up nominal interest rates.
The original poster committed a fallacy. The increased demand arising from new money should not simply signal to businesses to produce more stuff. Profit margins do this. If everything has increased demand, all prices, including producer prices, will increase. Profit margins should stay about the same, and few will be persuaded into changing their business.
One thing it would do is reduce the difficulty of pre-existing debtors to repay, while diminishing the real gains their creditors make on their loans. Interest rates will change to reflect this in real terms; however, if inflation is continuously surprisingly pursued to creditor’s dismay, this will have the effect of reducing time preference, reducing savings.
New money in real life has two important characteristics. One, it is not equally distributed relative to money savings. This means that new money creates specific winners and losers. It’s best to be closest to the source of the money. This alters the structure of production.
Two, most new money originates in the banking system, which drives down interest rates. Thus, while time preference is actually reduced, interest rates also go down, a fundamental mismatch in the market’s signals to determine production. This is the root of the business cycle. Interest rates and savings rates do not coincide, creating an unsustainable foundation for new investments.
Once the new money is loaned out, it can no longer effect interest rates, and they will rise to reflect time preference again, even if the new money is never removed from circulation. If new money is continuously produced and put into circulation through the credit market, it will continuously keep interest rates lower than they should be.
I think you’re misreading what I said, unless you’re referring to some other OP. I’m not talking about an overnight increase in everyone’s deposits, I’m takling about very specific increases in the money supply, the benefits of which are concentrated within a relatively small part of the economy.
That’s correct. In fact, this is partly what sets the business cycle in motion, FRB increases the amount of credit in circulation to the extent that the reserve ratio will allow. When entrepreneurs are forced to liquidate their investments due to malinvestment and return their loans to the bank, the amount of credit in the economy begins to decrease, moreover, since entrepreneurs are not as willing to take out loans, the banks have a much harder time increasing credit and this sets in motion a chain reaction, with more banks failing.
The concept of AD is not used in AE. It doesn’t make sense to add demands to each other for any purpose.
The problem is, that lowering interest cuts the profit motive for the lending. It also lessens the incentive for people to gt their money back to the bank for it to get circulating again. The notion that cutting interest will expand the money supply is absolutely invalid, and demonstrates how extremely short sighted theories get entrenched into our colective psyche
What kind of inflation are you talking about. Do you have any specific information from back there, or are you just validating rumor by repeating it.
Goods for the production of goods for the production of goods …
And what if money is injected into the system as a consequence of a changing time preference?
I don’t get this. Can somebody explain this with an example?
I don’t know where you got this from. Recessions are usually characterized by more roundabout methods of production. So productive capacity has in fact increased.
Assume that the new money arrives at once and in the hands of a single individual.
Because he has the newly-created money, for any good/service he might buy, the total quantity that will be demanded has changed (if even only marginally), but the quantity of available goods and services has not increased. This individual now has the ability to pay more than the previously prevailing market prices, which in-fact he (or someone else) must do, in order to effect their individual demand.
In the passage of mine which you quote, I’m talking about booms, not recessions. The recession happens as the malinvestments of the boom phase are discovered/revealed.
Although a change in time preference (collective or otherwise) may influence interest rates (i.e., price of future consumption/present consumption), it doesn’t augment the money supply.
When the new money enters into the hands of a single individual, he will be able to get more goods than otherwise would since prices are yet to adjust to the new quantity of money in the economy. In short, resources are redistributed.
What about this actually makes it an unsustainable boom? Or am I failing to find something obvious here?
The boom period is when these round-about methods of production are carried out, no? Basically society is made to save forcefully, which will increase investments.
It is precisely because during the boom period (to be exact, before the boom period) the methods of production ought to have been lengthened into more roundabout modes. They were not.
Had the “growth” been one of generally increased production rather than one of increased quantity demanded, prices would’ve fallen rather than risen, and the benefit of that organic growth would’ve been dispersed. However, because the “growth” is phony, the result of the increase MS which fuels quantity demanded, this is not the case, and there is redistribution of wealth etc.
Isn’t the Austrian position that monetary expansion lowers interest rates?
If people start spending less on consumption, and banks start expanding credit proportionately, will malinvestment follow?
Prices need to convey meaningful information about the relative availability of goods & services. By increasing the money supply (whether in the hands of a single individual or many), the resultant prices convey less-accurate information.
How do others in the economy respond?
etc.
No. When you spend less on present consumption and save more for the future (capital investment) what you are doing is this: deferring some fraction of your consumption immediately, in favor of more consumption in the future.
So when people begin spending less money, factors currently or previously devoted to immediate production can be re-purposed and re-allocated towards a more roundabout (lengthier) productive process with greater yield.
On the contrary, when you have all the factors running at or very near full capacity (during an inflationary boom), and people start spending more and investing less, what happens is that not enough is saved to sustain the same level of consumption. People want more, and they want it now. Well, where can they get it from? Above, we saw how you can defer present consumption, but this is clearly out-of-the-question if unemployment is low and resources are generally not idle. They can’t “borrow from the future” in order to sustain consumption today, can they? Of course not; eventually this is revealed as systemic error.
So if monetary expansion via credit markets is offset by a reduction in present consumption, systemic malinvestment will not be the consequence?
That’s basically the position of free bankers.
I suggest that since the bust, spending on present consumption has declined significantly. Do you think the Fed’s recent monetary policy since then has been appropriate?
Note: please understand that I would rather not have a central bank at all, but since we are stuck with one, there is presumably a least bad monetary policy.