What does Dr. Paul mean when he (as well as others) say that “the market determines interest rates”? Do they mean that the market should determine interest rates or do they mean that the Fed really doesn’t have much of a say in interest rates?
Also, I heard that the Fed can’t cause deflation regardless of how much they raised the Federal funds rate. Is it true that if the Fed raised the Federal funds rate, to say, 45% (and kept it at 45% for at least a few years), then deflation (as defined by Austrians) wouldn’t occur?
I hope these questions weren’t stupid. All I really know is that the Fed loves to inflate almost as much as Greenbackers would and that Rothbard was best on everything, especially money. Jefferson, Jackson, Van Buren, and Cleveland probably knew more about money than any other Presidents, other than Jackson established a bimetallic ratio (which is actually a major issue, but he meant well).
Both. What he means in the first place is, yes, there should be no interference in the market…even (or, especially, depending on how you look at it) in the price of money. It is disruptive, distortionary, and ultimately destructive.
However, at the same time, the market always wins out. Meaning, not even the Fed is more powerful than the market itself. Inflationary printing of money can only fool the market for so long. Of course, eventually the printing slows (or rates are raised by the Fed in one way or another), and the malinvestments that took place during the artificial boom are exposed (which is what we just had happen). But if printing continues indefinitely, it’s not as if interest rates will stay at zero forever, and the economy will be on a constant upclimb. Eventually the market will lose confidence in the dollar, and interest rates will rise (that is, people will demand a higher return because they see the value of the dollar declining).
This is what Peter Schiff is talking about all the time…eventually interest rates will rise. Either the Fed will raise them intentionally (theoretically to stave off hyperinflation), or the market will raise them on its own because of lost confidence in the tender.
Well, to answer that you want to have a clear understanding/definition of deflation.
If the Federal funds rate were instantly raised to 10%, then would that immediately cause interest on all of the current debt to be $1.5Tn? I was thinking no (in part because the state would never have chartered the fed if above market interest rates reduced borrowing by the state), but I’m not 100% sure so that was why I’m asking:)
I don’t know that Bernanke would ever raise it to quasi sane levels, but I think it would be a good idea if the government’s credit was cut off completely. All credit needs to be reduced to market levels and that’s why the Fed needs to be abolished and replaced with a pure gold or pure silver standard.