Friday, September 30, 2016

Should the Fed Raise Interest Rates

For some time now the Fed has been hinting that it will moderate its interventions--monetizing government debt by printing money to buy government bonds and now quantitative easing by printing money to buy corporate bonds--in order to drive down the interest rate to unprecedented low levels. The Keynesian theory behind these interventions is that lower interest rates will spur lending, which in turn will spur spending. In the Keynesian mindset spending is all important--not saving, not being frugal, not living within one's own means--no, spend, spend, spend. The Keynesians running all the world's banks firmly believe that it is their duty that spending not diminish one cent, even if this means going massively into debt. Keynes himself famously said that government should borrow money to pay people to dig holes in the ground and then pay them again to fill them back up.


To Austrian school economist like myself, this is childish, shallow, and ultimately dangerous thinking. Austrians understand that economic prosperity depends first of all upon savings, not spending. Savings is funneled by the capital markets into productive, wealth generating enterprises. Gratuitous spending is simply consumption. Now, there is nothing wrong with long as one has actually produced something to be consumed. Printed money is not the same as capital accumulation. Or, as Austrian school economist Frank Shostak explains, goods and services are the "means" of exchange and money is merely the "medium" of exchange. Expanding the means of exchange through increased production--which requires increased capital, which itself requires increased savings--is a hallmark of a prosperous society. Increasing the medium of exchange out of thin air, as is current central bank policy, is the hallmark of a declining society that has decided to eat its seed corn.


Of course, the central bankers and their political friends are terrified of a recession that undoubtedly would follow an increase in interest rates. What our monetary and political masters do not understand is that the recession is both necessary and inevitable. It is necessary in order to end capital consumption and wealth destroying enterprises. Furthermore, it is inevitable in that the structure  of production has been so skewed toward capital consumption that production is threatened. We are living on both borrowed money (at home and abroad), and  the accumulated capital of previous generations. This one time spending spree WILL end. The longer we try to prop up spending with borrowed and printed money, the worse will be the reckoning when it does come.


So, how far should the Fed go in raising interest rates? There is no answer for this question. The Fed must end its monetary interventions and allow the free market to determine the interest rate that balances savings with loan demand. The last time the free market was allow to work, in the era of Fed Chairman Paul Volcker, the prime rate went to over 20%. This was very hard on both business and workers, but inflation was cured and the American economy shed itself of wealth destroying enterprises and became the economic powerhouse of the world once again. The same thing can happen, if only our monetary master get out of the way.

Tuesday, September 6, 2016

Italy wants other European nations to pay its unemployment bills

From today's Open Europe news summary:

Italy to propose Eurozone joint unemployment insurance scheme

La Repubblica reports that Italian Finance Minister Pier Carlo Padoan will later this month submit to his Eurozone counterparts a draft plan for a joint unemployment insurance scheme. Eurozone countries would contribute gradually to the tune of 0.5% of their GDP – meaning that the common pot would eventually amount to around €50bn. The scheme could be tapped by any Eurozone country experiencing a sudden increase in unemployment or a slowdown in employment growth compared to the bloc’s average.

The socialists running most governments in Europe (they are all socialists in policy if not in name) keep coming up with more schemes to make all of Europe pay for their destructive economic policies. What reason will Italy or any other Eurozone country have to make its economy more robust and allow its people to work cooperatively with others, if it can draw upon a Europe-wide unemployment fund? I can't see Germany or some other more economically successful European nations agreeing to this harebrained proposal.

Friday, September 2, 2016

There is no such thing as a negative interest rate


We Austrian economists are used to having terms corrupted, misused and redefined by statists and others who love and advocate strong central control of money and power. The term "inflation" is a prime example. We Austrians refer to "inflation" as creating new fiat money--as in inflation of the money supply. This is in sharp contrast to what we commonly hear in the mainstream media and from all Keynesian influenced economists, who use the term to describe a general increase in prices. Now nearly everyone thinks of inflation in this sense, so much so that we Austrians must always be careful to say "inflation of the money supply" whenever we use the term "inflation".


Those of us of a libertarian political persuasion, which includes many (but not all) Austrian economists, likewise bristle at how modern statists have hijacked and corrupted the term "liberal". Liberal is a term that is derived from the word "liberty". Ludwig von Mises even penned a book titled "Liberalism". Naturally, it contains not one reference to what today's so-called liberals advocate; i.e., erosion of property rights and statist intervention in almost all aspects of life.


However, now we Austrian economists are faced with a term that is new. It is NOT a term that has had a prior meaning and has been corrupted and re-defined.. It is a new, made up and wholly fabricated term-- "Negative Interest Rate".


Interest is founded on time preference


The rate of interest is founded on an innate trait of the human condition. All other things being equal, humans desire goods and services earlier rather than later. Austrian economists refer to this human trait as "time preference". Those who desire things sooner rather than later are said to have a high time preference. Likewise, those who desire things later rather than sooner are said to have a low time preference.


No two people have the same time preference. In fact, time preference changes within the same individual constantly. So someone with a higher time preference, but without the resources to own the good in the present, may be willing to pay others a higher overall price in the future for access to the good today; they may be willing to pay extra to use someone else's money in order to have it today. This "extra" is the interest rate that "someone else" will charge the person in order to allow the purchase to happen today.


Here you see a basic principle. There are TWO prices for something, a "have it now but can't afford it now price" and a "I'll save up to have it later price". The "have it now but can't afford it now price" means that the buyer must borrow--or we could call it "rent"--the money in order to buy it now. We call that "renting of money" interest.


The difference in price is the interest rate for that transaction at that place and time. One sees that there really is no single "interest rate". Like any market, what appears to be a price of a good--money, in the most common example--is constantly in flux due to the fact that it is derived from a human trait, time preference, that itself is constantly in flux.


Stop abusing our language and insulting everyone's intelligence


What the mainstream media and the public call a "negative interest rate" is an abuse of language. Time preference can never be negative, because that would require a total change in human nature. People will always want something sooner rather than later. It is HARD to save and delay consumption. People have to be disciplined to save and delay gratification. The idea of a "negative interest rate" is an attempt to turn reality on its head. It is another tactic in the Keynesian attempt to refute Say's Law; i.e., that production must precede consumption and that what one produces becomes the means by which he consumes. One can neither consume nor sell something that was never produced, which is the absurdity that is implied by a negative interest rate.




It is human nature that no one is willing to give up control of what he possesses now and accept less in the future. Since time preference can never be negative, the interest rate can never be negative. What is called a negative interest rate is merely a deposit charge that is difficult to avoid. Central banks throughout the world are exploiting their ability to charge for reserves held by their bank customers. By calling its charge a negative interest rate, central banks are trying to create the impression that what they are doing is a natural market phenomenon. It is no such thing. Because the central bank has a monopoly on the kind of money that may be used--its own!--and the quantity of money that people and businesses may use within a currency zone, it has the temporary power to force its member bank customers, and by extension its member banks' own customers, a fee for holding that which they cannot conveniently house anywhere else at the present time. This is nothing more than monetary repression, the purpose of which is to force the banks and their customers to loan, loan, loan, and spend, spend, spend respectively in order to re-inflate moribund economies.


The charade of central banking can come to an end. An important first step for all of us is to stop accepting the central controllers' corrupt definitions of terms that we use to describe reality. Economics is not an opinion; it is a science of reality. Definitions matter.