This is a theoretical thing I have been struggling with and I was hoping to get some help here.
Can central banks suppress interest rates indefinately? Let us say that they are increasing the money supply by 20% each year, this causes the purchasing power of money to go down aproximately 20% each year and interest rates would have to go up to adjust for this fact in order for people to lend other people money.
But now the central bank comes in and provides free money for people, can this then suppress market interest rates forever or will interest rates rise on the market in order to take into account the increased money supply and subsequent inflationary loss?
K:But now the central bank comes in and provides free money for people, can this then suppress market interest rates forever or will interest rates rise on the market in order to take into account the increased money supply and subsequent inflationary loss?
This is an odd answer, but a good question. If you don't find my input sufficient, I'm sure you'll be able to find appropriate answers elsewhere with a few searches involving key terms on the forum, Austrian literature, google, and so forth.
When the federal reserve acts to influence the price of a market good, it necessarily eliminates the possibility of there being a free market. It has a monopoly on credit and money creation and thus is able to extort property rights outside contractual allowances by acting as a parasitic third party. Whether one views the federal reserve as a private firm with a few government priviledges or a part of the government itself, the federal reserve's existence is antithetical to natural conditions. This particular aggression on the part of the federal reserve can be seen as a price control, today specifically, as well as in your question, a price floor. THis is to say that it enforces a maximum upper limit on the price of credit. The definition of a price floor is a price for a good that is the maximum legal upper limit on the price of a market good; this necessarily implies that, for an effective price floor, it must be enforced at a level that is at a lower price than those for which market conditions would allow.
This ultimately is the cause of economic miscalculation and misallocation of scarce resources which have alternative uses. Price floors lead to surplus, given supply and demand analysis, ceteris paribus. This need not graphical analysis, but can be deduced praxeologically. I have provided an in depth analysis of price floors here as they apply to minimum wage laws.
You seem to touch on the answer in your question as I bolden the concept of market interest rates. The fact that prices do not reflect market conditions, given price controls, demonstrates that resources are being misallocated so long as such controls are not equivalent to the market price. It is this fact that leads to misallocations of scarce goods with alternative uses. From the very instant effective price controls are enacted, scarce goods with alternative uses are misallocated. True, we don't see the bust until interest rates rise and goods are reallocated from lesser valued ends to higher valued ends, as determined by the values of market actors, but this does not in any way negate the fact that the misallocations occurred because of the price controls. Political limits to the extent to which the federal reserve may expand credit include price inflation (which the federal reserve claims to keep under control) and destruction of the currency (again, a goal of the federal reserve to prevent; or so it says..).
Hope this helps.
If I had a cake and ate it, it can be concluded that I do not have it anymore. HHH
K:Can central banks suppress interest rates indefinately? Let us say that they are increasing the money supply by 20% each year, this causes the purchasing power of money to go down aproximately 20% each year and interest rates would have to go up to adjust for this fact in order for people to lend other people money. But now the central bank comes in and provides free money for people, can this then suppress market interest rates forever or will interest rates rise on the market in order to take into account the increased money supply and subsequent inflationary loss?
No, interest rates are only a part of a monetary system. The value of the money itself is a lot more important. See:
"the market determines interest rates"
Quote: "But now the central bank comes in and provides free money for people, can this then suppress market interest rates forever or will interest rates rise on the market in order to take into account the increased money supply and subsequent inflationary loss?"
What does "free money for people" mean? That anybody can go and ask central bank for any amount of money? Then the borrowing on the market would cease, so the interest rate would not be set at all at any value.
But this would not suppress the market interest rates forever. Hyperinflation would follow quickly, and the particular central bank would lose control of the currency.