What is the difference between the central bank pushing interest rates down and additional savings being put in bank deposits ? Under a fractional-reserve central banking system will not the effect be the same ?
If so why do Austrians stress real uncomsuned savings, even in an central-banking system ?
One way to understand it is not to look at the money, but at the resources available. If nobody is saving money, that means resources are being used to consume. Meaning they are not available for investing in capital formation. So you are better off selling pizzas than building factories.
If people are saving money, that means they are underconsuming, meaning resources are available for capital formation.
It is true that fractional reserve banking creates inflation of the money supply and the illusion that there is more underconsumption than really exists. And indeed it is a huge problem, capable of starting a boom and bust cycle in and of itself.
But if there is underconsumption, even with FRB, at least you have something. And capital formation is at least possible, whereas it is impossible if there is no saving.
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I am actually totally down with ABCT. But I still have to push this question further. If americans saved f.ex 15 % or 20 % through 2000-2007, would they still have had a boom-bust like they did ? Would it be bigger/smaller ? Can there be periods of no boom/busts under the current system if the central bank itself does not actively push interest rates down and only new savings and newly created credit in the "private" banks is lent out ?
Can there be periods of no boom/busts under the current system if the central bank itself does not actively push interest rates
Are you asking whether boom/busts would exist in an Austrian world?
Deep q's.
1. The boom bust is caused by increasing the money supply. Some will qualify that with the words "beyond the existing demand for money", but I don't grasp why they say that. So although there would be bright spots in the economy because of that 15 to 20% saving rate, the forces causing booms busts would be unleashed. What would the result be? I don't know. What you are describing sounds a lot like Japan in its lost decade. They had two contrary forces operating there, the great savings rate versus the insane money printing. Result: their nuclear reactor exploded.
2. Fractional Reserve Banking is enough to cause boom busts. Or any other reason there is an increase in the money supply. Like Spain finding gold and silver in the New World, or the Netherlands creating such superior banking conditions that the whole world sent in their gold there, when they had Tulipmania.
The difference is the the former is a false market signal and the latter is an honest one. In the latter situation people would invest more but it would be justified: people are actually saving. In the former scenario, where the bank pushes down the interest rates, this creates the false signal and people invest more and keep spending. Eventually one has to be curtailed to justify the other.
In the former scenario people are acting as if there are more resources available than there really are, in the latter they are acting accordingly with the given availability of resources.
Essentially what you're asking is what is the difference between a government price control below market and a market price falling naturally due to more supply/lower demand. The latter is the natural result of market interaction, the former is a government imposition that distorts the market.
To Wheylous. NO! I am asking whether boom/busts exist in an central-bank setting as today, if people save a lot for example 30 % - 50 %. And additionally where the central bank does not manipulate interest rates downward, but credit is still extended by fractional-reserve banks.
Good answers, Smiling Dave. 1. My question is sort of, what would have happened if BoJ had not inflated, but let the savings take place and that would be placed in the Japanese FR-banks. What would be the economic effects ? 2. Is simply an expansion of the money supply enough ? I sort of thought the boom/bust occurs because its done through an expansion of credit ? And that it acts in many ways as inflation(as it is inflation), but is connected with the banking sector specifically. Thirdly, I read on wiki that the Netherlands had full-reserve banking so that when more gold flows in that doesnt itself trigger a boom ? I might add that I wondered about the effects of increased foreign deposits in a country, under todays banking setting, would cause an artifical boom as that is lent out. The mainstream economists seems to have an idea of "overheating" or a bubble arising from this. Although they soft-peddle the possibility of this arising from loose monetary policy, strangely.
To xahrx, NO. I am not contrasting a free market in money and banking with todays system. I am contrasting savings under todays banking system, with the artificial injection of new credit into the banking system. Both will be multiplied beyond its original injection, and lead to an expansion of credit.
1. Fractional Reserve Banking can cause a boom/bust. My guess is that some sector of the economy would, for some reason or other, draw all the newly printed money, which would suck up resources for that sector, cause malinvestments, and then there would be a collpase in that sector. Now in theory the savings could be so beneficial to the economy that it would produce enough resources to offset the waste and malinvestment. Indeed it may provide such new wealth that even with the waste there would be a net increase in wealth. In that case, the damage from the waste caused by FRB woiuld remain invisible. Because it is hard to know how much richer they should have become.
2. Doesn't have to be credit. Now the classical ABCT as layed out by Mises gives low interest rates artificially set by a central bank a key role, that of misleading entrepeneurs etc., as I am sure you are aware. Absent that, if there is merely a significant expansion of money or credit, it's up to the people who get the new money to be foolish on their own and blow it on wasteful things. Historically this seems to have happened quite often.
3. About foreign deposits under today's banking setting. We aren't talking about them depositing gold, because that isn't done nowadays. Nor are we talking about them depositing their own currency, because that won't influence the money supply. For example, if China deposits yuan in a US bank, that changes nothing as far the US money supply is concerned. So we must be talkiong about China putting some dollars in a US bank.
Where did the Chinese get those dollars from? It doesn't matter, but it would indeed increase the money supply as sure as if it was printed that day by the Fed.