New to Austrian Theory, and after reading Austrian literature/watching YouTube, I have some questions:
The main pitfall of artificially lowering interest rates is that it inspires consumption of houses that would normally never be purchased by the same people. From what I gather, the trouble comes in when people have no savings and, instead, obtain loans and essentially go into massive debt.
1) How is this a problem? In a free market, couldn't everyone just spend all their money at one time? Does the problem come in with debt itself, or is it merely because the mass of people spent all the money there is to spend, thus inflating prices (albeit temporarily) in an unintentional illusion?
2) Logically, could the government control the amount people spend? I realize this is contrary to the goal in artificially lowering the interest rates to begin with, but I was considering whether the problem would be able to be solved by further government interference (or more specifically, why further interference is not helpful).
Thanks guys.
thetabularasa: New to Austrian Theory, and after reading Austrian literature/watching YouTube, I have some questions: The main pitfall of artificially lowering interest rates is that it inspires consumption of houses that would normally never be purchased by the same people.
The main pitfall of artificially lowering interest rates is that it inspires consumption of houses that would normally never be purchased by the same people.
I'm not sure where you got the idea that lower interest rates only entice a bubble in housing...but if you take out those two words, your statement is basically true.
From what I gather, the trouble comes in when people have no savings and, instead, obtain loans and essentially go into massive debt. 1) How is this a problem?
From what I gather, the trouble comes in when people have no savings and, instead, obtain loans and essentially go into massive debt.
1) How is this a problem?
It's not. That's not the trouble. Again I'm not sure where you got that idea.
Well if you want to get technical, anyone with a bigger gun can "control" pretty much whatever they want with regard to humans. But if you are wondering about this particular case, and why government interference does not lead to prosperity, and in fact creates the exact opposite, see:
Stimulus & "the multiplier"
For Austrian Business Cycle Theory, see:
Austrian Business Cycle Theory (ABCT) (full resource collection: here) In particular, see this one.
Interest rates & ABCT
For a whole host of other topics, check out The Ultimate Beginner meta-thread
Please don't take this to be a brush-off response. It's just a lot easier to send you to the resources that already explain the business cycle and will give you a much better foundation, plus there's no real use in reproducing all the same content here in a new thread. These are very basic questions and they should generally be answered for you in those materials. After going through some, definitely come back in this thread if you have some more specific inquiries.
thetabularasa: New to Austrian Theory, and after reading Austrian literature/watching YouTube, I have some questions: The main pitfall of artificially lowering interest rates is that it inspires consumption of houses that would normally never be purchased by the same people. From what I gather, the trouble comes in when people have no savings and, instead, obtain loans and essentially go into massive debt.
Great links by John James, please do read them. In particular though pay attention to Time Preference, Uncertainty, Risk, and Savings. A loan is a promise about an uncertain future. When the 99% are railing about the growing gap, they should go look at the initiatives to put every person into a home, to get everyone to buy a new car, etc. I did buy my home with a mortgage, but I bought one at 2x annual income, instead of 6x, like many of our friends. Now, so what?
The moral hazard was that rising housing prices, created additional paper wealth which people borrowed against to fun additional consumption. Think of it like tornadoes spun off from a hurricane. Eventually the people creating the debt in their personal lives, have to instead begin to pay it off. There is in fact no way to pay off an everincreasing debt load. The only way to pay if off is to stop consuming at a higher rate than you have been, and begin instead to "save" which in this case is actually paying off debt interest, instead of becoming wealth you have.
Money doesn't go away, it simply changes hands. The problem is that debt transfers money that you haven't ever been paid, into the hands of someone who already lent you the money. The money spent from debt, isn't money you have. It's money you didn't have, and that you have to at some point pay back.
How would the government control the amount people spend? And to what effect? In other words who would benefit from the change they create?
If you notice carefully, all of the interest rate manipulation isn't about getting rich people to expose their money to risks. That would require high interest rates. Low interest rates get poor people to borrow money, which puts their future unearned income at risk.
Being healthy involves at the individual level requires belt tightening debt reduction and savings. The government can't cattleprod an economy to produce something it's not able to produce. Think of it as a jockey using an electric prod on a horse. Eventually the horse keels over dead from exhaustion. If the horse isn't designed to run that way, then eventually it stops working. Austrian Economics explains how an economy works, and explains how it naturally corrects the errors of prediction (uncertainty/risk I mentioned above) inherent in action. The government is expert at trying to override this natural process. But they're simply running us to death. When the pain gets too geat, we'll throw the jockey, and look for a new one... Sadly... I wish we'd just run free.
David B:Great links by John James, please do read them.
And here I thought the term was "link spam". Silly me.
Don't forget that the central banks, government bureaucrats and other uses of force not only create the Business Cycle but are also unable to perform Economic Calculation.
Strapping on more regulations just solve the symptoms, not the underlying problem. The fed's low interest rates distorted the market and placed resources to where it should not have went. This means that if the fed DIDNT manipulate the interest, then spending, investments, savings, resources would all be allocated to the right places by themselves (consumer time preference would direct producer's products).
“Since people are concerned that ‘X’ will not be provided, ‘X’ will naturally be provided by those who are concerned by its absence.""The sweetest of minds can harbor the harshest of men.”
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