Economics Questions

Re: Artificial Interest Rates

z1235 — Sun, 08 Nov 2009 03:42:23 GMT

1. Correct. Btw, the concept of sound money and the pitfalls of fiat money were not invented (though accepted and promoted) by the Austrian School.

2. They do "borrow" from the Fed, as the Fed regularly purchases (and holds on its balance sheet) Treasury notes and bonds. This, in addition to the foreign debt (sales of Treasuries to foreign banks). The govt will sell Treasuries to anyone who has US currency to buy them, the Fed being one among the many, as it can freely create as many $USD as it wants.

For a great explanation on fractional reserve (central, fiat money) banking "The Case Against The Fed" from M. Rothbard is a great read.

Re: Artificial Interest Rates

David. — Sat, 07 Nov 2009 21:46:57 GMT

Hi, I think it'd be best to refer you onto a more thorough answer than anyone is going to give on a forum:

The case for a 100% Gold Dollar:

http://mises.org/daily/1829

Also, just have a read of a decent intro to Austrian Economics, that should help.

Re: Artificial Interest Rates

Wanderer — Sat, 07 Nov 2009 21:24:58 GMT

Interest rates are naturally set by the amount of savings. High savings means lower interest rates, and vice-versa. Simple supply and demand.

Re: Artificial Interest Rates

The Late Andrew Ryan — Sat, 07 Nov 2009 20:29:38 GMT

Jack400:
Thanks for your quick responses. I think I understand, but want to clarify:

1. So, under an Austrian system, there would be no central bank that created money for lending. Lending would have to come from existing money supply only?

Somewhat unrelated:

2. Why does our government even take out foreign debt? If the federal reserve can lend out a seemingly endless supply of capital at a cheap rate, why don't they just take it all from the fed?

1. No there would an could be no central banks under an Austrian system. Many Austrians are actually anarchists which would naturally make a government run central bank impossible. 2. That would cause hyper inflation instantly if used on that large a scale. Also although this seems to conflict with the answers of others I thought interest rates were set by the savings rate because this means that if more people are saving then they are showing a preference twoards future consumption and thusly firms should focus onlonger term projects

Re: Artificial Interest Rates

Sieben — Sat, 07 Nov 2009 20:27:24 GMT

Jack400:
1. So, under an Austrian system, there would be no central bank that created money for lending. Lending would have to come from existing money supply only?

Austrianism is free currency.You could continue using dollars, you could trade in gold, trade in oil, whatever. Doesn't matter.

You can make a bank if you want. A bank is just a warehouse. You can keep money in a warehouse or you can keep bikes.

Jack400:
2. Why does our government even take out foreign debt? If the federal reserve can lend out a seemingly endless supply of capital at a cheap rate, why don't they just take it all from the fed?

Its complicated and I dont think anyone fully understands it. The federal reserve is a banking cartel that is very private. No one fully understands their motives or who exactly they serve.

Anyway, the answer is corrupt politics.

Re: Artificial Interest Rates

Jack400 — Sat, 07 Nov 2009 20:12:36 GMT

Thanks for your quick responses. I think I understand, but want to clarify:

1. So, under an Austrian system, there would be no central bank that created money for lending. Lending would have to come from existing money supply only?

Somewhat unrelated:

2. Why does our government even take out foreign debt? If the federal reserve can lend out a seemingly endless supply of capital at a cheap rate, why don't they just take it all from the fed?

Re: Artificial Interest Rates

z1235 — Sat, 07 Nov 2009 20:07:20 GMT

At all times, the lending rates are determined by the market and are inversely proportional to the amount of money (liquidity) that is available for lending. The Fed uses this free-market relationship to manipulate (choose, decide) the lending rates through its unique power to create money (liquidity, loans) out of thin air and by a stroke of a key on a keyboard. The Fed is also the ONLY entity in the system allowed to do this. The more money (liquidity) it provides to the banks, the lower the rates, and vice versa. By stripping the Fed of its power to create money, or simply by abolishing the Fed, there would be no entity able to create money out of nothing, hence the rates would be simply decided by the amount of REAL, ACTUAL savings available in the system.

If there are too much savings (loans supply), seeking not enough borrowers (loans demand: entrepreneurs with ideas, factories seeking to expand, consumers willing to borrow and spend, etc) then the rates would start trending down as these savings start chasing (competing for) the scarce borrowers. As rates get lower, more potential borrowers would appear willing to borrow, and less potential savers would be willing to save. If on the other hand there are not enough savings to satisfy the borrowing demand, rates would start going higher as the many borrowers start chasing (competing for) the scarce savings. The higher rates would discourage more borrowers from borrowing, and encourage more potential savers toward saving. The balance of these supply/demand forces is what would determine the REAL interest rates at all times.

Re: Artificial Interest Rates

nirgrahamUK — Sat, 07 Nov 2009 19:42:04 GMT

the market solution does not involve a fed at all, neither does it involve a 'discount rate'.

it just involves people that have money to lend, being left to do it.

Re: Artificial Interest Rates

Sieben — Sat, 07 Nov 2009 19:41:44 GMT

Jack400:
Is there some better calculation the Fed should use to set the discount rate

Jack400:
I'm just confused as to how interest rates would get set by market forces since at some point, some individual (or agency) actually has to set the discount rate.

The interest rate is determined the same way that the price for milk and bread is determined. Lending money at interest is just selling money.

Artificial Interest Rates

Jack400 — Sat, 07 Nov 2009 19:38:56 GMT

I am trying to better understand Austrian economy theory and was wondering if anyone out there could help explain something to me, or direct me to a good article explaining it:

How should interest rates be set?

I understand that part of the problem, according to Austrian theory, is that interest rates were artificially low, thus encouraging too much borrowing and malinvestment of that borrowed money. I also understand that it is generally seen as the Fed who sets this rate artificially low through the discount rate.

My question is: how should that rate be set? I read a lot that it should be set "by the market," but what does that mean? Is there some better calculation the Fed should use to set the discount rate (and is that really allowing "the market" to set it)?

I'm just confused as to how interest rates would get set by market forces since at some point, some individual (or agency) actually has to set the discount rate.