The Unintended Consequences Of Government Meddling In Markets
I thought this was a clear explanation of the problem with governments artificially shoving interest rates down. Benjamin J. Thompson writes at FEE about small hotel owners in Europe who were angry about low interest rates, as they said that big hotel chains would be the beneficiaries of low interest rate policies, not a mom-and-pop operation.
Thompson continues:
...The Austrians have argued for the last half-century or more that artificially low interest rates bias the market in favor of the Large. Interest rates are the price of access to future money today subject to the same supply-and-demand pressures as anything else that has a price. Depending on how much stored capital is sitting in the banks to lend and how many demands there are to borrow, a natural market interest rate would emerge. The ECB, just like the Federal Reserve, takes it upon itself to press a finger on the scale and push that price down.Since prices carry information, wrong prices carry wrong information. In the case of interest rates fixed to be too low, it sends the message that the economy is ready and waiting for very large capital projects. Production shifts to larger, more time-intensive projects at the cost of smaller ones. If this goes on long enough, it becomes the poison boom that creates a bust later, as it turns out consumers weren't actually waiting to buy the ambitious finished product. The top-heavy house of cards, built on an illusion of rich-and-waiting customers, topples over.
So many of the economic maneuvers said to help people will actually harm them -- and the economy. It's always amazing to me that the cleaving to ideology always seems to win out over the really pretty simple math.
Oh, and going "natural" a la interest rates might reveal a thing or two:
Government set interest rates distort lots of things. Real floating market set interest rates would reveal a lot of the problems in our economy.
— KnoxvegasMike (@mlittle101) April 8, 2019
Since real, floating, market set interest rates would reveal problems in the economy, why would you expect any politician or government employee to support the idea?
Wfjag at April 8, 2019 12:20 AM
Real, floating, and market-set interests rates would respond to market conditions more quickly. However, they are also subject to the panic of the mob and over-reaction to market conditions.
One reason we use central banks is to keep panic pricing out of our markets as much as possible. While artificially-low interests rates create a false picture of risk, they also help to keep inflation at bay.
American consumers tend to have a blasé attitude toward inflation as something other countries experience, but not us. After all, it's been 40+ years since American consumers had to worry about even high single-digit inflation.
Conan the Grammarian at April 8, 2019 8:35 AM
I'm not saying you should buy bitcoin.
No one cares if you buy bitcoin.
You should understand how bitcoin (not cryptocurrency generally, but bitcoin specifically) relates to this blog post.
Saifedean can help you.
Crid at April 8, 2019 10:43 AM
For starters, he'll help you resist childish prattle about "centralized clearinghouses."
Crid at April 8, 2019 10:44 AM
To wit.
Crid at April 8, 2019 10:46 AM
The next few decades are going to be interesting.
Conan the Grammarian at April 8, 2019 12:19 PM
Low interest rates are the biggest reason why no one can afford to retire anymore.
Cat at April 8, 2019 2:59 PM
Denial of reality doesn't change reality Crid.
Ben at April 9, 2019 6:17 AM
Punctuation, clarity, tone.
Huh?
Crid at April 9, 2019 11:07 AM
After the 2008 crash, the gov set rules for banks to reduce their risk--this has meant it is harder for small companies to get loans but it is the small companies that grow to become large companies in the future and that do lots of hiring. In addition, the rules got so complex that big banks were favored (many small banks closed) but big banks don't want to talk to a small business--too much trouble.
cc at April 9, 2019 11:21 AM
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