Post
by moda0306 » Wed Jul 03, 2013 5:40 pm
If the fed winding down QE would increase rates, why have rates done most of their increasing during QE, and decreasing after it's over?
If interest rates are so unnaturally low, how has gold gone from $1,900 to $1,200?
If interest rates are so unnatually low, why don't we have rampant inflation as demand for credit-fuelled consumption and investment overtakes our productive capacity?
What is the "natural" rate of interest for a currency issuer to borrow the money they issue? Seems to me it's either 0% (kind of like the "natural score" of a referee or umpire), or whatever rate produces full employment and price stability in the market. Both are below current rates.
Since demand for new loans is so low, and supply (either constrained (willing depositors x reserve multiplier)) or unconstrained (no true reserve req't)) is so high, with low current inflation (as measured even by the BPP) and low projected future inflation (spread between inflation and non-inflation-protected t-bonds), why is the "natural rate" anything but super low right now?
If the fed came out and raised t-bill rates to 7% (or whatever Austrians think they deserve on risk-free assets), this would be the subsidy of a lifetime, and would absolutely tank the economy, resulting in deflation, making 7% t-bills even more of a ridiculous subsidy.
The fed may be able to control the floor on the price of money, but they can't control the movements of the entire economy... The market is showing very, very few signs that these are grossly unnaturally low rates.
This idea that we've seen some asinine increase in the money supply is astoundingly misleading. The fed trades fiat nominal "liabilities" for fiat nominal liabilities" of equal value. If the government came out tomorrow and signed a bill making T-bills legal tender, open market operations would do NOTHING to the money supply on a chart going forward. However, all the PP'ers holding T-bills wouldn't just shit the bed in fear and start spending their T-bills because the "money supply" exploded and their dollar-denominated confetti is about to collapse.
It's much better to look at there being a spectrum of "moneyness," much of which is made up by financial assets, some of which generate in the private sector (a share of stock or private bond) and are a direct claim (likely) to some non-financial assets (factory, home, business, car), or they are generated by the government to be used to clear private transactions (dollars/t-bills) and help control interest rates. Most actual transactions don't use shares of the S&P 500 or a T-Bond or a muni bond as legal tender, but they very well could in our modern economy. The problem isn't there being too much money on our balance sheets, it's that there's not enough money and other financial assets on our domestic balance sheets to keep our economy running at full capacity.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine