• 349 days Will The ECB Continue To Hike Rates?
  • 349 days Forbes: Aramco Remains Largest Company In The Middle East
  • 351 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 751 days Could Crypto Overtake Traditional Investment?
  • 756 days Americans Still Quitting Jobs At Record Pace
  • 758 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 761 days Is The Dollar Too Strong?
  • 761 days Big Tech Disappoints Investors on Earnings Calls
  • 762 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 764 days China Is Quietly Trying To Distance Itself From Russia
  • 764 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 768 days Crypto Investors Won Big In 2021
  • 768 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 769 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 771 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 772 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 775 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 776 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 776 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 778 days Are NFTs About To Take Over Gaming?
The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

  1. Home
  2. Markets
  3. Other

Interest Rates Are Prices

One of the most enduring myths in the United States is that this country has a free market, when in reality, the market is merely the structural shell of formerly free institutions. Government pulls the strings behind the scenes. No better illustration of this can be found than in the Federal Reserve's manipulationof interest rates.

The Fed has interfered with the proper function of interest rates for decades, but perhaps never as boldly as it has in the past few years through its policies of quantitative easing. In Chairman Bernanke's most recent press conference he stated that the Fed wishes not only to drive down rates on Treasury debt, but also rates on mortgages, corporate bonds, and other important interest rates. Markets greeted this statement enthusiastically, as this means trillions more newly-created dollars flowing directly to Wall Street.

Because the interest rate is the price of money, manipulation of interest rates has the same effect in the market for loanable funds as price controls have in markets for goods and services. Since demand for funds has increased, but the supply is not being increased, the only way to match the shortfall is to continue to create new credit. But this process cannot continue indefinitely. At some point the capital projects funded by the new credit are completed. Houses must be sold, mines must begin to produce ore, factories must begin to operate and produce consumer goods.

But because consumption patterns have either remained unchanged or have become more present-oriented, by the time these new capital projects are finished and begin to produce, the producers find no market for their goods. Because the coordination between savings and consumption was severed through the artificial lowering of the interest rate, both savers and borrowers have been signaled into unsustainable patterns of economic activity. Resources that would have been used in productive endeavors under a regime of market-determined interest rates are instead shuttled into endeavors that only after the fact are determined to be unprofitable. In order to return to a functioning economy, those resources which have been malinvested need to be liquidated and shifted into sectors in which they can be put to productive use.

Another effect of the injections of credit into the system is that prices rise. More money chasing the same amount of goods results in a rise in prices. Wall Street and the banking system gain the use of the new credit before prices rise. Main Street, however, sees the prices rise before they are able to take advantage of the newly-created credit. The purchasing power of the dollar is eroded and the standard of living of the American people drops.

We live today not in a free market economic system but in a "mixed economy", marked by an uneasy mixture of corporatism; vestiges of free market capitalism; and outright central planning in some sectors. Each infusion of credit by the Fed distorts the structure of the economy, damages the important role that interest rates play in the market, and erodes the purchasing power of the dollar. Fed policymakers view themselves as wise gurus managing the economy, yet every action they take results in economic distortion and devastation.

Unless Congress gets serious about reining in the Federal Reserve and putting an end to its manipulation, the economic distortions the Fed has caused will not be liquidated; they will become more entrenched, keeping true economic recovery out of our grasp and sowing the seeds for future crisis.

 

Back to homepage

Leave a comment

Leave a comment