Category Archives: Federal Reserve Bank

Interest Rates Mess With Time Preference Rates

While crediting the “Fed’s interest-rate policies, together with other measures,” for having “helped avert a much deeper economic slump,” the War Street Journal is prepared to admit (here) that artificially keeping interest rates so low doesn’t “just hurt retirees. [It] also penalizes people of any age hoping to build up funds for the future, and discourage rainy-day savings that could make U.S. consumers more resilient to job losses and other financial jolts.”

Dah. Austrian economists have warned all along that the Fed’s policies will see the dollar drop like a stone, assets continue to devalue, and saving and retirement become near impossible. Prices will soar, and the currency will eventually collapse (hyperinflation).

“Americans who have done everything right, have worked hard, saved their money and stayed out of debt are the ones being punished by low interest rates.”

Time preference rates are the degree to which different people discount the future in favor of immediate gratification. In a credit-fueled, consumption-based economic culture, those who want it all now come out on top. The saver, investor or producer is not the type of economic actor that such a fiscal culture cultivates and rewards.

DiLorenzo Dishes It Out To Subcommittee On Domestic Monetary Policy

Business, Debt, Economy, Federal Reserve Bank, Healthcare, Individual Rights, Inflation

Pearls before swine? Probably. Still, the freedom movement is gaining momentum. First came Randy Barnett’s powerful testimony before the Senate Judiciary Committee (read “Turning Citizens Into Subjects: Why The Health Insurance Mandate Is Unconstitutional”). My good friend Thomas DiLorenzo, Professor of Economics at Loyola University in Maryland, followed. Tom tried to explain to members of the Committee on Financial Services (Subcommittee on Domestic Monetary Policy and Technology) that the “Fed’s monetary policies tend to create temporary and unsustainable increases in employment while being the very engine of recession and depression that creates a much greater degree of job destruction and unemployment.”

Here’s an excerpt from “How the Fed Fuels Unemployment”:

When the Fed expands the money supply excessively it not only is prone to creating price inflation, but it also sows the seeds of recession or depression by artificially lowering interest rates, which can ignite a false or unsustainable “boom” period. Lower interest rates induce people to consume more and save less. But increased savings and the subsequent business investment that it finances is what fuels economic growth and job creation.
Lowered interest rates and wider availability of credit caused by the Fed’s expansionary monetary policy causes businesses to invest more in (mostly long-term) capital projects (primarily real estate in the latest boom-and-bust cycle), and there is an accompanying expansion of employment in those industries. But since the lower interest rates are caused by the Fed’s expansion of the money supply and not an increase in savings by the public (i.e., by the free market), businesses that have invested in long-term capital projects eventually discover that there is not enough consumer demand to justify their investments. (The reduced savings in the past means consumer demand is weaker in the future). This is when the “bust” occurs.
The economic damage done by the boom-and-bust policies of the Fed occur in the boom period when resources are misallocated in the ways described here. The “bust” period is actually a necessary cure for the economic miscalculations that have occurred, as businesses liquidate their unsound investments and begin to make decisions on realistic, market-based interest rates. Prices and wages must return to reality as well.
Government policies that bail out businesses that have made these bad investment decisions will only delay or prohibit economic recovery while encouraging more of such behavior in the future (the “moral hazard problem”). This is how short recessions can be turned into seemingly endless ones. Worse yet is for the Fed to create even more monetary inflation, rather than allowing the necessary economic adjustments to take place, which will eventually set off another boom-and-bust cycle.

MORE.

A Paul-Bachmann 2012 Ticket

Elections, Federal Reserve Bank, Foreign Policy, Politics, Republicans, Ron Paul, War

HOW FAR WE’VE COME. On February 20, 2010, I blogged about the reaction of the CPAC (Conservative Political Action Conference) regimists to a straw poll that placed libertarian Ron Paul in the lead. (http://barelyablog.com/?p=21977.) Granted, out of 10,000 conference attendees, approximately 2500, very motivated Paulites had voted. Still, I expressed my hopes that this informal gauge of the state-of-the GOP was significant, and that, finally, “the bums and their statist sycophants” would be tossed out and replaced with strict Constitutionalists such as Peter Schiff and Rand Paul. “The small Beltway Politburo that runs CPAC” was certainly worried.

With a smart strategy, this scenario is not implausible. As abcNews reports (http://blogs.abcnews.com/thenote/2011/01/romney-wins-new-hampshire-republican-party-committee-straw-poll.html), “In the first ever ‘straw poll’ of New Hampshire Republican party committee members sponsored by ABC News and WMUR and sanctioned by the state Republican party, ex-Massachusetts Gov. Mitt Romney took 35 percent of the 276 valid ballots cast. This is just 3 percent more than Romney took in the 2008 GOP primary, when he finished in second place behind Sen. John McCain, R-Ariz. Coming in a distant second was Rep. Ron Paul, R-Texas, with 11 percent. Paul took 8 percent in the 2008 GOP primary.”

Ron Paul can pull this off. But he needs the punch and the pizzazz of a Michelle Bachmann as second-in-command. Bachmann is cerebral (a quality poor Palin is without). She’s also beautiful, eloquent and is seldom fazed. Moreover, Bachmann is not wedded to the warfare state. She has officiated on enough panels with Paul, and is wise enough, to recognize the value of bringing moderate liberals into the fold by denouncing America’s forays abroad.

Hey, what do you know? On 09.28.09, I had already proposed a Ron Paul and Michele Bachmann ticket. The occasion? An address by Paul, introduced by Bachmann, about “The Ben Bernanke.” By that time, Bachmann had already beefed-up her knowledge of the Fed and was familiar with Tom Woods’ Meltdown.

Reps. Paul and Bachmann can neuter Mitt Romney politically, but they must unite to do so.

‘Apocalyptic Pain’ Coming Down The Pike

Debt, Economy, Federal Reserve Bank, Inflation

Another obstetrician who says “no” to spending is Sen. Tom Coburn, R-Okla. The good doctor has warned of “apocalyptic pain’ from an out-of-control debt that could cause 18 percent unemployment and a massive contraction in the economy that would destroy the middle class.” This is what this “leading Republican deficit hawk said in an interview that aired Sunday” on Fox News.

Sen. Coburn, who recently issued a report on government waste, warned that the U.S. only has about three or four years to get its fiscal house in order or it could find itself facing austerity measures seen in Greece, Ireland, Spain, Portugal and earlier in Japan.

For one, we already have that level of unemployment:

The real unemployment rate is 16.3 percent. The discrepancy between the official and the awful numbers has arisen because the former count, conveniently, “only those who have looked for work in the last four weeks.” “Hundreds of thousands of people, some discouraged by their failed job searches, left the labor force. The labor force includes only those who are either employed or are looking for work.”

Coburn is a good man. But hitherto there have been too few good men like him. The band (of fools) has played on for too long. “WE ARE DOOMED.”