Comments (4)

• Stefan Karlsson

  When I read it I was just about to post here about, but you came before me. Both the leader you link to and the "Monetary Myopia"-article also in this issue is, even apart from the Mises quote, quite good and near-austrian in its analysis. Although they in some parts discuss asset price bubbles like it is something which the central bank didn't create and so imply that they are a market phenonema which the central bank should intervene against, they at the end of the article when arguing against Ben Bernanke's view that asset price bubbles shouldn't be pricked writes that "However, his [Bernanke's] model assumed that bubbles just happen. In reality, monetary policy can contribute to the inflating of a bubble—not least if investors expect the Fed to cut interest rates when share prices fall, but to do nothing to prevent their rise.".

  Which is similar to what I wrote in my review of Greenspan's legacy.. And the general theme of The Economist's article is in many ways surprisingly similar to the one in my article (except they left out Greenspan's randian-misesian
  past ).

  Published: January 12, 2006 3:20 PM

• Roger M

  Half a loaf is better than none. But did you catch the anti-Austrian implication that consumer demand drives the economy? If I understand Austrian econ correctly, the low interest rates channel investment into capital goods and away from consumer goods, which causes consumer prices to rise. But in our case, most consumer goods are made in China, so our deficit with China increases. The Economist argues that low interest rates spurs consumption, which isn't Austrian.

  Published: January 14, 2006 12:01 PM

• Stefan Karlsson

  Actually Roger, artifically supressed interest rates
  will in the short-term serve to increase both investment and consumption, although the short-term effect will be disproportionally increased investment. In a closed economy this would have meant less consumption (at least relatively) but now it have instead created a hugh trade deficit which enables both consumption and investment to increase.

  Moreover, the long-term effect of fiat money supression of interest rates is to lower investments as the incentive to save have been reduced. As I pointed out in my recent article on Alann Greenspan, the savings rate have been declining (which is to say consumption have increased in relative terms) during the Greenspan era (the investment rate have at the same time held steady at least if you include residential construction resulting in today's record trade deficit), something which is largely a result of Greenspan's policy of negative real interest rates.

  Published: January 14, 2006 4:37 PM

• John McVey

  Roger:

  
  Low interest rates only "cause" spending to shift from consumption to more investment IF the cause of the lower rates is a change in capital accumulation preferences - ie the lower rates are a consequence rather than a cause of the shift. If, however, the State artificially lowers rates, effected by means of monetary and credit expansion, then as Stefan points out both capital and consumer spending will increase.
  

  
  The extra money being created to keep rates low goes, sooner or later, entirely into people's pockets. However, people only want to keep so much ready money on hand, so will spend the rest. While business may be able to borrow at lower rates from the financial institutions who are the conduit for the government's inflation, people's own investment preferences remain unchanged so the lower rates mitigates against capital accumulation from the extra funds (indeed, begins to favour capital consumption, with the future consequences this entails). There is only one other direction for the unwanted money to go: consumer spending, whereupon the money goes were the goods are cheapest which is presently places like China. This, as simplified as it is, is straight out of von Mises' Theory of Money and Credit.
  

  
  JJM

  Published: January 14, 2006 7:53 PM