Thursday, July 3, 2014

Interest Rates and Balance

Miyagi: You remember lesson about balance?
Daniel Larusso: Yeah.
Miyagi: Lesson not just karate only. Lesson for whole life. Whole life have balance. Everything be better. Understand?
--The Karate Kid

Interest rates reflect the price of borrowing money. In unhampered markets, interest rates are determined by the supply of savings and the demand for funding.

Low levels of savings pressure interest rates higher in free markets. Higher interest rates reflect low supply of savings and encourage more people to save more. As savings build, supply grows, causing interest rates to fall.

Over time, the system comes back into balance. Shortage of savings is alleviated. Capital is replenished for productivity improvement projects.

Today's markets are hampered, however. Rather than being permitted to float freely, interest rates are being held low at gunpoint. In a system that is extremely short on savings and extremely long on consumption, hostaged interest rates impair the rebalancing process. People continue to borrow and consume. Debt continues to grow. Savings continues to decline. Capital continues to dwindle.

A person must either believe that a system that is forced to remain out of balance thru interest rate repression is not a concern, or that there will be consequences to pay for this forcible restraint.

1 comment:

dgeorge12358 said...

Credit expansion is the governments foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.

No one should expect that any logical argument or any experience could ever shake the almost religious fervor of those who believe in salvation through spending and credit expansion.
~Ludwig von Mises