Central Banks Won’t Produce Natural Interest

The Daily Bell.com
Thursday, March 29, 2012

The Bank of England should raise interest rates next week … Most people that read finance columns have heard of the “natural rate of unemployment”, and many will know that the term was introduced by Milton Friedman. But far fewer will know where he got the term. He said himself, in his Nobel Prize lecture, that “The ‘natural rate of unemployment’ [is] a term I introduced to parallel Knut Wicksell’s ‘natural rate of interest’”. But who was Knut Wicksell and what is the “natural rate of interest” – and does it matter? We shall see that it does indeed matter, and tells us something important about current UK monetary policy and the outlook for the UK economy and George Osborne’s chances of delivering his fiscal plans …Three years, now, at 0.5 percent, and counting. That compares with a natural rate of interest that was about 5 percent when times were better and will be around 3-3.5 percent now. (Essentially, add the 2.5 per cent RPI inflation rate that’s about the target to the 1 percent or so sustainable growth rate, and you get a decent guess at the natural rate.) Having interest rates so far below the natural rate damages the sustainable growth rate of the economy. – UK Telegraph/ Andrew Lilico

Dominant Social Theme: We just have to figure out what’s natural and then fake it.

Free-Market Analysis: Here comes Andrew Lilico, an economist with Europe Economics, and a member of the Shadow Monetary Policy Committee, according to the UK Telegraph (see article above).

The gibberish contained in the above excerpt is only magnified throughout the article. It is really incredible. What is it about price fixing that such intelligent commentators don’t understand?

If you artificially set a price by force – and this is what central banks do – then that price is almost bound to be incorrect. Only the market itself can generate a “natural” rate of interest or determine monetary volume.

That’s because the market itself is competitive. The “Invisible Hand” of competition creates naturally fluctuating interest rates and the appropriate volume of money stuff.

This is why monetary competition historically yields up evermore efficient and healthy money. People voluntarily choose the kind of money they want and the volume of money as well.

• A d v e r t i s e m e n t

Within this context, gold and silver have proven to be a historically popular money stuff. Used with each other, gold and silver provide a ratio. If the ratio becomes distorted, people can tell that someone is trying to manipulate the market. This called bi-metalism.

Greenbackerism has made a startling comeback of late, which we have long predicted, citing Ellen Brown‘s effective boosting of the idea that government ought to have the sole franchise to print money.

But regardless of whether a mercantilist public/private body like the Bank of England or Federal Reserve prints paper-fiat money, or a fully public enterprise, such as those found in India or China, the problem of the natural rate and volume remains. Once human beings arrogate to themselves such decisions, money itself cannot help but be distorted.

Both India and China are now suffering from vigorous price inflation. That’s because when human beings have a monopoly of something, it will inevitably be abused. It is impossible to expect mere flesh and blood not to print too much money. Money buys all kinds of fun, especially for those in control of it.

Over time, even within a competitive monetary environment, government eventually prints too much paper money, eventually debasing it. As this paper money became cheapened, people seek not to hold it, and try to get rid of it.

This is why schemes like Greenbackerism tend to lead to government consolidation of money authority. As people reject government money, those in charge gradually mandate its use. Within historical contexts, there tends to be an expansion of force as people are compelled to use what they would otherwise reject.

There are arguments that certain kinds of government monopoly money have proven more effective than other kinds. Ellen Brown, Bill Still and others argue that tally sticks were a wonderfully effective government initiated money that helped England build an empire.

But from our point of view this is perhaps a misreading on several fronts. First of all, there is nothing all that admirable about an empire. Societies tend to flourish, as we have often pointed out, when they are separate and singular but gathered closely together.

This allows people to travel from one place to another nearby place if they are being oppressed. Gradually over time, a culture of freedom is established as governments compete with one another to provide environments that are attractive and laissez faire.

Many great cultures have been established within this context. Rome had its Seven Hills, the Greek Golden Age and the Renaissance had city states, the United States had “these” united States.

Over time, consolidation usually takes place and gradually what was free and innovative becomes less so. Eventually dirigisme and socialism may set in.

Gradually the leaders of the consolidated country begin to become aggressive and to focus on outside threats to distract attention from an increasingly failed society. This is the empire phase.

It is unfortunate that most of history focuses on the “greatness” of empire when in fact, an “empire” is symptomatic of societal sickness not health.

During the tally stick era in Britain, Kings – having access to the money supply – apparently borrowed against the stock of tally sticks considerably for purposes of waging war. Not only that, but as tally sticks were generated to pay taxes, the volume of the money supply was seemingly artificially restricted.

This was great for those who controlled tally sticks – the ruling class – because an artificially restrained money deprived people of capital and likely had a retardant effect on social mobility and individual economic potential. Tally sticks were a perfect money for the elites.

There is seemingly no substitute for competitive money and for the Invisible Hand setting the volume and price of money. In economies that use gold and silver, hoarding and dishoarding sets the price of market money, along, perhaps, with the opening and closing of mines, depending on how much gold and silver is circulating. This is one reason why precious metals have been successful as money throughout history.

In the modern era, central banking has taken over the world – and the result is general catastrophe and ruin. This is only to be expected. It is in fact what those behind the system are intending to create.

The power elite that has seemingly installed modern monopoly fiat money – and the dollar reserve system itself – apparently seeks to build world government. It needs to foment economic turmoil and wars in order to move society toward one-world money.

Central banking is key to this strategy. The more monetary price fixing there is, the more economic chaos and catastrophe takes place. It is a closed loop, a virtuous circle from the power elite point of view.

The elites spend an enormous amount of time trying to justify central bank price fixing. It is one of their biggestdominant social themes – that only a handful of good, gray men can manage the economy and make decisions for everyone else.

Andrew Lilico wants us to believe that central banks ARE capable of mimicking natural rates of money production. In truth, there is no “natural interest rate” or rate of monetary production that human beings are EVER capable of creating.

Even if the top people at these monopoly money banks were capable of figuring out where the price and volume of money could be, there is no guarantee that they would generate the correct prices over time.

They would use their power for their OWN benefit. As indeed they have. We can see it clearly, even today. What misery there is in the world.

Conclusion: Power corrupts, and absolute power corrupts absolutely.

 

This article was posted: Thursday, March 29, 2012 at 10:56 am

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