Economic Growth and Lower Interest Rates
If the economy continues to expand and the demand for money rises, do interest rates have to rise also?
"If economic expansion is occurring coincident with an increase in the demand for money, interest rates do not have to rise, and they could even fall, if the market understands that the U.S. government is going to maintain an honest accounting unit indefinitely." That accounting unit being the dollar. Maintaining it honestly means its valuation.
"The presumption that interest rates will rise in an expansion follows the assumption that the borrower of capital is more interested in borrowing than the lender of capital is in lending. There is always a price that clears the market -- where supply exactly equals demand. If there is an expansion of demand for credit while there is an increase in the supply of credit greater than the increase in demand, economic growth will occur against a background of falling interest rates."
"Growth is the result of risk-taking. Not all risks produce growth, but if there is enough risk-taking, growth will occur. If the risks required for growth are reduced, more growth will occur. If the rewards to successful risk are increased, more growth will occur." This is the function of lowering interest rates, it lowers risk, and sows the seeds of growth.
"There are times of, yes, what Greenspan called, excessive optimism, when banks give money to projects of lesser and lesser quality, many of which will fail. Unless there are unexpected spectacular successes to absorb the money advanced to the defaulting firms, there will be inflation." This is what happened when the tech bubble burst. Now, we are suffering from energy stagflation. And, in the near term, we will again start to see the projects of lesser quality, which have spawned since the tech bubble burst, as a result of lowered risk, begin to fail.
"It is similar to a situation when more money was printed, chasing, after all, fewer goods and services than expected." Today's equities and housing markets are an example, the latter being supported by the government GSE's (FNMA and FHLMC) and a market mania which has people still willing to pay the going price because they "think" they can afford to.
"The story is different in places where the government creates credit for the State Owned Enterprises, which produce things nobody wants to buy. Then you have excessive credit creation - but that`s the governments’ and central banks’ fault, not the market’s." For the time being, in the case of China, they are producing and we are continuing to buy. As long as they can afford to keep buying our bonds, we can afford to keep buying their goods.
"If banks are supported by the Fed (implicitly) - as with the S&L’s, you may have a similar problem." The GSE supported housing market has yet to hit a price point where people stop buying. This by no means justifies the prices they "think" they can, in the long run, afford. Irrational exhuberance comes to mind.
What this theory assumes is an honest accounting unit, that being the dollar. We do not have an honest accounting unit at the moment; foreign central banks influence the honest accounting units valuation by buying our debt in the form of bonds, which artifically supports the dollar and suppresses interest rates. This keeps the vicious cycle of excess liquidity going along with its attendant staflation and inflation.
Lower interest rates may encourage risk taking and result in growth. However, the money acts as an object in motion, following the path of least resistance, it gravitates towards the easiest and highest yield. Those being arbitrage in the form of the carry trade, equities and the housing market. None of which build a lasting, durable and sustainable economic base for the future.
Denial is not a river. Corporate America and the American public need to stop fooling themselves. We need to "maintain an honest accounting unit" through investing here at home, in a durable, self sustaining economy. As it stands now, we are dangerously close to handing our economic and sovereign future to foreign governments and global economic entities, over which we have little, if any control. Our future does not and should not be reliant on the action or inaction of these self serving third parties.
There needs to be a paradigm shift and soon. So far, not enough money has flowed towards capex, industrial infrastructure, wages and jobs in this country. If enough money does not flow into building a durable economy, then there will need to be some "unexpected spectacular successes to absorb the money advanced to the defaulting firms", otherwise, it wont be a very pretty picture we and our children are left with.
See: Supply Side University - Jude Wanniski
http://www.wanniski.com/searchbase/les23.html
"If economic expansion is occurring coincident with an increase in the demand for money, interest rates do not have to rise, and they could even fall, if the market understands that the U.S. government is going to maintain an honest accounting unit indefinitely." That accounting unit being the dollar. Maintaining it honestly means its valuation.
"The presumption that interest rates will rise in an expansion follows the assumption that the borrower of capital is more interested in borrowing than the lender of capital is in lending. There is always a price that clears the market -- where supply exactly equals demand. If there is an expansion of demand for credit while there is an increase in the supply of credit greater than the increase in demand, economic growth will occur against a background of falling interest rates."
"Growth is the result of risk-taking. Not all risks produce growth, but if there is enough risk-taking, growth will occur. If the risks required for growth are reduced, more growth will occur. If the rewards to successful risk are increased, more growth will occur." This is the function of lowering interest rates, it lowers risk, and sows the seeds of growth.
"There are times of, yes, what Greenspan called, excessive optimism, when banks give money to projects of lesser and lesser quality, many of which will fail. Unless there are unexpected spectacular successes to absorb the money advanced to the defaulting firms, there will be inflation." This is what happened when the tech bubble burst. Now, we are suffering from energy stagflation. And, in the near term, we will again start to see the projects of lesser quality, which have spawned since the tech bubble burst, as a result of lowered risk, begin to fail.
"It is similar to a situation when more money was printed, chasing, after all, fewer goods and services than expected." Today's equities and housing markets are an example, the latter being supported by the government GSE's (FNMA and FHLMC) and a market mania which has people still willing to pay the going price because they "think" they can afford to.
"The story is different in places where the government creates credit for the State Owned Enterprises, which produce things nobody wants to buy. Then you have excessive credit creation - but that`s the governments’ and central banks’ fault, not the market’s." For the time being, in the case of China, they are producing and we are continuing to buy. As long as they can afford to keep buying our bonds, we can afford to keep buying their goods.
"If banks are supported by the Fed (implicitly) - as with the S&L’s, you may have a similar problem." The GSE supported housing market has yet to hit a price point where people stop buying. This by no means justifies the prices they "think" they can, in the long run, afford. Irrational exhuberance comes to mind.
What this theory assumes is an honest accounting unit, that being the dollar. We do not have an honest accounting unit at the moment; foreign central banks influence the honest accounting units valuation by buying our debt in the form of bonds, which artifically supports the dollar and suppresses interest rates. This keeps the vicious cycle of excess liquidity going along with its attendant staflation and inflation.
Lower interest rates may encourage risk taking and result in growth. However, the money acts as an object in motion, following the path of least resistance, it gravitates towards the easiest and highest yield. Those being arbitrage in the form of the carry trade, equities and the housing market. None of which build a lasting, durable and sustainable economic base for the future.
Denial is not a river. Corporate America and the American public need to stop fooling themselves. We need to "maintain an honest accounting unit" through investing here at home, in a durable, self sustaining economy. As it stands now, we are dangerously close to handing our economic and sovereign future to foreign governments and global economic entities, over which we have little, if any control. Our future does not and should not be reliant on the action or inaction of these self serving third parties.
There needs to be a paradigm shift and soon. So far, not enough money has flowed towards capex, industrial infrastructure, wages and jobs in this country. If enough money does not flow into building a durable economy, then there will need to be some "unexpected spectacular successes to absorb the money advanced to the defaulting firms", otherwise, it wont be a very pretty picture we and our children are left with.
See: Supply Side University - Jude Wanniski
http://www.wanniski.com/searchbase/les23.html
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