Don, RE: The article you posted, specifically the assertion that "Professor von Hayek demonstrated that if capitalists expected an interest rate of, for example, 4 per cent to be the norm they would continue under certain circumstance until interest rates rose to about 12 per cent. The reason why interest rates would eventually rise, even in the absence of a price premium, is that because the current rate signalled there is more real capital available than actually exists, capitalists would find themselves in competition for a much smaller pool of savings. It is this competition that eventually drives up rates near the end of the boom. This clearly suggests that even were official interest rates to be kept artificially low interest rate to business would still rise, which seems to have been happening in the US."
I assume he is referring to the limitations on the volume of lending based upon restrictions against lending institutions lending more than a certain % of the amount of reserves held. The simpler explanation may be that in times of increasing liquidity fueled by sharp increases in the money supply, the demand for goods and services increases dramatically. This increase in demand will likely occur for ALL of the mix of goods and services that buyers have been buying in the past. This would result in greatly increased production of goods and services where excess capacity exists to produce such goods and services. Where no excess capacity exists and, therefor, where the supply cannot grow as fast as the demand or cannot grow at all, it will result in increased prices.
The inevitable result of throwing money into the mix to stimulate global demand in an economy will be to create pricing pressures in some segments of that economy. Two sectors of the economy that typically respond slowly in response to increases in demand would, I think, be housing and energy. Look at what has happened to the housing mrkt in the Bay area of the GREAT STATE OF CALIFORNIA, and look at what has happened to energy; natural gas and electric rates have jumped.
The bottom line would be inflation creeping into the economy not irrespective of low interest rates, but rather BECAUSE of low interest rates and increased liquidity. Where one of the sectors that cannot grow quickly in response to rapidly increasing demand is as important a sector as energy, the inflationary effects will be felt all through the economy. As institutions recognize the onset of inflation, they recognize that their real rate of return, the rate of interest they receive BEYOND THE RATE OF INFLATION, will be less and may even be a negative rate if the loan is over a long enough period and the rate of inflation is high. In order to protect their interest rate profits, they will not loan unless they receive a higher rate. In other words, they are building the inflation rate into their loan in order to acheive a postive REAL rate of return.
Either that or that Austian economist is on to something. gg
OT, Don, your post on your big, hairy and bristly nose was a little insensitive to Razorback. He probably either sees you as competition or has hurt feelings. Maybe you should apologize. If you have tusks, a short tail and a weight problem, I apologize. g
OT, isopatch, I noticed your efforts to gather a circle of supporters. I don't think you have me on ignore. I also doubt that any analysts are reading si and taking their cue from your posts as you inferred. You'll have to write better posts. Or maybe you meant psychoanalysts?
Finally, I took a trip to S. Cal last week and was surprised to see oil platforms off the coast at Ventura and lots of hammer pumpers working off land west of the grapevine on I-5. Looked like Texas except greener, lusher and the people were better looking and smarter. (gg) Ed |
