The article mentions when savings get low - interest rates should rise -
The greater the demand for credit the greater is the interest rate that is charged to borrow the savings. As the savings pool is drawn down through lending, savings become scarcer, hence a higher rate of interest is needed to convince savers to part with their savings.
If credit is lent out of the savings pool, and the savings pool is at the lowest levels in history, how is it that credit and debt can be expanding? This is a conundrum. Interest rates are also at historical low levels, another conundrum, as interest rates should be rising to attract scarcer savings into the credit markets.
Fundamentally, a credit/debt structure is built upon the loaning of current resources, which is not dependent upon new savings - but rather only upon the willingness of agents to exchange those resources for a promise to repay. We call the prevailing willingness to exchange by various names: the rate of profit, or the marginal efficiency of capital, or the rate of interest. This “rate of interest”, which equates savings with investment, is the differences between prices that pervade the intertemporal price structure – keeping in mind that when resources already exist in various forms, the act of savings and investment are distinct acts (separated by time and by agent) and savings need not occur before investment.
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What lay people call the “rate of interest” is the price of money loans, although even in the economic literature the terms are used interchangeably (usually the context makes it clear which “rate of interest” is actually being referred to.) Keynes, as you are doing, regarded the money rate of interest as being solely dependent on the quantity of money and the varying desires of people to keep certain balances of money in hand. Thus, there was no linkage between the rate of profit and the price of loans (Keynes acknowledged a long-run relationship), and consequently the price of loans was not sufficient to equate savings with investment – as the classical economists had asserted. This is tacit acknowledgement of the degree to which the Keynesian framework pervades popular thought.
But the central bankers, being ever resourceful, dreamed up a new way to finance the government debt.
There is only a weak and indirect link between government debt and Central Bank actions. The Fed could by debt/assets from anywhere and accomplish the same goals.
Instead of selling the bonds to the commercial banks, the bonds were sold to private investors via existing financial markets, and to foreign investors and central banks, especially Japan and China. This placed the bonds in the hands of investment funds, hedge funds, and foreign central banks, which meant the bonds did not show up on the books of our commercial banks as before.
You’re inventing a conspiracy theory – for what purpose? No one is forced to buy government debt and, although I have not verified it, I would be surprised if debt held by private individuals is substantially different from any other period of history when the debt as a percentage of gdp was at similar levels.
This is the how historical debt levels have been issued without creating price inflation, which would have caused market interest rates to rise to make up for the loss of purchasing power of the currency.
There is no connection between debt and price inflation – that is a Keynesian notion that assumes individuals suffer from what is called “bond illusion.” Further, there is no connection between government debt and interest rates – the so-called “crowding out” concept never had much of a theoretical coherence, has been empirically shown to be false, and was eclipsed by the concept of Ricardian Equivalence.
But the central bankers, being ever resourceful, dreamed up a new way to finance the government debt. Instead of selling the bonds to the commercial banks, the bonds were sold to private investors…..Instead of price inflation of consumer goods, the money has flowed into the bond market and other financial markets, including the stock market and especially the real estate market, bidding up the prices of financial assets.
If central bankers sold the bonds they hold as assets, the money supply would shrink – not grow. Governments sell bonds to finance expenditure – this does not create money – you have to get that down. Nevertheless, reserves ex-of currency has not grown much, if at all, since 1986.
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The United States has learned how to export inflation.
Nope. The US could export inflation as long as our currency is used as a defacto reserve currency of the world. But as more US currency is held abroad, the more this lowers the elasticity of demand with respect to inflation – thus the more hamstrung, some might say disciplined, the Fed becomes.
In place of price inflation we have asset inflation, as exemplified by the rise in bonded debt issuance from less than $1 trillion in 1970, to $23 trillion by 1997, to approximately $46 trillion by 2003 - a doubling in just six years. Such is not an increase in debt - it is an explosion of debt.
The tail does not wag the dog. The lower the risk of moral hazard, the more likely it is for future income to be brought into the present (thus, the more likely for a borrower to "max out"). You’re assuming that “all else has remained the same.” Since the 70’s, there been an explosion of innovation in financial markets.
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....By monetizing government debt, Federal Reserve Notes, which are irredeemable promises to pay, circulate as the currency. When money, credit and debt are one and the same, such a system must inflate or die.
Your conclusion is simply restating what one already assumed. Try actually answering the question and you will see that there is no causal relation between a fiat currency and inflation. The original theoretical justification for adopting a fiat currency was to maintain an independent monetary policy and, ironically, to maintain a fixed money supply – not as a means to create debt. |
