Does an inflationary monetary policy mean that interest rates are lowered?
First, let me say I'm no authority - in economic matters I'm self trained. The way I see it, inflationary policy is an increase - by any means imaginable - in supply of money and credit. Lowering rates, stimulus package bonanza giveaways, bailouts, money dropped off helicopters, deficit spending - anything will do. Money is generally borrowed or newly created - which, ultimately, dilutes the existing wealth.
Does it follow that since the producer's interest expenses are less, he can lower price?
Interesting question. My understanding is that those in power like prices to keep going up - albeit slowly. Apparently, the fear is that if prices decline, producers would be on the losing end, a step behind every step of the way. That would discourage production, decrease hiring and jobs, and generally worsen the decline.
The paradox is that - just as you said - under conditions of lower rates (and economic decline, and people willing to work for less) the prices of products (and services) SHOULD decline. (I'm beginning to think that this is what "gregor" meant in his remark).
What seems to be happening now is that the government is "encouraging" lenders to lend - but lenders are afraid to lend during these uncertain times, as they should be.... while borrowers are reluctant to borrow, since they have no confidence in being able to pay back.
The entire conundrum will have to work itself out -- and it will have to happen naturally, by discovering true prices and true demand -- in the end, there is no other workable way.
In the meantime, the government is pushing on a string - and keeps worsening the mess by creating additional layers of unpredictability and uncertainty. Some of their actions - like using taxpayer money to "buy" control over private corporations - are completely out of line. |
