This is where a basic understanding of Austrian Business Cycle Theory comes in handy in cutting though economic bullshit. No. Setting negative interest rates will -not- help the European economy, they will only drive it into the ground. In a free market, the interest rate is set by the time-preference for money. Money saved is money borrowed and invested. As investment is funded through savings, investors know that there is money in the economy to back up (i.e. purchase) their products in the future when the production process is complete. Whats more, the interest rate also provide signals to investors in where to invest. A low interest rate indicates a low time-preference, leading investment towards lengthier duration production processes. A high interest rate indicates a high time preference, leading investment towards shorter duration production processes. When a central bank sets interest rates lower than the free market rate, it causes: 1) Overconsumption - As people are disincentivised from saving and driven to spend and borrow; 2) Malinvestment - Where: - Money printed to finance loans creates inflation. This makes it difficult for investors to correctly estimate costs (which rise due to inflation), leading them to make investment errors and driving business failures; - Interest rates give false signals to the market: telling investors to put resources in lengthier duration production processes when in reality there is no demand and no savings to back up these investments, leading to business failures. In other words, the low interest rate stimulus creates an artificial economic boom which is later followed by a bust period, during which widespread investments fail and the economy goes into recession. Lets hope the other European countries follow Switzerlands lead and get onto the gold standard or at least buy some bitcoin. To learn more about Austrian Business Cycle Theory, see here: https://youtube/watch?v=YaxIPPMR3fI
Posted on: Sun, 07 Sep 2014 06:56:35 +0000
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