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A Free Market in Interest Rates

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Under gold, the saver always has a choice. If he likes the rate of interest, he can deposit his gold coin. If not, he can withdraw it. By withdrawing, he forces the bank to sell an asset. That in turn ticks down the price of the bond, which is the same as ticking up the rate of interest. His preference has real teeth, and that’s an essential corrective mechanism.

Unfortunately, the government removed gold from the monetary system. Now you can own it, but your choices have no effect on interest. If you buy gold, then you get out of the banking system. However, the seller takes your place, getting rid of his gold and thereby taking your place in the banking system. The dollars and gold merely swap owners, with no effect on interest rates.

The Fed has kicked savers to the curb, along with gold. Now the dollar is considered to be money. And what is it, exactly? The dollar is the Fed’s IOU. If you have dollars, then you are funding the Fed. You—along with billions of others around the globe—are empowering the Fed. It can lend at any rate it wishes, because it has a seemingly unlimited credit line. The Fed is lending your wealth to profligate borrowers who use it for nonproductive purposes—and that’s putting it mildly.

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One of the essential truths that I’ve learned from the Austrian School of Economics is the concept of “malinvestment”. As I understand it, because there is no free market interest rate to evaluate the value of future purchases with, people make decisions that they would not have if they knew the actual correct market set rate of interest. This brings on the boom and bust cycle that we are all too familiar with.

Essentially the interest rate is set politically. 

By the way, I am sure by complete accident, the very low interest rate makes it easy for the Gooferment to carry a large debt. Last estimate, I read was the current 18T+ national debt and the guesstimated 200T+ in unfunded liabilities is what our posterity will have to deal with!

Of course, this is unpayable.

So, the Gooferment will “default” on this debt by further inflating the money supply and rob all the holders of dollars of their purchasing power. Look at any of the charts of a dollar’s purchasing power and see it go to near zero. I’ve ranted about this before citing anecdotally my sainted Father-In-Law’s fifty dollar bill that he kept in his wallet (i.e., when he put it in it work house and feed his family for a month and when he died his daughters didn’t realize what had been lost), the three silver dimes for a gallon of gas in 1963 that could buy two gallons today (i.e., loss of purchasing power), and — my personal favorite — the Smithsonian exhibit of the French gold Franc over the time of the French Kings (i.e., from hockey puck to shirt button).

With a gold standard, there is a finite limit to the amount of credit available. And, like any scarce resource in a truly free market system, the invisible hand of that market will establish the time value of money. That will allocate credit to those people who will pay the most for it. Some people will have their projects funded; others not. 

What we fail to understand is that these resource usage decisions are “the Great Calculator” that takes all our wants, needs, and desires as input and “rations stuff” to maximize satisfaction.

Too hard to understand?

Try it this way. If the cost of interest is more than you can afford, then you’ll change your wants.

Argh!

The Gooferment, by the mechanism of the The Federal Reserve Bank, — a misnomer. IT ain’t “federal”. It reserves nothing. And, it ain’t a “bank”. It is a private cartel of the elite banks run for their benefit and that of the entrenched politicians. — is robbing us of our wealth and the dikw (i.e., data, information, knowledge, wisdom) to make wise economic decisions.

Argh!

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