Human action and the
interest rate
People
value present goods more highly than future goods. For instance, an apple
available today is considered more valuable than the same apple available in,
say, one month. This is expressive of time preference — which
is an undeniable fact, a category of human action.
The
sentence “Humans act” is a logically irrefutable truth. It cannot be denied
without causing a logical contradiction. By saying "Humans can not act”,
you act and thus contradict your very statement.
From
the true insight that humans act we can deduce that human action takes place
in time. There is no timeless human action. Were it otherwise,
people’s goals would be instantaneously reached, and action would be impossible
— but we cannot think that we cannot act.
The
market interest rate is expressive of time preference, and as such,
it is also a category of human action. If determined in an unhampered market,
the (natural) market interest rate denotes the discount that
future goods are subject to relative to present goods.
If
one US-dollar available in a year is trading at, say, 0.95 US-dollar, it means
that the market interest rate is 5.0% (the calculation is: [0.95 / 1 – 1]*100).
Should
people start valuing present goods more highly than future goods — which is
expressive of a rise in time preference —, the discount on future goods vis-à-vis
present goods and thus the market interest rate go up.
If
peoples’ time preference declines, the discount on future goods vis-à-vis
present goods drops, and so does the market interest rate — meaning that people
wish to save more and consume less out of their current income.
The interest rate and
central banking
In
an unhampered market, the market interest rate reflects peoples’ time
preference. Nowadays, however, the market interest rate is no longer determined
in an unhampered market. It is dictated by the central bank.
Central
banks set short-term interest rates by providing commercial banks with credit.
In doing so, they exert a strong influence on short-term interest rates. In
more recent years, central banks have also been determining long-term interest
rates through bond purchases.
The
rather uncomfortable truth in this context is that central banks, in close
cooperation with commercial banks, keep issuing new money produced through bank
credit that is not backed by real savings.
The
purpose of such a money-increase-through-credit-creation-scheme is to bring
down the interest rate: to deliberately suppress it to a level that is lower
than the level of the market interest rate determined in a free market.
This
has far-reaching consequences. The artificially lowered market interest rate
tempts people to save less and consume more – compared to a situation in which
the market interest rate had not been artificially lowered.
As
savings decline and consumption increases, the lowered market interest rate
causes new investment, and the result is an artificial economic upswing.
However, such a “boom” is not sustainable, and at some point it will have to
turn into a recession (“bust”).
This
is, in a nutshell, what the Austrian Business Cycle Theory (ABCT) says about
the consequences of the central banks' meddling with the market interest rate.
However, there is much more that the ABCT reveals.
Central banking and
valuation
In
fact, the ABCT tells us that central banks, by manipulating the market interest
rate, tinker with humans’ valuation scales. Pushing down the market
interest rate does not only result in declining borrowing costs or rising stock
and housing prices.
These
are merely symptoms of a more profound and most elementary
cause — namely central banks influencing the way people value the present
satisfaction of wants relative to the future satisfaction of wants and act
accordingly thereupon.
Through
artificial depression of the market interest rate, people are compelled to
value present consumption higher than future consumption. In fact, they are
compelled to care less about the future and more about the present.
Saving
for future needs is discouraged, consuming in the present is encouraged.
Furthermore, artificially lowered interest rates persuade people to give up a
debt-free life and run into credit to bring forward future consumption to the
present.
The
disconcerting insight is that such an increased valuation of present needs
relative to future needs affects all fields of human action — such as peoples'
valuation of, e.g. education, family, manners, you name it.
The
artificially lowered market interest rate makes it less attractive for the
individual to spend hours learning, as it would mean reducing present
consumption in the form of leisure time. As a result, the quality of general
education can be expected to decline.
Starting
a family appears to become more self-sacrificing and burdensome — as parents
have to forego present consumption. Also, divorce increasingly seems to be an appealing
way out of current relationship problems.
Having
good manners — getting out of somebody's way, saying good morning, helping a
stranger across the street, and so on — is considered less rewarding, as it
often means restricting present consumption, forgoing potentially higher
consumption in the future.
Valuation and human action
By
directly influencing peoples' valuation scales through the manipulation of
market interest rates, central banks affect every aspect of peoples' lives. It
amounts to a "Revaluation of all Values", to use a term coined by the
German philosopher Frederick Nietzsche.
It
should be easy now to see that the root cause of many severe defects in social
matters can be directly or indirectly traced back to central banking. There
should not, actually cannot, be any presumption of innocence as far as central
banking is concerned.
As
a final point, let us address the issue of “speculative bubbles” in financial
markets. Of course, prices sometimes overshoot or undershoot, inflate and then deflate,
as investors try to bring a financial assets' price in line with its estimated
value.
Fear
and greed, panic and optimism, stupidity and wisdom, all play a role in forming
financial asset prices — as people are what they are. However, it is central
banking that drives peoples' dispositions and actions to extremes.
By
pushing down the market interest rate below its natural level — which becomes
chronic if and when the money supply is increased through bank credit expansion
not backed by real savings —, central banks inevitably coax investors into
becoming overly high-spirited.
In
that sense, central banks are to be held responsible for aggravating, or even
inducing, speculative bubbles. To make it even worse: Once the speculative
bubble pops, people become dispirited. They blame the free market or capitalism
for their plight.
They
do not see — often misguided by mainstream economics — that the root cause of
the trouble is central banks' downward manipulation of market interest rates in
the first place, which is made possible by central banks running an unbacked
paper money system.
To
conclude: The indisputable insight that central banking brings about a
"Revaluation of all Values", which is neither in the economic
interest of the people nor ethically justifiable, should encourage efforts to
put an end to central banking.
Any
such effort must propagate the intellectual insight that central banking is
very harmful to the society, and it also requires truly bold and determined
action, for "We know that no one ever seizes power with the intention of
relinquishing it,” as George Orwell put it.1
·
1.Orwell, G. (2008 [1949]), Nineteen
Eighty-Four, Penguin Books, p. 276.
Dr. Thorsten Polleit, Chief
Economist of Degussa and macro-economic advisor to the P&R REAL VALUE fund. He is Honorary
Professor at the University of Bayreuth.