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Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]
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Samizdata quote of the day “As long as life sustenance remains the ultimate goal of individuals, they are likely to assign a higher valuation to present goods versus the future goods and no central bank interest rate manipulation is likely to change this. Any attempt by central bank policy makers to overrule this fact is going to undermine the process of wealth formation and lower individual’s living standards. It is not going to help economic growth if the central bank artificially lowers interest rates whilst individuals did not allocate an adequate amount of savings to support the expansion of capital goods investments. It is not possible to replace savings with more money and the artificial lowering of the interest rate. It is not possible to generate something out of nothing. Likewise, by raising interest rates the central bank cannot undo the damage from the previous easy interest rate stance.”
– Dr Frank Shostak, writing at the Cobden Centre website. (Thanks to Paul Marks for the pointer.)
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Who Are We? The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling.
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It’s a great quote, but in order to reach more people language and concepts really do need to be simplified so people can really understand what they’re being told and how it relates to their daily lives.
Then again Dr Shostak probably wasn’t writing it and thinking of a more general audience at the time:)
Seconding what Tim C said, simply because I read the article three times, and what I see to be its prime thesis makes so little sense to me that I would appreciate someone who has something beyond my BA in Econ from 42 years ago explaining what it really says.
Succinct summary – “State control wrecks markets.”
@Bobby B, I’ll give it a go, please feel free to criticise!
“Staying alive and healthy is the ultimate goal for everyone, so we all focus on how much things cost right now rather than what they will cost in the future. Central banks raising and lowering interest rates doesn’t affect this way of thinking. If central banks try to affect this basic way of thinking then it provides a barrier to people becoming more wealthy and will actually lower people’s living standards [My own comment: this needs to be explained further. Why? What does he mean? Give real world examples].
It does not help individuals, or the economy, if interest rates are lowered by Central banks if people/companies do not have enough money saved up already to buy things before the lower interest rates stimulate artificial demand and prices start to rise. This is because cheaper lending means more people will be tempted to buy things (via debt) that they would not do under normal circumstances. This is because debt will now be cheap so the cost is far lower. And we tend to live in the present! So as a result of low interest rates, prices for all necessary goods that are now being bought will rise [I was going to explain why but it was far too long! I think this might be the important bit as just saying something without explaining why it happens will not really provide any understanding].
It is not possible to replace people using savings to buy things with people using debt to buy things with artificially low interest rates. [Why? Simple explanation needed. This does not make as much sense if it is not explained].
It is not possible to generate something out of nothing [Actually this is very vague. Cheap debt via lower interest rates actually does generate something out of nothing. It’s just not a good ‘something’. What he means is that no value to either an individual or an economy is actually generated using artificially low interest rates which means cheap debt which means lots of people going into debt to buy things now which ends up raising prices].
So then, if a Central Bank decides to raise interest rates after having such low interest rates for so long, it is impossible to undo the damage from the previous low interest era [What damage will there be?].
I can highly recommend a trading book called Methods of a Wall street master by Victor Sperandeo https://www.goodreads.com/book/show/1385712.Trader_Vic_Methods_of_a_Wall_Street_Master
He provides the best (and simple) explanation for how economies actually work via a simple explanation of Austrian economics and interest rates etc. Ignore the trading stuff if you buy it!
Thanks to both of you.
I did get that that was his conclusion, but it was all of the words before that that left me in the dust. Sure, the Fed (in the US) has blown our savings rate out of the water with low interest rates, and it is not helpful to now try to re-encourage savings once they’ve inflated us all into subsistence and the possibility of savings is a chimera, but . . . well, I think he lost me at:
which I take as, there are some intermediate steps that such a simple thesis as “increase M = inflation” ignores, one of which is the impact of coercive interest rate setting by decree, but he says it all in such a – to me – convoluted and unnecessary manner that it left me wishing I had only read his conclusion.
And, “Staying alive and healthy is the ultimate goal for everyone, so we all focus on how much things cost right now rather than what they will cost in the future. Central banks raising and lowering interest rates doesn’t affect this way of thinking” – ?? Flew right over my head. Maybe if we’re all broke and worried that our paycheck today won’t buy us the food to survive until tomorrow. I want to buy a boat, but boat loans right now are pegged at 18%. Ouch. But if that rate went to 2%, I’d be in my boat in a minute! Those rates DO affect present expenditure, to the extent that we all pay interest somewhere.
Sorry, just frustrated. Usually, I can recognize when my own confusion is simply my lack of pre-reqs. This didn’t have that flavor, if that makes any sense.
“And, “Staying alive and healthy is the ultimate goal for everyone, so we all focus on how much things cost right now rather than what they will cost in the future. Central banks raising and lowering interest rates doesn’t affect this way of thinking” – ?? Flew right over my head. Maybe if we’re all broke and worried that our paycheck today won’t buy us the food to survive until tomorrow. I want to buy a boat, but boat loans right now are pegged at 18%. Ouch. But if that rate went to 2%, I’d be in my boat in a minute! Those rates DO affect present expenditure, to the extent that we all pay interest somewhere.”
You just improved my long winded summary in that one paragraph:)
The central point of the essay is that, as Ludwig Von Mises and F.A. Hayek so often pointed out (calling on a tradition that goes back three centuries – to Richard Cantillon and so many since his time), just ending inflation does NOT end the harm it has done.
“We have stopped prices rising – problem solved” is not only wrong because inflation (i.e. the increase in the money supply) can do terrible damage WITHOUT prices in the shops rising (for example the late 1920s – the Benjamin Strong inflation, when people such as Irving Fisher denied there was a massive inflation because “prices in the shops are not going up” there was no move in the “price index”), but even if you really do stop increasing the money supply – the change in the economy is not reversed.
What is meant by the “change in the economy”? The Credit Money inflation tends to concentrate wealth (via the “Cantillon Effect”) into a few corrupt hands – and that utterly distorts (twists) the Capital Structure of the economy and debases (corrupts) society itself.
And just stopping the Credit Money inflation (not doing it any more) does NOT reverse the damage that has been done.
For example, the concentration of economic power in a few “Woke” hands that one sees in the United States – the vast Corporations that turn out to be largely “owned” (if the word “owned” even has any clear meaning any more) by other corrupt entities, such as BlackRock, State Street and Vanguard, managing Pension Funds and other such.
What happens in the end?
In the end there is horrible suffering in a corrupted economy and society – it has already started (we are seeing the start of it), but it is going to get a lot worse. Vastly worse.
“But the Central Banks can change course” – yes they can, but I refer you back to the central problem. Just not producing any more money-from-nothing does NOT undo the damage that has been done.
What the Federal Reserve, the Bank of England (and the other Central Banks – and the commercial banks that follow their lead) have done, can NOT be just wished away (as if it had never been done). There is going to be horrible suffering on a vast scale – it can not, now, be avoided.
What is done is done – and now we will see the terrible consequences of many years of very bad monetary policy decisions – in the United States going back to when Alan Greenspan (who betrayed everything he had once claimed to believe in) first started to push Credit Money expansion beyond all traditional limits.
Every Federal Reserve Chairman since Alan Greenspan has “kicked the can down the road” – pushed more “hair of the dog” Credit Money expansion to try and deal with the consequences of the last Credit Money expansion. That road has now ended – and, regardless of what the Federal Reserve does, the time of pain (real pain – terrible suffering) is starting.
Paul, although I agree that inflation is a tax (regressive in one sense, ever so progressive in another) that steals money and concentrates it in economically (and politically) undesirable hands – I do not think that is what the OP quote is talking about.
Bobby b illustrates the OP’s initial remark, about people living in the present.
Living-in-the-present would-be-boat-owner bobby b will save up, and then use his savings to buy his boat, when boat loans charge 18%. But if boat loans charge 2%, he will buy his boat using debt.
Using TimC’s expansion,
As booby b exemplified, it is possible to persuade people to replace using savings to buy things with using debt to buy things. The OP points out the consequences.
I think Dr Shostak does not mean ‘overrule’ literally in one of the two senses that apply here (an error which I think illustrates bobby b’s point that Shostak’s literary skill does not equal his economic understanding).
1) Literally to “overrule this fact” (that bobby b prices his present enjoyment of a yacht above his future paying for it) would mean that the central bank had provided the incentive but then propagandised or compelled bobby b not to think or act that way. On the contrary, Shostak is warning the incentive will be acted on.
I think he means “ignore this fact” – act as if their action’s intersection with bobby b’s present-overvaluing temperament would not make him buy a boat with debt.
2) To ‘overrule this fact’ (that 2% is an incorrect economic valuation of a boat loan and/or causes bobby b to price it incorrectly) is what a quantitatively-easing central bank does – it under-prices debt and/or causes living-in-the-present people to under-price their debts. ‘Overrule’ is a possible but poor word for this assigning of a false price.
With that clarified, we continue the quote.
Obviously, it will directly undermine the process of wealth formation by encouraging bobby be to acquire a boat now, instead of savings now and a boat later. Obviously the under-priced debt will, as the future becomes the present and discloses the debt’s true price, lower bobby b’s living standards relative to his expectations.
There will also be significant secondary effects from the fact that many of bobby b’s fellow citizens and even foreign trading partners will be in the same boat – metaphorically speaking. 🙂
I’ll skip the next three sentences
speculating people here do not needing much explanation (but by all means correct me and/or say if they do not communicate to others – they have relevance to the statement above that the eased rate under-prices the debt) to reach the final lines.
The raised interest rates will dissuade someone else from buying a boat (maybe bobby b’s second-hand boat) using debt, but at the price of making bobby b’s situation worse. Bobby b is now paying interest at a rate that would have dissuaded him from buying a boat using debt, while working in a less-capitalised economy that offers him fewer chances to earn well, make savings, etc.
Paul’s point about the wealth-destruction-and-transference effect of inflation is worth making – it makes the problem worse – but the above is my 0.02p FWIW on what I think Dr Shostak was trying to express.
“As long as life sustenance remains the ultimate goal of individuals”
No-no-no-no-no. Noooooo !
That may be the, or at least a, proximate, goal. But it’s certainly not the ultimate goal. Or at least not in the straightforward sense of life sustenance. The attempt to remain alive is, except in the very short term, a doomed enterprise. Of course – as the quote hints – staying alive right now is the minimum requirement for then staying alive for the nexr slice of time. But even so, we are all doomed to die in the blink of an eye.
The ultimate goal of life for individuals (whether they be humans or beetles) is reproduction. Reproduction is the only way to remain “alive” – in any sense – in anything approaching the medium term. Nor do the overwhelming majority of humans – or beetles – behave as if preserving their own individual life was the ultimate goal of their existence. They strive to reproduce, even if that predictably shortens their own life, or expends time and effort that might otherwise have been spent shoring up ones individual defences against the perils of the world, or requires hunting down and sweet talking a necessary reproductive partner.
The enterprise of remaining alive as an individual organism – at least long enough to breed – is a reasonable proximate goal. But to strive to stay alive without then using the opportunity of then reproducing makes your short term survival essentially pointless.
Lee Moore (April 5, 2022 at 7:56 pm), as Mark Steyn puts it,