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Peter N,

The Post Office ensures that its price of stamps is the lowest by being the monopoly supplier of stamps.

How does the Fed ensure that its price for funds is the lowest?

"There have been circumstances where the Fed was unwilling to raise rates high enough to cut off speculative lending for fear of the effect on other borrowers. In this case there is no control on total lending."

I see: so if I'm unwilling to not curse, there is no control over my cursing, and therefore I have no responsibility for what I say? Great!

"Nor am I. I *think* he's saying that the BoC should deliberately set the rate of interest above the natural rate, and so push inflation below target, whenever the BoC thinks that people are borrowing and lending "too much". Put a bend in the road to slow down the drivers when they are driving too fast? (Isn't that what the Fed did in 1929?)"

What the Fed did in 1929 was raise reserve requirements which is not the same thing as raising the rate of interest above the natural rate. In a fractional reserve banking system the total amount of debt outstanding is limited by the amount of reserves a bank must keep on hand. If a bank observes a 10% reserve ratio, then it can make $10 in loans for every $1 in reserves. If those reserves must be convertible to another asset at a fixed exchange rate (for instance gold), then both the reserve ratio and the supply of the asset serve as limiting factors on the amount of debt that can be created.

http://www.federalreserve.gov/monetarypolicy/0693lead.pdf
Page 587

Reserve requirements - Central Reserve City Banks (1917) - 13%
Reserve requirements - Central Reserve City Banks (1936) - 19.5%

What happens when you "tighten" monetary policy, is that the government shovels mountains of free money into the pockets of the rich (interest on debt), whilst poor people living day to day lose their homes and their jobs and their incomes.

That's how you "get inflation down" by "tightening" monetary policy.

"Tightening" is code for giving lots of free money to the rich, and taking homes and jobs from the poor, "to control inflation".

"Loosening" is code for inflating the assets of the rich, and tempting the poor to get more heavily in debt, "to stimulate growth".

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