Should the Fed Raise Interest Rates?
For some time now the Fed has been hinting that it will moderate its interventions–monetizing government debt by printing money to buy government bonds and now quantitative easing by printing money to buy corporate bonds–in order to drive down the interest rate to unprecedented low levels. The Keynesian theory behind these interventions is that lower interest rates will spur lending, which in turn will spur spending. In the Keynesian mindset spending is all important–not saving, not being frugal, not living within one’s own means–no, spend, spend, spend. The Keynesians running all the world’s banks firmly believe that it is their duty that spending not diminish one cent, even if this means going massively into debt. Keynes himself famously said that government should borrow money to pay people to dig holes in the ground and then pay them again to fill them back up.
To Austrian school economist like myself, this is childish, shallow, and ultimately dangerous thinking. Austrians understand that economic prosperity depends first of all upon savings, not spending. Savings is funneled by the capital markets into productive, wealth generating enterprises. Gratuitous spending is simply consumption. Now, there is nothing wrong with consumption…as long as one has actually produced something to be consumed. Printed money is not the same as capital accumulation. Or, as Austrian school economist Frank Shostak explains, goods and services are the “means” of exchange and money is merely the “medium” of exchange. Expanding the means of exchange through increased production–which requires increased capital, which itself requires increased savings–is a hallmark of a prosperous society. Increasing the medium of exchange out of thin air, as is current central bank policy, is the hallmark of a declining society that has decided to eat its seed corn.
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