www.kuro5hin.org/story/2002/7/17/214310/914
Clarke states about what our knowledge of Europa should be. It is perhaps the most complex of all branches of economics and to often gets simplified in the media. In most cases the extent of our understanding of monetary theory is also seriously restricted. To get a grasp of the simplistic nature we need look no further than the federal reserve and interest rates. There is an intimate link between interest rates and monetary theory. The lower interest rates the more money ciculates through the economy, and conversely higher interest rates results in less money ciculation. The results of this are obvious, with more money ciculating asset prices rise. Thus recent activity has seen the federal reserve utilize interest rates to either heat up or cool down the economy. However currently we can see that monetary theory is not sufficiently understood. We have seen the federal reserve lower interest rates to recent historical lows and yet the economy is potentially on the verge of collapse. A simplistic viewpoit is that of a firm facing a depressed economic environment. This is clearly seen in the commodity markets specifically land. Additionally, due to imperfections in the labor market, salaries continue to increase. So firms are faced with an increasing cost base and declining demand. To reaction has been clearly evident- layoff employees to reduce costs, and selloff land and assets which are no longer utilized. So the immediate question should be how are lower interest rates expected to stimulate the economy? The traditional answer is that lower interest rates stimulate investment. However I contend that investment has a very strong cyclical component which is independant of interest rates and thus greatly reduces the effect of interest rates and investment. For the consumer a similar argument is presented, lower interest rates will stimulate consumer spending, this I will content is also invalid due to the incredibly smooth levels of consumption. What is the mechanism which monetary policy is expected to stimulate the economy if the effects upon firms and consumers is negated by longer term economic trends? The contrarian view that in our depressed environment interest rates need to increase, to depress factor prices and allow firms to compete using lower cost structures. Higher interest rates will most immediately effect land prices, the recent appreciation of real estate will reverse itself and allow firms to renegotiate leases and even enter the market to buy assets. The long term trend is that of linear increases in real estate (again this is a hunch finr material on this). This trend has been mediated through the years by unknown monetary interventions as opposed to central banking policy. Lower real estate pricing will allow corporations to better compete and stimulate classical demand through lower prices. As for the effect upon labor prices, this is less understood area and needs to be a branch of study (if not already). The coupled effects of higher interest rates during the end of a recessionary period than what would be "expected" could potentially lead to a more stable long term expansion. For an example we need look no further than the recession of 1982. The economy, already suffering in a recession, was hit with increases in interest rates. This increase drastically effected the factor pricing firms faced and allowed the economy to have a very stable expansionary period following the increases. The small recession of 1991-92 did NOT see this increase in rates and thus did not see a monetary induced decrease in factor prices. However is should be noted there was a factor pricing bubble in the late 80's which contributed to the fed ability to stimulate the economy with lower rates simply because extranious factors had already adjusted factor pricing outside of monetary policy. In our current recession, we have had no outside event contribute to declining factor prices, this fact in my opinion may possibly forshadow future problems with our economy in the coming 5-10 years. Sponsors 31 Voxel dot net 32 Managed Servers 33 Managed Clusters 34 Virtual Hosting 35 Collocated Linux/FreeBSD Server As low as $45/month Root on your own FreeBSD or Linux server Very fast, triple-homed network NO hardware or setup fees, unlimited support 36 Testimonials from K5 Users Login 37 Make a new account Username: Password: Login Mail Password Note: You must accept a cookie to log in. Newest First Set 39 A Contrarian View on Monetary Theory | 1 comment (1 topical, 0 editorial, 0 hidden) Confused? I agree, and I believe that one of us has got it backwards. My understanding is that The fed does not control interest rates directly, but rather they announce a target rate to Congress(or maybe they announce their target inflation rate, I forget but I remember it being mostly useless now), and purchase bonds (or sell them) accordingly. What this does is fiddle with the money in the market, especially since bonds are seen as the base investment. More money available in market means more supply for the demand, interest rates should go down. From my brief stint in Macroeconomics, I seem to remember my professor mentioning that nobody really know what graphs of things like interest rates vs GDP really look like and the possiblity of reducing interest rates having no effect is posible. But I don't think increasing interest rates help there either. The title reminded me of an interesting topic about a man from Kansas who was on a campaign against the Fed. Using a relation between velocity and inflation he argued that you could keep inflation in check and that the Fed was responsible for our economic downturns. I seem to recall it being labeled Monetary Theory or maybe The New Monetary Theory or something. The only drawback to his solution is that its impossible to measure velocity. So when I saw this article about putting unique id transmitters in money I instantly thought of that.
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