Professor Mark J. Perry's Blog for Economics and Finance
According to the Cato Institute: As of September 26, 2008, Zimbabwe’s annual inflation rate was 531 billion percent. Give or take a few billion. Now that's a real economic and financial crisis, by anybody's definition.
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
8 Comments:
When the central bank cuts interest, it cuts local bank income and so cuts the cash supply and causes all the problems seen in the US today. Conversely, when the central bank hikes interest rates it raises the profitability of the local cash creation, and so fuels an expansion of the money supply.
The reality is completely contrary to the unfounded notions which has been brainwashed into the mindset of every student of economics since Keynes founded of the educational discipline.
So as economically "educated" central bank presidents try and stem inflation, they in fact fuel the inflation that they are trying to fight. It is exactly like fighting fire with the gasoline hose.
Conversely, when the central bank president tries to loosen the cash supply by cutting interest rates, it is exactly like dumping sand instead of woodchips on the fire.
arman,
I think your missing part of the equation. Banks dont make money by what the interest rate they charge is. They make money based ont he spread between what their cost of funds is and what the loan at. If the bank is paying 2% for deposits and loand at 6%, they make the same amount of money per dollar of loan as it does when deposits are 10% and loans are at 14%.
The difference is that with lower interest rates, there is greater quanity of loans demanded by borroweres because the price is lower and therefore more loans are made even thought he spread is the same.
Inlfation is so high in this example because they are printing money endlessly to pay for government spending and therefore gorwing the money supply astronimically.
ej,
Spoken like a true Chicago School monetarist. I completely agree!
db
Coming to a country near you...
Coming to a country near you...
>I think your missing part of the equation.<
No, you all miss the point. Money is not created by the central bank. Money is created in the lending operations of the local bank. The central bank is just a print house. The exchange certificates that they loan to the bank is for that small part of the created money that some people hold in their wallets. The drop in interest that the Fed commands does almost nothing to the costs involved in money creation, but only affects the income from those operations. You guys never hear of fractional reserve?? Although the notion seems to be that money comes from the fed, anyone with ANY kind of understanding of money will tell you that a very small part of the money supply comes from the central bank. They will tell you that 10% comes from the Fed. I tell you that even this is a red herring. Money is created by the local bank's lending operations, period! The Fed dictated rates do almost nothing to the local banks costs, but only affects their income.
And regardless the logic of your notions, your causal theory is incongruous with real correlations. When the Fed cuts interest, money tightens up and the various markets crumble. When a central bank hikes rates, it chases inflation into the stratosphere.
Therefore, Keynes was wrong, and all of the brainwashing that has come through the generations of economists has been the main cause of the economic instability through the last century, especially now in the US and in Zimbabwe.
Money that is printed and sitting on the floor in the bank vault has absolutely no effect on the economy. Money is not money until it is borrowed from the bank.
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