G, your soul mate, I think you've found her
She is pretty cute.
I made some notes last night I wanted to add to this thread, a summary of the video, key points etc.
Interest rates are the price of savings.
Savings are deferred consumption. Whenever you produce MORE than you consume.
When an economy has a lot of savings, the cost of borrowing (interest) is low, because many people have savings to lend. Low interest rates encourage people to consume. This also reduces the amount saved going forward.
When an economy has little savings, the interest rate is high, as more people compete to borrow from a smaller pool. High interest rates ENCOURAGE people to save more, which in turn brings down the interest rate, which in turn creates more consumption, which in turn increases the interest rate later.
It is very much a self correcting system.
The fundamental Austrian idea here is that when the rate of interest is disturbed, consumption and production become skewed.
Austrians (and you may have heard Ron Paul say this) call this "malinvestment".
Mal from bad, e.g. "Mal à la tête" (sick in the head), malware, malformed.
An example of malinvestment might be the rise of Cold Stone Creamery or the incredibly pricey
cup of joe available at Starbucks. Luxury food items (at luxury prices) served fast food style is the sort of malinvestment that occurs when people are consuming a lot, and investment capital is so cheap, there is no vetting process for the long term stability of business ideas.
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The reason to end the Fed, is that the Fed manipulates interest rates. It does this for political reasons, instead of letting the market work things out naturally. Needless to say, this is an enormous amount of power, as it can fundamentally alter the structure of an economy, the direction of social attitudes and the future of technological advances.
By the way, FED chairmen, and Central Bank chairman in other countries like Australia, Canada, the UK, France are all appointed. The most powerful people in the country, receive their enormous political power by appointment, not by democracy.
As Peter discusses, interest rates are a signal to the market. High rates? Save more, consume less. Low rates? Save less, consume more. That signal is very, very important as Mises and Hayek, the two most famous Austrians have explained. Price signals are how economies with hundreds and billions of people coordinate production to bring us an ipad, that may be made in many countries, using thousands of goods, produced by millions of people. One little ipad, the result of so much social cooperation.
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A lot of people like to shout down Peter and Ron Paul for saying there will be hyperinflation because there is no hyperinflation yet.
The argument for hyperinflation is based on logic, not timing. No decent Austrian claims to be a market timer, because of all the economic approaches, Austrians are the ones who are most time sensitive. They know that time is a variable we account for, but cannot pin down specifically.
Right now, the USG is pumping tons of money into the economy. It is spending like crazy. There is no hyperinflation yet. Why?
After the 2008 crack up, we're now experiencing what Mises called the "crack up boom". If you know Marc Faber, he likes to use this term.
Right now, there is deflation, as the market tries to purge the excesses of the last decade of low interest rate shenanigans. But the government is inflating at the same time, so prices are rising slowly but not at a hyper-inflationary rate.
Some people say this is proof that hyperinflation won't come. But here is the problem. As long as there is deflation to offset the money printing, then they are right, prices will only rise modestly. But when the deflation has ran its course, then the money printing will spike prices dramatically upward.
At one point, the losses will be purged from the system, but due to the low interest rate stimulus by the government, there will be no savings to rebuild and grow the economy.
The government will step in, because the popular political will necessitates it, and they will start printing money to fund growth. That printed money, as Peter explained is a tax on the future. Any growth you see now, will be borrowed against your children and your grandchildren's taxes.
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The distinction between real money and paper or fiat money is very important. Real money has very specific characteristics which allow it to perform the role of being a store of value and a medium of exchange. Fiat money can be a medium of exchange, just like traveler's checks or credit cards, but no one thinks of a check or a credit card balance as money.
I don't know the world will return to metals in the future, but metals make great money. You can't use them today in exchange, but I think that will change.
Metals are really money because they are an asset which is not simultaneously someone else's liability.
To break that down, if you own a gold coin, you have a gold coin.
If you own a federal reserve note (dollar) you have a promise to pay. A note. A debt instrument, whose entire value beyond the ink and paper hinges on that promise to pay the bearer in something "real". That's the liability.
If I owe you $20 or 1 ounce of gold, the ounce of gold will still be an ounce of gold in 100 years. If I give you $20, that $20 might only have $1 purchasing power in 100 years, if the issuing government still exists at all.
Never confuse capital with bank credit. They are very different things technically, even if we use the names interchangeably.
I know this was a mess, so I hope it is somewhat readable. If anyone has questions, I am happy to try to answer as best I can. I'm a lay economist like Tom Woods, not an academically trained one like Milton Friedman, so cut me some slack.
