Monday, October 19, 2015

David Beckworth makes a great point here.

Of course, it remains true that the Fed is "fixing" interest rates, though not through a conventional price control.   Rand Paul is correct the Fed should stop doing this and let all interest rates be controlled by market forces.

But as David points out, the market clearing interest rate is almost certainly very low right now because of "low spending," or alternative, high saving and low investment.   

And worse is the notion that the Fed should manipulate interest rates to "normalize" them, that is to fix them at a level from the past.   The job of prices is to coordinate, not be at some traditional level.   It is the notion that there is something to "normalize" about any price, including an interest rate, that is the fallacy of price fixing.

Of course, some free marketers have in the back of their mind some notion that the quantity of money should remain fixed, and so present or even past increases in the quantity of money imply that interest rates are below the appropriate level.   

It is only when one considers both the quantity of money and the demand to hold it, and then dig deeper into the concept of the nominal anchor of the economy, that any notion any change in the quantity of money is distortionary is shown to be empty.