Congressman Ron Paul, who is perhaps most well known for his career-long quests to rein in the Federal Reserve, published an interesting commentary this past week in his “Texas Straight Talk” series entitled “Interest Rates Are Prices.” Here at the Coalition to Reduce Spending, we’ve made it a point to touch upon the rarely discussed but centrally important concept of how artificially low interest rates encourage economically unsustainable behavior from not only the federal government, but private citizens as well. (For more on this, please read Coalition to Reduce Spending advisory board member Peter Schiff’s Washington Times piece, “The Real Fiscal Cliff“).
Touching further upon the important interest rates issue, Congressman Paul says:
Because the interest rate is the price of money, manipulation of interest rates has the same effect in the market for loanable funds as price controls have in markets for goods and services. Since demand for funds has increased, but the supply is not being increased, the only way to match the shortfall is to continue to create new credit. But this process cannot continue indefinitely. At some point the capital projects funded by the new credit are completed. Houses must be sold, mines must begin to produce ore, factories must begin to operate and produce consumer goods.
Congressman Paul makes an interesting analogy when he compares interest rates to price controls for goods and services. Certainly, one could see where this might be problematic in a long-term context.
As Paul states:
Because the coordination between savings and consumption was severed through the artificial lowering of the interest rate, both savers and borrowers have been signaled into unsustainable patterns of economic activity.
What does Congressman Paul mean by “unsustainable patterns of economic activity?” As he goes on to explain, resources that would have been put to use in more productive ways in a less manipulated system are allocated toward projects that are later found to be unprofitable, and thus, unsustainable. Paul posists that the only way for an economy to recover from this kind of manipulation is that the resources that have been invested in unproductive sectors need to be liquidated, instead of consistently propped up. And the latter has been standard practice for some time – only prolonging recessions, as Paul notes.
Additionally, as Paul explains:
Another effect of the injections of credit into the system is that prices rise. More money chasing the same amount of goods results in a rise in prices. Wall Street and the banking system gain the use of the new credit before prices rise. Main Street, however, sees the prices rise before they are able to take advantage of the newly-created credit. The purchasing power of the dollar is eroded and the standard of living of the American people drops.
Certainly, there has been a correlation between rising prices and increased credit injection into the system, and there’s no doubt that with a stagnant economy and the purchasing price of the dollar decreased, that the American people are adversely impacted. At the Coalition to Reduce Spending, we’re very concerned about the fact that so much money is being reallocated from productive sectors of the economy to serve the interests of well-connected central planners at the expense of honest taxpayers.
Current economic conditions demonstrate that the central planning in Washington, which has unfortunately been promoted in large part by both major parties, is not only not working – it’s harming everyday Americans. It’s time to reduce spending and manipulation in DC, and to put more resources back in the hands of the American people. After all, our national debt already divides up at $51,000 per citizen and $140,000 per taxpayer – and will increase exponentially if Americans do not demand a serious change of course in Washington immediately.