Pointers Regarding Interest Rates and Inflation; The Delusion in Manipulation of Interest Rates

We encourage the reader to consult the following entries.

The Ineptitudes in Central Bank Operations

John H. Cochrane’s Article in the Wall Street Journal, Thursday 8/25/2022

Facing Facts: The Ideal of Constant Value of the Currency vs. the Fact of Inflation

The Road Up is The Road Down; the Mechanism of rising and Falling Prices

Stagflation Demystified

Paul Romer’s “Endogenous Technological Change” in Bernard Lonergan’s Framework

Here are a few brief selections from the above treatments:

Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective. [CWL 15, 133)

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

The ineptitude of the procedure arises not only from its inadequacy to effect a redistribution of income of the magnitude required but also  from its effects upon the demand for money. … The effect of rising interest rates on consumer borrowing will be excellent as far as it goes; for it cannot but reduce consumer borrowing; on the other hand, one may doubt if such reduction is very significant, for an inability to calculate is a normal condition of consumer borrowing, and rising interest rates hardly exert a great influence on people who do not calculate.  The effect of rising interest rates on the demand for surplus products is great: one may say that the initiation of further long-term expansion is blocked; to increase the interest rate from 5% to 6% increases by 10% the annual charge (FTNT.  That is, increases in the annual charge by approximately 10%.  The precise increase would be 8.557% if payments were made monthly; 8.651% if payments were made annually.) upon a piece of capital equipment paid for over 20 years.  Thus rising interest rates end further initiation of long-term expansion; on the other hand, expansion already initiated, especially notably advanced, will continue inasmuch an increased burden of future costs is preferred to the net loss of deserting the new or additional enterprise. The effect of rising interest rates on turnover magnitudes depends upon the turnover frequency of the enterprise.  If the frequency is once every two years, 1% increase in the rate of interest is a 2% increase in costs; if the frequency is once every month, 1% increase in the rate of interest is 1/12 of 1% increase in costs.  Effects of the latter order are negligible when prices are rising.  Indeed, then even a 2% increase might be disregarded; but the combination of the 2% increase in costs with the uncertainty of what prices will be in two years’ time is a rather powerful deterrent.  The effect on turnover magnitudes, accordingly, is great when the turnover frequency is low, but negligible when the frequency is high. … ¶ However, the following conclusions seem justified.  When the rate of saving is insufficient, increasing interest rates effect an adjustment.  This adjustment is not an adjustment of the rate of saving to the productive process but of the productive process to the rate of saving; for small inctrements in interest rates tend to eliminate all long-term elements in the expansion; and such small increments necessarily precede the preposterously large increments needed to effect the required negative values of dwi.  Finally, the adjustment is delayed, and it does not deserve the name of adjustment.  It is delayed because the influence of increasing interest rates on short-term enterprise is small.  It does not deserve the name ‘adjustment’ because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements. (CWL 15, 143-44)

Inflation and deflation are swindles.  Each has winners and losers.

It is now necessary to state the necessary and sufficient condition of constancy or variation in the exchange value of the dummy.  To this end we compare two flows of the circulation: the real flow of property, goods, and services, and the dummy flow being given and taken in exchange for the real flow… Accordingly, the necessary and sufficient condition of constant value in the dummy lies in its concomitant variation with the real flow. (CWL 21, 38-39)

Now every unit of enterprise involves a turnover magnitude and a turnover frequency.  The statement would be merely a truism if it meant no more than that the rates of payment received and made by the unit of enterprise involved quantities and velocities of money.  But the statement is not a truism, for it involves a correlation between the quantities and velocities of rates of payment and the quantities and velocities of goods and services. (CWL 15, 57)

the quantity alternative in the rates of payment is conjoined with the quantity alternative in the rate of production, and the frequency alternative in the rate of payment is conjoined with the frequency alternative in the rate of production.  The two cases of quantity-velocity are not only parallel but also correlated. (CWL 15, 57)

It is to be observed that there is no simple correlation between quantities of money added to the circuits or subtracted from them and, on the other hand, the rates of flow in the circuits.  For the rates of flow in the circuits are not just quantities of money but quantities multiplied by velocity [CWL 15, 52]

A certain amount of the recent inflationary flood of $trillions into this nation’s economic process is sitting idle, but most remains in the operative circuits and the secondary stock and bond markets effecting inflation.

Interest payments are payments from Smith to Jones.

All interest payments are made – directly or indirectly – to humans, no matter their status as individuals or participants in an organization. Ice cream and clothing do not have bank accounts.


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