NCPA - National Center for Policy Analysis

Low Interest Rates Cannot be Dictated

April 14, 2011

Let's improve Americans' health by drastically reducing everyone's weight, significantly increasing longevity and reducing medical costs.  All we need to do is revalue the pound.  Instead of a pound being 16 ounces, it will now be 32, cutting everyone's weight in half.  We adjust our bathroom scales, our weight drops, and our health is improved.  Of course this "solution" rests on two fallacies, says Richard W. Fulmer.

  • First, it conflates measurement with what is measured --adjusting your bathroom scale does not change your weight, only your perception.
  • Second, the solution confuses cause and effect --weight is not necessarily the cause of health or lack thereof.

The two fallacies are so obvious that no one could possibly fall for them, right?  Sadly, no.  Many brilliant people have fervently believed in nearly identical fallacies for decades and are even now basing our country's monetary policy on them.

  • Historian T. S. Ashton noted: "If we seek... for a single reason why the pace of economic development quickened about the middle of the eighteenth century, it is to low interest rates we must look."
  • John Maynard Keynes, making this same observation years before, concluded that simply by manipulating a country's monetary supply and financial markets to produce artificially low interest rates, infrastructure would spring into being.
  • But Keynes is confusing "cheap capital" with easy money.
  • Capital must be produced through saving, that is, deferred consumption.

Dictating low rates will not improve a nation's fiscal health any more than manipulating your bathroom scale will improve your physical health, says Fulmer.

Source: Richard W. Fulmer, "A Simple Solution," Freeman Online, April 11, 2011.

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