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August 20 2018

moneymetals

Dr. Engelhardt: Economy Beholden to Fed Interest Rate Policy; Here's One Way Gold Could Reach $14,000+...

Well now, without further delay, let’s get right to this week’s exclusive interview.

Mike Gleason: It is my privilege now to welcome in Dr. Lucas Engelhardt associate professor of economics at Kent State University. Dr. Engelhardt is an Austrian economist who has been a guest lecturer at the Mises Institute and in his teaching specializes in macro-economics in the examination of the business cycle, and it's certainly a real pleasure to have him on with us today. Lucas, thanks so much for taking the time and welcome.

Dr. Lucas Engelhardt: Well thank you for having me on.

Mike Gleason: Well, I'm excited to have you on today because there is a lot to discuss with you. For starters I think a good place to begin is the business cycle. Now, but before we get into the misunderstandings that the Keynesians seems to have about this, explain the business cycle if you would and why it's important in order to have a proper understanding of monetary policy.

Dr. Lucas Engelhardt: Sure. Now, as you mentioned, I come from the Austrian economic framework. And Austrian economics describes the business cycle as the consequence of manipulations happening in the money supply, specifically in credit markets. So starting from that point, so how the business cycle happens is that we have somebody in the banking system. We know in modern America it would be the Federal Reserve is generally responsible for this. Decides to push down interest rates, normally to stimulate the economy.

Austrians, we definitely do not deny that this actually does work for a while. That the lower interest rate does actually encourage investment, especially in very long structures of production. The types of things that won't pay off maybe for five, 10, or even more years. We see lots of research and development, lots of construction, these types of things happening when interest rates get pushed down.

The problem is that the way that the Fed pushes interest rates down, as I suspect most of your listeners know, is by adding additional money into the economy through the banking system. Eventually this money gets out into the economy and prices start going up. You have more money, the money loses value, the flip side of that is that prices are higher. It takes more money to buy anything.

Now, there are a couple ways this can go. The central bank could just ignore this fact and continue with the low interest rate policy, just pumping out more and more money to the point where the money is worthless. We see that happen right throughout history, and we see that happening today in places like Venezuela. Now, what the Fed has done historically most of the time is get nervous about this rise in prices and start tamping back on the increase in the money supply. Of course, as soon as they do that interest rates go up. Once interest rates go up, all these investments that looked great when interest rates were low, that research and development, building new houses and what have you, stop looking as good.

So, we see all of these areas that expanded then start contracting, and that's where we see the bust of the business cycle come in. We see there it's really all centered on what the Federal Reserve in modern America is doing in interest rates.

Mike Gleason: Now, you come at things from an Austrian viewpoint as you mentioned. I'm curious if sometimes you feel like a lone wolf in the wilderness, because nearly everyone in the mainstream financial world and among the central bankers and central planners throughout the globe seems to have that Keynesian mindset where government and a tight management of monetary policy is the answer to every economic problem. So, why is it dangerous in your view, expand the point if you would about a centrally planned economy instead of letting the free market forces dictate things. What are they so afraid of?

Full podcast here: https://goo.gl/dUWCp8​

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