Dina Titus’ Mistake

As I articulated in my last commentary, artificially low interest rates brought on by loose monetary policy (i.e. the FOMC) causes capital to flow outward.  Tightening – while sending interest rates upwards and exposing insolvencies outright – reverses this and capital flows back into the system, consequently lowing the natural rate of interest.

Dina Titus’ mistake – one which Republicans have made, too – is confusing a dollar leakage with a dollar shortage.  The dollars are there; they’re just piled up in foreign reserves.  You don’t want to re-create non-existent savings on a printing press.

Interest rates have to be set pursuant to the true supply of savings.  The rate of interest represents the discount rate of future goods as against present goods.  Presents goods are more valuable than are future goods.  A credit transaction involves the exchanging of present goods for future goods.

If you asked me to get you an apple to eat and I said in fifteen minutes, you might be okay with that response.  Suppose I changed it to one hour, or one year?  Suddenly, you lose interest.

People would rather have an apple today than an apple ten years from now.  Thus the rate of interest represents an agio placed on present goods over future goods.  The borrower promises to pay back the lender with at least slightly more than an apple in the future.  And that’s what the rate of interest represents.  It’s the discount rate of future goods against present goods.

Interest rates that are set below their natural levels - only the unhampered free market can set interest rates pursuant to the true supply of savings - undermine savings and destroys future wealth.  Consumption outstrips savings.

The problem here is not capital per se, but that capital is so inaccessible to the common person.  This is due to previous economic policy which is being pursued with vigor by politicians like Dina Titus.

This problem isn’t cyclical, either; it’s structural.  Until structural changes are made to Washington (not the private sector), there will be no economic recovery.

Whatever you do, don’t let politicians bribe you with your own money for votes.  The federal dollars flowing into states is called political bribery.  Dina Titus is complicit in wrecking the currency – i.e. your future – and needs to be held accountable.  Her mistake?  Conflating a dollar leakage with a dollar shortage.

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