Sunday, September 28, 2008

Rent and Interest Will Shrink

Artificially high interest rates?

The current interest rates range from about 2%, the Fed funds rate, to 10%, the mortgage loan rate. The Austrian School economists that I encountered see this rate as artificially low. They think that the Federal Reserve, the central bank that counterfeits new money, artificially lowers interest rates which promotes malinvestment. They base their theory on the Austrian Business Cycle Theory, which suggests the artificial decrease of interest rates by the central banks. However, I see these rates as artificially high. Let me explain.

The burdensome lending regulations prohibits anyone to lend without a license. Less individuals would lend as a result, and interest rates raise in response due to low supply of loaned funds. Taxes also lower the supply of loaned funds and increases the demand of loans. The state directly confiscates about 50% of the workers' income through taxes. If one multiplies up both sides of the payroll taxes, tariffs, the federal, state and local income taxes, value added taxes, sales taxes, corporate income taxes, property taxes and the regressive excise and inflation taxes, one would get a taxation rate higher than 50%. Indirect "taxes" include the monopolized firms (we will explain this below), business regulations, and others mentioned in the index of fully parasitic industries, although workers see these "taxes" as loss of opportunity costs, not a decrease in production (as in gross domestic product, we will mention later). Including these indirect taxes would result in an 80% "tax" or, more accurately, 80% opportunity loss. Without these "taxes," individuals would lend more which lowers interest rates significantly.

The Austrian economists also avoided the uneven distribution of rates. In the current corporatist society, interest rates distribute unevenly throughout wealth and class levels. I see the privileged corporations borrow at the Federal funds rate, a nominal rate of 2% from the Federal Reserve.

Unprivileged individuals, such as the working class, borrow at a nominal interest rate higher than 6% for mortgages. I consider this unfair to the productive working class when the privileged corporations borrow at 2%.

Monetary expansion may also raise the real mortgage interest rates, to 10-30%. Monetary expansion discourages savings at the expense of increases in speculation and consumption. Suppose an individual wants to lend out money and earn interest. However, he or she cannot profitably invest by lending. The current monetary expansion rate looks closer to 10%-30% annually. The individual cannot profitably invest even if he lends out with an 8% interest rate. If the individual lends 8% when the rate of monetary expansion approximates 10%, he would lose 2%!

Besides the workers who unfairly borrow at a higher rate than the privileged corporations, the current system also treats Mom and Pop businesses unfairly. The Federal Reserve prohibits anyone other than the privileged corporations or banks to borrow at the Federal funds rate. Smaller businesses borrow at a higher rate. They could only borrow at a high interest rate of 20%, which allows the privileged corporations to crush them!

Many Austrian economists consider Hans-Hermann Hoppe as a respectable economist. He wrote an article theorizing the existence of the upper class, even in a free society, though many Austrians disgree with him. In his article, he mentioned that in the monarchical period in early modern period, the real interest rates averaged an amazingly 2.5%. Even in the feudal age, in which I consider as a highly corrupt period, interest rates averaged 5%. The state raised the interest rates since corruption begun in the 19th century.

If a free society exists today, individuals can borrow at a lower interest rate, such as 1%, much lower than the current Federal funds rate of 2%. Everybody will own a house!

Many Austrian economists assume that interest rates would rise in a "free" society. We proved that they made a mistake. They avoided about how corruption, such as regulation and taxes, raises interest rates more than the central banks would decrease. They failed to take note of the inequality of interest rates differing between the privileged corporations and the mortgage rates. We predict that interest rates will decrease.

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