Interest rates need to be decided by free market forces, not a group of persons in priviledged positions. Ideally, businesses should be able to use interest rates as a planning tool. If set by the free market, interest rates will tell a business whether to engage in either short-term or long-term projects. Stated another way, interest rates are a sliding scale that moves back and forth between two ends. High interest rates represent the public's preference to consume in the near term (a preference for spending rather than saving), while the other end of the spectrum, low interest rates, represent the public's preference to consume at a later date (a preference for saving rather than spending).
In a scenario with artificially low interest rates, producers assume that there is general preference from the public to save rather than spend. Thus producers are inclined to borrow and invest in long term projects. This results in shortages for goods that consumers are demanding in the near term. In a scenario with artificially high interest rates, borrowers assume that the public is generally interested in spending their money immediately. Thus borrowers undertake projects to produce goods for the near term. But the artificially high rates have actually incentivised people save, so we end up with a surplus of goods that few consumers are interested in purchasing.
The manipulation of interest rates by central banks and governments interrupts the natural balance between producers and consumers. It causes the producers and consumers to pull in opposite directions, instead of efficiently sharing the current available pool of resources in a symbiotic manner. The manipulation of interest rates by governments and banks causes the booms and recessions that we experience repeatedly. If decided by the free market, the interest rate would constantly move. It would fluctuate based on public preference to either spend now, or later. There is no man or group of men who can effectively manage the cost of borrowing. No single person or group of persons is smarter than an entire market.
In a scenario with artificially low interest rates, producers assume that there is general preference from the public to save rather than spend. Thus producers are inclined to borrow and invest in long term projects. This results in shortages for goods that consumers are demanding in the near term. In a scenario with artificially high interest rates, borrowers assume that the public is generally interested in spending their money immediately. Thus borrowers undertake projects to produce goods for the near term. But the artificially high rates have actually incentivised people save, so we end up with a surplus of goods that few consumers are interested in purchasing.
The manipulation of interest rates by central banks and governments interrupts the natural balance between producers and consumers. It causes the producers and consumers to pull in opposite directions, instead of efficiently sharing the current available pool of resources in a symbiotic manner. The manipulation of interest rates by governments and banks causes the booms and recessions that we experience repeatedly. If decided by the free market, the interest rate would constantly move. It would fluctuate based on public preference to either spend now, or later. There is no man or group of men who can effectively manage the cost of borrowing. No single person or group of persons is smarter than an entire market.
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