Interest Rate Manipulation: Authoritarian Control Over People’s Choices
Interventionist policies, which are highly supported by the fiat monetary system, play a not so apparent but nonetheless significant role in increasing society’s time preference and in de-civilizing it by shifting its voluntary decision making.
Interest Rates Manipulation
One of the biggest government market intervention tools is interest rate manipulation, which is also an inflationary/deflationary tool. To understand how government using artificial interest rates to alter with the natural time preference of society, one must first understand the relationship between the two, time preference and interest rates. Time preference is simply the valuation put on receiving a specific good at an earlier date in contrast to receiving it at a later date. Therefore, the more you lean toward the latter the more you tend to increase your savings today and the more you lean towards the former the more you tend to increase your consumption today and postpone saving for later.
In a perfectly free market economy, this act of saving for consuming is what actually drives the interest rates and not a central bank’s assessment of the economy. When society is reluctant on spending and more driven to save in the bank’s vault, the said vaults get filled and banks would have enough liquidity to lower interest rates and attract entrepreneurs to take up on some loans and start the investing process, more so, getting cheap loans is not only a factor that drives entrepreneurs to take on the investing risk but natural low interest rates, based on supply and demand, could serve as an indicator for the said entrepreneurs to understand that there is enough money in the economy to run a profitable business. Entrepreneurs build businesses that are ready to be made profitable by the earlier saver and who is now the current spender. In contrast, when people see a reason in spending money rather than saving up for later, hence their overall time preference shift to the upside, bank’s interest rates tend to rise in order to attract deposits. This is an indicator for entrepreneurs to avoid investing or buying loans as the market is already over saturated with enough participants. This absolutely natural order gets ruined by government interventionism through manipulation of interest rates to inflate or deflate the supply of money. Usually central banks increase the money supply by lowering the interest rates. They do so by granting loans to private banks at lower than the current market interest rates and hence the private banks would be able to loan out this money to individuals at also a decreasing interest rate. The central bank can provide the private banks with such liquidity mainly through the printing press. By doing so, the central bank disrupts the natural saving, consuming, and investing cycle. Lowering interest rates would push entrepreneurs to withdraw money and invest it on shaky grounds. The lowering of interest rate would no longer serve as an indicator for excessive money saved by the population and thus is ready to be spent. Building a business under such conditions would be even riskier for the investors and the economy might end up in the business cycle (boom & bust).
The central bank can also artificially increase interest rates, but for a different purpose, and that is to support public spending. Increasing interest rates usually happens in underdeveloped countries with weak monetary policies and a huge public sector. The reason behind doing so is to increase deposits in foreign ‘hard’ currencies, first to support the local currency and second to loan that money to the government who will in turn support the debt and the ever increasing public expenditures. The government take up a loan from the private banks at high interest rates that could reach up to 30% & 40% on the loan, this opens up the possibility for private banks to increase interest rates on deposits and attract deposits in hard currencies from foreign investors and more conveniently for Lebanon as an example, a wealthy diaspora that had confidence in the banking sector. The government being the only market participant who is able to afford such loans, ends up with the most capital in the country and becomes free to spend it the way it likes. Either for inefficient useless ‘development’ projects or simply to support politicians in their next re-election campaign. When the government becomes the only ‘capitalist’ in the country the people have no choice but to consume, they can simply forget about investing and saving. Consequently, this would lead to increasing people’s time preference and de-civilizing society as a whole.
This phenomenon described above had arguably the biggest effect on the time preference of the Lebanese society. This process is leading Lebanon down the road of monetary nationalism (lirafication), a society living off of government subsidies (Article coming soon)
Time Preference Series