78. National Bank, Slave to National Wealth

National Bank, Slave to National Wealth
Bob Komives
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When a national government borrows money it competes with private folks who wish to borrow. That competition tends to raise interest rates above the rates that economic growth would prescribe. An artificially high interest rate affects the economy. Entrepreneurs may have productive ideas and good projections that show a profit under correct interest rates and a loss under higher rates. They may avoid the risk, take the risk and get lucky, or to take the risk and go broke. In the first instance, the economy loses the new wealth; the product never appears. In the last instance the economy may gain something; the innovation may survive; but the entrepreneur gets sacrificed and his lender suffers a loss.
If I have an excellent idea that at nine percent interest profits me, the economy, and the biosphere, what should I do when a government policy raises the interest rate to ten percent and makes my profitable idea a bad investment? If I do borrow at the artificially high rates I will try to raise the price of goods and services I sell.         I may or may not succeed, but I become inflationary pressure. Consistent federal borrowing pushes inflation.
When government borrows it attracts money from people who prefer to invest in government's promise to print enough currency to pay them back with interest rather than in an entrepreneur's promise to market a product that will reward them for buying stock or giving a loan. By trying to cover fantasy budget imbalances through borrowing the national government will make private finances ever more responsive to the central bank and ever less responsive to and promoting of underlying economic growth.
A central bank can play an important role in a monetary economy, but finance should always be subservient to economics. The bank should use its monetary tools to keep money synchronized with wealth.

We let you be near master of our money,
central bank,
so that you be mere slave to our wealth.

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:: Bob Komives, Fort Collins © 2006 :: Plum Local IV :: 78.  National Bank, Slave to National Wealth  ::
With attribution these words may be freely shared, but permission
is required if quoted in an item for sale or rent

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