[TT]

Australian Prime Minister, John Howard, said today that in light of the recent price increases in fuel, food and other commodities, an increase in interest rates was inevitable.

I'm confused !!!

Why do interest rates have to increase because fuel and food increase. Surely this is only making it harder for people and will drive us into recession sooner rather than later.

I'd appreciate input from some of the clever minds I've seen on this forum.

[jmacdaddio]

Raising interest rates in theory keeps inflation in check. Fewer dollars, euros, yen, lira, chasing the same amount of goods and services should keep prices from taking off too high.

US interest rates are heading up no matter what because otherwise there will be a run on the USD. The Fed has no choice other than to jack up rates or else the US will mimic the troubles that have historically plagued Argentina, Brazil, Weimar Germany, etc.

[rogerhb]

$this->bbcode_second_pass_quote('TT', 'A')ustralian Prime Minister, John Howard, said today that in light of the recent price increases in fuel, food and other commodities, an increase in interest rates was inevitable.

[TT]

$this->bbcode_second_pass_quote('jmacdaddio', 'R')aising interest rates in theory keeps inflation in check. Fewer dollars, euros, yen, lira, chasing the same amount of goods and services should keep prices from taking off too high.

[rogerhb]

$this->bbcode_second_pass_quote('TT', '')$this->bbcode_second_pass_quote('jmacdaddio', 'R')aising interest rates in theory keeps inflation in check. Fewer dollars, euros, yen, lira, chasing the same amount of goods and services should keep prices from taking off too high.

[jaws]

There is a natural rate of interest that represents how people value goods in the present against goods in the future. If you would rather have 10 apples today instead of 11 apples a year from now, your natural rate of interest is 10%.

When the scarcity of money is non-increasing (gold standard for example), the market rate of interest will come to reflect the average of the natural rate of interest of the population. A long time ago socialists complained that the existence of the market interest rate was unfair, that it was only a monetary phenomenon determined by money-grubbing capitalists to exploit the poor borrower. They demanded the creation of central banking. The central bank would be controlled by the government and its job would be to lower the rate of interest below the natural rate by money creation.

This however has the nasty side effect of lowering the scarcity of money, also known as inflation. The longer they keep the rate of interest below the natural rate by money-creation, the more money they have to create at an ever-accelerating rate, the more inflation accelerates as well. Eventually they have to break the cycle by stopping or at least slowing down the rate of money creation. The consequence is that the market rate of interest shoots up in reaction to all the inflation spreading through the economy.

Thus, when the government says that they will raise rates because of inflation fears, they mean that they will slow down their money-creation activities because they are creating too much inflation.

[jaws]

$this->bbcode_second_pass_quote('TT', 'O')K. Seems to make sense - BUT - food and petrol are not discretionary purchases. People can't cut down on petrol and food much. In reality I think people will still buy petrol and food and choose to default on credit card payments and loans.

[peaker_2005]

$this->bbcode_second_pass_quote('rogerhb', '')$this->bbcode_second_pass_quote('TT', 'A')ustralian Prime Minister, John Howard, said today that in light of the recent price increases in fuel, food and other commodities, an increase in interest rates was inevitable.

[OilsNotWell]

Jaws, you are right, but perhaps he's another way to present this concept to our questioner...

Think of the money people use nowadays as just debt...pieces of paper that are just a promise to pay. It's fiat - by government decree - money. A "Federal Reserve" (a private banking cartel composed of private banks) note could just as soon be replaced by a check from me to you. If I give it to you, it's my promise to pay you some amount of 'money' if you take it to the bank it is drawn upon. But you are tired and don't want to make a trip to the bank, so you bring it to Bob's grocery store, who you happen to know, and he accepts my check (which you signed over to him) as payment for some butter and eggs...This essentially, is what the founding fathers called 'bills of credit'..

But a funny thing happened since 1789, when the US Consitution was enacted. You see, that document clearly specifies that fiat money was not to be used. The Founding Fathers realized and felt quite strongly that throughout history, fiat money always had very bad consequences. It led to the theft of wealth though its inevitable inflation (rampant unrestricted printing)), wars (creating the 'resources' to finance them, and general overall suffering through giant wealth disparities and classes. The Constitution was very explicit about what 'money' was to be defined as, and what the proper unit of money was to be, even going to so as specificing exactly how much of a certain precious metal was to be defined as a 'dollar' and so forth.

But over the years, and despite the very best intentions of Presidents like Andrew Jackson and Abraham Lincoln, and even John Kennedy, a private monopoly over the creating of money has sprung up and become entrenched in the fabric of your everyday life. Gradually, all vestiges of true money have disappeared (gold consfication 1933, eliminating redeemable gold and silver certificates, debasing (taking out or reducing the precious metal content) of coins (1965 silver taken out of dollars, half-dollars, quarters, and dimes; 1982 even the penny stopped being 95% copper)...Think about it...where'd all that stuff go...whose vaults is it sitting in? When you learn that the Constitution specifically provided for the DEATH penalty in cases where a person was found to have debased money, well then, you know they were quite serious about it. But you'll never hear THAT from your controlled media.

Anyway, an ever-present, constant, inflation now reigns supreme...the reduction in your real purchasing power by ever-increasing concentrations of wealth in the hands of fewer and fewer. The 'business cycle' they say...inflation, deflation, inflation, deflation...all designed to make you poorer and a very few people very, very, very rich. For instance, did you know that the wealthiest 400 people in the US are worth over 1 TRILLION dollars? That's right, only 400 people. In a nation of 260 million folks, that comes out to over $3800 for every man, woman, and child. Astonishing, no? But yet, we're all sold a dream.

Now back to the point about this bills of credit thing. This debt-based money is really just created out of thin air. When an excess of money-creation has occured, the bankers (I prefer to call them banksters, for they are the real age-old mafia), they start to call back in their 'loans', so to speak. They start to 'dry up' 'credit', making 'money' (the debt) scarcer, so more people are chasing less money that is available. The banksters utilize one of only two weapons they have: interest rates. So they make 'money' (credit, but really debt) less available by raising rates, and then stopping the negative effects of the inflation they caused in the first place!

But the real tricky part for these banksters is that sometimes they like to raise interest rates at the same time they are printing 'money' (or making it available in purely electronic form) furiously...At which point, the system becomes quite unstable, of course. That is called 'stagflation', which happened in the 70's. And, I believe, is happening again. Right now.

I am not very familiar with your country's particular economic monetary and 'central bank' history, but I would venture to say it is quite similar...Currency debasement and rampant deficit spending and debt creation.

[jaws]

Two things oilsnotwell:

1 - A cheque is not the same thing as money. It is a money substitute that can pass as money as long at it remains in the hands of someone that trusts the banks which issues is. If someone is afraid the cheque will bounce, they will not accept it and it will not be money. If someone cashes a Bank A cheque to his account at Bank B, Bank B will immediately convert the cheque into real money by requesting a money transfer from Bank A. Once Bank B has real money in its reserves it can issue a loan, but it will not issue a loan from a reserve of Bank A cheques it isn't sure are solvent.

2 - Bankers cannot create money and raise interest rates at the same time. If banks raise interest rates, they will face lower demand for loans. Their reserves of money will begin to increase. If they create money at the same time, their reserves will simply increase even faster. Reserves don't earn interest and don't generate profits for the bank, thus they will lower rates and try to make more loans.

[TT]

$this->bbcode_second_pass_quote('OilsNotWell', '
')
I am not very familiar with your country's particular economic monetary and 'central bank' history, but I would venture to say it is quite similar...Currency debasement and rampant deficit spending and debt creation.

[OilsNotWell]

Jaws,

You miss my point. The 'check' has BECOME our 'money'. That 'real' money you speak of is gone.
$this->bbcode_second_pass_quote('', '
')It is a money substitute that can pass as money as long at it remains in the hands of someone that trusts the banks which issues is.

[OilsNotWell]

$this->bbcode_second_pass_quote('', 'T')hank you for that very enlightening post. It certainly made the issue clearer for me.

I believe you're right when you say the Aussie system is similar to the US system. We too have a current housing bubble and our government is happily selling off all our assets.

My grand-daughter laughingly refers to our Prime Minister as Yankee Doodle's Poodle.

I believe that our economy is very closely tied to America, and that whatever befalls America will hit us hard too.

[jaws]

I've spent a lot of time studying monetary economics and I can assure you that I'm well aware of the relationship between money and money substitutes. What makes something money is the universal acceptance of the thing as money. A U.S. dollar, even though it is issued by fiat, is real money. It is not debt. A U.S. dollar loan is debt, but it is also an asset for the lender. The distinction is important.

When the central bank issues credit, it is loaning out money for which no assets (accounts or reserves) exist, thus it must first create the money which consists of implicit U.S. dollars. When a private bank issues credit it must first have the required asset because private banks are not allowed to create U.S. dollars (that would be counterfeiting). A bank does not turn a 10$ deposit into 1000$ of loans. It turns a 10$ deposit into slightly less than 10$ of loans. Those loans circulate in the economy until someone deposits part of that loan back into the bank. But then the bank has more than 10$ in deposit. It may have 19$ in deposits. So now the bank can increase its loans from <10$ to <19$. The same physical U.S. dollar bills are circulating, but the bank isn't creating money, it is creating loans.

Fractional reserve banking is perfectly legitimate. It is when banks issue loans in greater amounts than their assets that they create inflation, but without a central bank this is impossible because the bank has no 'lender of last resort'.

[OilsNotWell]

$this->bbcode_second_pass_quote('', 'W')hat makes something money is the universal acceptance of the thing as money.

[jaws]

I unfortunately don't spend my time reading U.S.A. government session transcripts, therefore I can't really provide the names of the people you requested who are of absolutely no importance anyway. I just want to make sure that you know what money is and what debt is. What the U.S. constitution says about what is money or isn't money doesn't matter, money is a natural economic phenomenon that exists outside any law. U.S. dollars, whether or not they are constitutional, are real money. They are prone to rapid depreciation from inflation but as long as people use them as money they are money. They are not debt either because someone who owns a U.S. dollar does not owe anything to anybody.

[ohanian]

$this->bbcode_second_pass_quote('TT', '')$this->bbcode_second_pass_quote('jmacdaddio', 'R')aising interest rates in theory keeps inflation in check. Fewer dollars, euros, yen, lira, chasing the same amount of goods and services should keep prices from taking off too high.

[dukey]

there are 2 types of inflation ..

1 cost push. The price of the costs of production increase, ie when the price of fuel rises or labour increases. Smashing trade unions can help to reduce the cost of labour getting out of hand, but as for the cost of fuel .. well we all know about that.

2. Demand pull inflation, when people start to go crazy and borrow a tonne of money on credit .. or usually on credit. This can be controlled by upping interest rates because it makes borrowing money more expensive. However upping interest rates can be a chalange sometimes as some countries have a lot of people with mortages and they can hit hard by this i think.

From what i can see upping interest rates due to cost push inflation is a no brainer. If they really wanted to control the price of increasing fuel costs they COULD reduce tax on fuel. But theres so many times u can do this.

[Doly]

$this->bbcode_second_pass_quote('ohanian', '
')Movies. New cloths. Dining outside. Cafe. Coffee Latte. Overseas holidays.

There are lots of wasteful spendings. People can afford to spend less when the interest rate goes up.

[aahala]

OilsNotWell

It might be useful when you make claims the US Constitution specifically
says this or that about money, to give us a heads up as to which of the
seven Articles and the section you are referring to.

I have a copy of the constitution in front of me, and there are a few
specific items concerning money, like the Congress shall have the right
"to coin money and regulate the value thereof"(Article I, Section 8, subsection 5.)

For the most part however, I don't find the level of detail you have claimed.