[Adapted from an HBL post] It's not possible to quantitatively isolate Fed-induced distortions in our system of interest rates. Why this is so, even apart from issues of idiosyncratic credit risk, is an insight of Austrian monetary theory.
The Fed effectively controls short term interest rates by fiat, which it has the power to do by creating "money" (i.e. electronic deposits in a federal reserve bank) out of thin air (i.e. government IOUs). Since an interest rate is really just the price of credit, this is basically a price control. In particular, the Fed is capping the price of credit. Usually when the government perpetually forces a producer to sell the fruits of his labor at sub-market levels, he goes out of business. But here what's being sold is a time-limited right of disposal over a given sum of paper money. Virtually no labor was required to create the paper, and the fruits are owned not by the lender (a federal reserve bank) but by all the dupes who unknowingly accept a perpetual debasement of their money.
As Hayek emphasized, the price system is a means of disseminating the particularized knowledge held within the mind of each individual producer-valuer to a sea of other such individuals who might better coordinate their activities with his own. Price controls, on the other hand, are only a means of destruction, and what they destroy is primarily this knowledge. To abolish a market price is an act of censorship. When the price is one so basic as that governing the economy-wide trade-off between present and future consumption, an entire realm of cooperative discovery is disintegrated.
Volumes of information pertaining to people's actual preferences in regard to this trade-off -- the information that would have been discovered and disseminated through countless acts of consumption and abstinence, of planning and hedging -- this information simply does not exist. There is no way to retrieve what never was.
The Fed effectively controls short term interest rates by fiat, which it has the power to do by creating "money" (i.e. electronic deposits in a federal reserve bank) out of thin air (i.e. government IOUs). Since an interest rate is really just the price of credit, this is basically a price control. In particular, the Fed is capping the price of credit. Usually when the government perpetually forces a producer to sell the fruits of his labor at sub-market levels, he goes out of business. But here what's being sold is a time-limited right of disposal over a given sum of paper money. Virtually no labor was required to create the paper, and the fruits are owned not by the lender (a federal reserve bank) but by all the dupes who unknowingly accept a perpetual debasement of their money.
As Hayek emphasized, the price system is a means of disseminating the particularized knowledge held within the mind of each individual producer-valuer to a sea of other such individuals who might better coordinate their activities with his own. Price controls, on the other hand, are only a means of destruction, and what they destroy is primarily this knowledge. To abolish a market price is an act of censorship. When the price is one so basic as that governing the economy-wide trade-off between present and future consumption, an entire realm of cooperative discovery is disintegrated.
Volumes of information pertaining to people's actual preferences in regard to this trade-off -- the information that would have been discovered and disseminated through countless acts of consumption and abstinence, of planning and hedging -- this information simply does not exist. There is no way to retrieve what never was.
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