Central Banks Won't Produce Natural Interest

The Bank of England should raise interest rates next week ... Most people that read finance columns have heard of the "natural rate of unemployment", and many will know that the term was introduced by Milton Friedman. But far fewer will know where he got the term. He said himself, in his Nobel Prize lecture, that "The 'natural rate of unemployment' [is] a term I introduced to parallel Knut Wicksell's 'natural rate of interest'". But who was Knut Wicksell and what is the "natural rate of interest" – and does it matter? We shall see that it does indeed matter, and tells us something important about current UK monetary policy and the outlook for the UK economy and George Osborne's chances of delivering his fiscal plans ...Three years, now, at 0.5 percent, and counting. That compares with a natural rate of interest that was about 5 percent when times were better and will be around 3-3.5 percent now. (Essentially, add the 2.5 per cent RPI inflation rate that's about the target to the 1 percent or so sustainable growth rate, and you get a decent guess at the natural rate.) Having interest rates so far below the natural rate damages the sustainable growth rate of the economy. – UK Telegraph/ Andrew Lilico

Dominant Social Theme: We just have to figure out what's natural and then fake it.

Free-Market Analysis: Here comes Andrew Lilico, an economist with Europe Economics, and a member of the Shadow Monetary Policy Committee, according to the UK Telegraph (see article above).

The gibberish contained in the above excerpt is only magnified throughout the article. It is really incredible. What is it about price fixing that such intelligent commentators don't understand?

If you artificially set a price by force – and this is what central banks do – then that price is almost bound to be incorrect. Only the market itself can generate a "natural" rate of interest or determine monetary volume.

That's because the market itself is competitive. The "Invisible Hand" of competition creates naturally fluctuating interest rates and the appropriate volume of money stuff.

This is why monetary competition historically yields up evermore efficient and healthy money. People voluntarily choose the kind of money they want and the volume of money as well.

Within this context, gold and silver have proven to be a historically popular money stuff. Used with each other, gold and silver provide a ratio. If the ratio becomes distorted, people can tell that someone is trying to manipulate the market. This called bi-metalism.

Greenbackerism has made a startling comeback of late, which we have long predicted, citing Ellen Brown's effective boosting of the idea that government ought to have the sole franchise to print money.

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