Wednesday, 19 October 2016

Guardian article trotts out the old multiplier myth.

The article is by Stephen Koukoulas who according to article is “a Research Fellow at Per Capita, a progressive think tank.” Gosh. He’s “progressive” is he? That’ll impress the rather large proportion of Guardian readers who are cuckolds. (Article title is: "Economic growth more likely...")

And it’s not just me who thinks that self-styled “progressives” are often not all that bright: Bill Mitchell (left of centre Australian economics prof) has made that point over and over.

Anyway, the “multiplier” is simply the idea, widely accepted in  economics, that the ULTIMATE effect on GDP of different types of spending varies widely. And the particular instance of that phenomenon that Koukoulas deals with is the different effect on GDP of donating money to the rich as compared to donating it to the poor.

As Koukoulas rightly points out, the poor spend a larger proportion of any increase in income than the rich, thus the ultimate effect on GDP of giving $X to the poor is larger than the effect of giving $X to the rich. Thus it seems that we get better value for money from giving money to the poor.

Unfortunately that argument does not stand inspection and for reasons set out below. I’ve actually set out the flaws in the multiplier before on this blog, but to get any point across one normally has to repeat it ad nausiam, so here goes – for the umpteenth time.

First, to attack the multiplier IS NOT to attack equality enhancing measures Koukoulas refers to. I.e. if it can be shown that higher taxes on the rich and more generous benefits or lower taxes for the poor brings big social benefits, no one can object to that.

But that’s quite separate from the strictly economic claim, namely that there’s a case for giving preference to high multiplier types of spending because the ultimate effect on GDP is higher per dollar of expenditure.

The basic flaw in the latter idea is that stimulus dollars cost nothing in real terms. To illustrate, if stimulus consists of helicopter drops (i.e. literally printing $100 bills and giving a bundle of those bills to every household in the country), the real cost of doing that is minute compared to the face value of those dollars.

As Milton Friedman put it, "It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances."

Of course stimulus does not normally consist of overt helicopter drops, but conventional stimulus actually comes to almost the same thing. Indeed, conventional fiscal stimulus (government borrows $X, spends $X and gives $X of bonds to borrowers) followed by the central bank printing money and buying back some of those bonds so as to keep interest rates stable or even reduce them, comes to EXACTLY the same thing as a helicopter drop (assuming that by “helicopter drop” one means dropping money onto government departments, state schools, etc as well as households).

Thus given a number of different ways of getting the economy up to capacity, A, B, C etc, the only important point (as far as economic rather than social considerations are concerned) is the effect on GDP. The number of stimulus dollars needed to effect A, B, C etc is irrelevant. I.e. the multiplier is irrelevant.

Tuesday, 18 October 2016

The amazingly nonsensical “sticky price channel”.

It’s quite widely recognized that a significant proportion of the economics profession are not interested in reality: rather, they’re interested in erecting complex theories and models with a view to keeping themselves employed at the taxpayer’s expense. But when it comes to a blatant disregard for reality, the “sticky price channel”, which I stumbled across recently takes some beating.

A guide to the sticky price channel is set out under the heading “The Sticky Price Channel” in a recent CEPR article by Carlos Garriga and Finn Kydland. The article title is “Keeping Policy Rates Persistently Low…”.

The paragraph that claims to explain the sticky price channel runs as follows. (Incidentally I’m not promising that this para is an accurate description of the sticky price channel, but having Googled the phrase “sticky price channel”, this para seems to have got the idea roughly right, far as I can see.)

“The sticky price channel is the central mechanism of monetary policy transmission in the modern macro literature. A number of texts (e.g. Woodford 2003, GalĂ­ 2015) describe this channel in detail.1 The key element of this channel is the so-called ‘New-Keynesian Phillips curve’. According to this relationship, aggregate output depends negatively on the expected change in the inflation rate. If today’s inflation is high relative to tomorrow’s expected inflation – that is, the expected change in inflation is negative – aggregate output is relatively high today. The microeconomic foundations for this relationship are driven by the costly adjustment of prices at the firm level. Consider a firm that faces a cost of adjusting its price. When the aggregate price level increases, and thus inflation increases, the firm finds itself with a higher demand, as its products look relatively cheap. If the increase in the aggregate price level is expected to only be temporary, the firm does not find it profitable to incur the adjustment cost of changing its price. Instead, it increases output to satisfy the higher demand. In equilibrium, all firms facing price adjustment costs behave this way and, as a result, aggregate output increases. However, when the increase in inflation is expected to be highly persistent, the cost of changing the price is worth paying and the firm adjusts its price, rather than output. In equilibrium, all firms behave this way and, as a result, aggregate output does not change. The sticky price channel is thus most potent when changes in policy rates, and thus inflation, are only temporary.”

Now if you didn’t fall about laughing at that, here’s why you should have.

First, why would any government implement monetary stimulus (or indeed fiscal stimulus) given a significant amount of inflation? It wouldn’t!! Put another way, when inflation rises above the 2% target, governments and central banks normally turn off the stimulus tap.

Raising prices is costly?

Second, the idea that raising prices is costly is a joke. A supermarket chain can raise all its prices nowadays by pressing a key on a computer keyboard. The cost of doing that is negligible compared to what supermarkets spend on wages, purchasing food to sell and so on.

And in the case of small businesses which are not quite so computerised as supermarkets – e.g. small hotels and restaurants – where they want to adjust prices, they’d have to re-print menus etc. Well shock horror! That’s not going to ruin any hotel or restaurant.

And if there are any small hotels or restaurants out there who don’t know how to set up a desktop printer, I’m happy to offer instructions.

And this ere “sticky price theory” is according to the above paragraph “…the central mechanism of monetary policy transmission in the modern macro literature...”. If that’s the case, most macro-economists should check in with their shrink.

Why expand sales when they’re not profitable?

A third problem is this passage:

“Consider a firm that faces a cost of adjusting its price. When the aggregate price level increases, and thus inflation increases, the firm finds itself with a higher demand, as its products look relatively cheap. If the increase in the aggregate price level is expected to only be temporary, the firm does not find it profitable to incur the adjustment cost of changing its price. Instead, it increases output to satisfy the higher demand.”

Now hang on. Let’s make the not unreasonable and simplifying assumption that the typical firm is making a standard return on capital or a “normal profit” as economists sometimes call that, at the start of the above mentioned inflationary period.

Once that inflation has started, and given that the firm does not raise its prices pro rata, it will then be making a LESS THAN normal profit, or even a loss. Now what’s the point in bothering with extra sales if they’re not profitable? None!

Indeed, why bother selling ANYTHING? Strictly speaking it could make sense for the owner of a business in that situation to simply close down the business temporarily and go on a fishing holiday, till profitability returns.

In practice, nine times out of ten, businesses obviously don’t do that when faced with making low or zero profits for a while because they risk losing regular customers. So what they often do is to keep supplying regular customers, while telling new customers their demands just cannot be met.

Indeed there’s a second reason for ignoring those new customers. It’s a reasonable bet that the new customers have simply been attracted by the artificially low prices the firm is demanding. I.e. when things return to normal, those new customers may vanish. To that extent it makes sense (unless the firm is desperate to buy market share) to politely tell the new customers their orders cannot be met.

A fallacy of composition.

A fourth error in the sticky price theory is in the sentence that follows on from the latter quote. The sentence reads “In equilibrium, all firms facing price adjustment costs behave this way and, as a result, aggregate output increases.”

Now hang on: inflation by definition is a situation where a significant proportion of the country’s firms are increasing their prices!!! I.e. you can’t assume inflation and then in the next breath assume firms are not increasing prices!

To be more accurate, there is no sharp dividing line between what might be called a micro and a macro scenario. We’ve dealt above with the purely micro scenario: i.e. situation where an individual firm faces generally rising prices while it keeps its own prices constant.

At the other extreme there is what might be called a “pure macro scenario”. That’s where inflation is running at X%pa because EVERY firm is raising its prices by X%pa.  In that scenario it’s clearly a nonsense to suggest that the typical firm will expand sales and output because its prices have risen less than the general increase in prices.


The whole “sticky price channel” looks to me like a train wreck, or something so near a train wreck that it can be ignored.

So what is the “central mechanism of monetary policy transmission”?

And finally, having ridiculed one alleged “central mechanism of monetary policy transmission”, there is perhaps an onus on me to set out what I think the real “central mechanisms” are. So here goes. But be warned: they’re very boring, simple and straightforward, which is perhaps why some economists don’t like them. To repeat, what many economists want is complexity because complexity keeps them employed. Anyway, I propose the “mechanisms” are as follows.

First, there is interest rate cuts. The result of those cuts is to encourage more borrowing and when money is borrowed and spent demand rises. That’s simple enough.

Second, there is QE. That consists of the central bank printing money and buying sundry safe assets. That leaves the private sector with an excess stock of cash, which induces the private sector to spend in one way or another. That raises demand. That’s also simple enough.

Third, there is helicoptering, which is a mixture of monetary and fiscal policy. Helicoptering consists of having the state print money and spend it and/or give it away to households. When a household finds it has more cash, it tends to spend some of it (gasps of amazement). That increases demand.

Alternatively, if the new money is directed towards public spending, than that extra spending also increases demand. (Incidentally, helicoptering is more common than many people think: that is, when government implements standard fiscal stimulus (government borrows $X, spends it and gives $X of bonds to lenders) and then then central bank prints money and buys back some of those bonds (which the CB is quite likely to do at least to some extent) then to the extent the latter “buy back” takes place, that whole exercise equals helicoptering.

Sunday, 16 October 2016

Random charts III.

Australian residential dwelling stock value to GDP ratio 1880-2016.

Private nonfinancial debt as % of GDP.

Contributions to EU budget.

Fed remittances to the Treasury.

Gender gap in PhDs.

GDP losses due to pollution.

England: population of the North as % of total population.

The effect of QE.

Which countries host the most refugees?

Which nationalities consider religion important?

Friday, 14 October 2016

Merge monetary and fiscal policy?

Positive Money says the two should be merged.

Here’s why that’s a good idea (which is not to suggest Pos Money would agree with all the points below).

1. Fiscal stimulus on its own has flaws.

Fiscal stimulus on its own equals “government borrows $X and spends $X (and/or cuts taxes)”. Problem with that is that borrowing AS SUCH is deflationary. Now what’s the point of doing something deflationary when the object of the exercise is the opposite, i.e. stimulus?

Put another way, what’s the point of the state borrowing money when it can print the stuff?

And for the benefit of the Pavlov dogs who chant “inflation” whenever the words “print” and “money” appear in the same sentence, as long as the AMOUNT of money printed and spent is not excessive, i.e. as long as it’s enough to raise numbers employed, but not so much as to cause inflation, then (roll of drums) there won’t be any excess inflation.

Of course if (and it’s a big if) it makes sense to borrow so as to fund infrastructure and in that stimulus consists of more infrastructure spending, then it would make sense to borrow to fund that infrastructure via borrowing. However, rapid changes to infrastructure spending are just not feasible: first, most infrastructure projects are not shovel ready. And second, it doesn’t make sense to abandon a bridge building project when its half complete just because a recession comes to an end. Ergo infrastructure spending is not particularly suited to dealing with recessions.

As to whether it makes sense for governments to borrow to fund infrastructure, Milton Friedman and Warren Mosler thought not.

2. Some merging of monetary and fiscal stimulus is needed ANYWAY.

The extra borrowing involved in traditional fiscal stimulus probably raises interest rates which is the last thing needed when stimulus is required. Thus the central bank has to print money and buy back some of the newly issued government debt so as to keep interest rates down: i.e. at least a FINITE amount of monetary stimulus has to accompany fiscal stimulus.

3. The flaws in monetary policy on its own.

There’s a glaring flaw in implementing monetary stimulus (at least in the form of interest rate cuts) on its own: it’s that there is no reason whatever to assume a recession is caused by inadequate borrowing, lending and investment any more than there’s reason to assume it’s caused by inadequate spending on education or ice-cream.

It’s certainly true that given a recession, interest rates will probably fall, but what’s the reason for thinking interest rates will not fall of their own accord, given a recession? There’s nothing much to stop them: to illustrate, there’s been a substantial fall in interest rates over the last twenty years or so which has quite clearly NOT BEEN caused by central banks.

As for the other possible element in monetary policy, QE, much  the same goes. QE is designed to increase investment spending in riskier assets. But there are zero reasons to assume a recession is caused by inadequate investment spending.

Moreover, not even the fact that investment spending has fallen prior to a recession is proof that inadequate investment spending is the problem: that fall may have taken place for perfectly good reasons.

4. Merging monetary and fiscal is compatible with the basic purpose of the economy.

The basic purpose of the economy is to produce what people want: both what they normally buy out of their disposable income and what they want by way of publically provided goods and services which people vote for at election time. That being the case, the logical solution to a recession is to give people more of the stuff that enables them to buy stuff out of disposable income, i.e. money.

Thus one element in curing a recession should be boosting household bank balances: perhaps via tax cuts or via increased social security payments. As to publically produced goods, more should be spent on those as well, though the exact ratio of increased PRIVATE vis a vis PUBLIC spending is clearly a political choice.

Increasing those two forms of spending by simply printing new money and spending it amounts to a combination of fiscal and monetary policy.

5. Lags.

There might be an argument for concentrating on monetary policy if the lags there were shorter than in the case of fiscal policy, but that doesn’t seem to be the case.

6. Investment spending rises ANYWAY.

Those with a fetish about investment might like to know there’s nothing a bank manager likes more than a business with plenty of customers coming thru the door. I.e. raise demand generally, and increased investment will probably follow. But if businesses decide more investment is not needed on a big scale to meet the extra demand, there is no reason to think that’s any sort of problem.

7. A “merge” is close to the free market’s cure for recessions.

The above GENERAL rise in demand is what would happen in a perfectly functioning free market given a recession. That is, given a recession, wages and prices would fall, which in turn would increase the REAL value of money (base money particular). That effect is known as the Pigou effect. It would also increase the real value of the national debt, which as Martin Wolf pointed out more or less amounts to money.

In short, in a free market spending by those in possession of base money and national debt would rise which is a FAIRLY widespread rise in demand as distinct from the relatively NARROW rise in demand that takes place when interest rates are cut with a view to raising investment spending.

8. Reversibility.

Some thought must be given to whether any form of stimulus is reversible, and it might seem that reversing helicopter drops is politically difficult as it means tax increases. However, interest rate rises hit most of those with mortgages, so that’s not politically popular either. Also the UK raised the VAT sales tax a few years ago and there wasn’t even a whiff of riots.

Also, in that raising interest rates is politically easier than raising taxes, then after some helicoptering, it would always possible to assist the reversal by a temporary rise in interest rates.

9. Deciding the size of a stimulus package is a decision for experts.

Re the charge against fiscal stimulus that it depends on a collection of squabbling children sometimes known as “politicians”, Positive Money and co-authors thought of that one long ago. See here. The solution is to have ECONOMISTS, not politicians decide on the TOTAL SIZE of a stimulus package, while strictly POLITICAL decisions like what % of GDP is allocated to the public sector and how that is allocated as between education, infrastructure etc are left in the hands of politicians: easily done.

In other words converting to a system where monetary and fiscal policy are merged requires a significant re-arrangement and the responsibilities of governments and central banks, but that’s not a big problem in principle. The problem is explaining the new system to all and sundry.

Incidentally, that re-arrangement largely disposes of another criticism of fiscal policy namely that fiscal changes take a long time where they are dependent on the whim of politicians.

Thursday, 13 October 2016

Random charts II.

Net worth of US households in blue. GDP in red.

What people thought about balancing the budget in 1936.

The relationship between chocolate consumption and Nobel laureates per million of the population.

Private debt relative to GDP.

Views on diversity.

Stock of houses in the UK since WWII.

Inherited wealth.

Youngsters not in work, education or training.

Crude oil: what each country produces.

Participation rate for US men and women.

Sunday, 9 October 2016

The economic illiteracy of Pete Peterson.

Just for a laugh, let’s run through this article by Pete Peterson, the billionaire founder of the Peterson Institute: the organization that hands out wads of cash to academics with a view to buying academic credibility. The article title is “America can’t afford Greek complacency”

If you know anything about economics, you’ll have spotted a flaw in the article already: comparing the US, a country which issues its own currency, to Greece, which doesn’t.

Peterson doesn’t EXPLICITLY say Greece and the US face exactly the same problems. But the mention of Greece is clearly there for a purpose: to fool the gullible into thinking that the horrendous problems of Greece could be replicated in the US.

Peterson then suggests there are few similarities between Greece and the US. Oh yes? So what was the purpose of the title of his article “America can’t afford Greek complacency”.

Anyway, with a view to showing there are few similarities between Greece and the US, he says, “There are countless differences between the circumstances of the U.S. and Greece.” So exactly which Greek problems might be replicated in the US? Well Peterson is vague on that one, probably because he does not know the answer to the latter question.

But there is SOME SORT OF indication as to where the problems lie in this paragraph:

 “Without question, the United States remains on a fiscal path that is unsustainable and dangerous by any international standard. Last month's non-partisan Congressional Budget Office analysis projects that by 2040, federal debt will climb to more than 100% of gross domestic product based on current laws, and would reach 175% of GDP under less optimistic assumptions. Debt at that level, CBO warns, would significantly harm our economy, reduce incomes and increase the chances of a fiscal crisis.”

Well first, the fact that something is “unsustainable” proves precisely and exactly nothing. An accelerating car is not a “sustainable” system: reason is that the car cannot go on accelerating for ever. First, it will reach the legal speed limit, at which point the driver ought to take his foot off the gas. Second, there’s a physical upper limit to the speed of any car. So is the “unsustainability” of an accelerating car anything to worry about? No!

And in fact something very similar to the latter self-limiting characteristic of the speed of a car applies to the national debt. That is, national or government debt is an asset as viewed by those holding the debt, i.e. the private sector. And the larger the private sector’s paper assets (as pointed out over and over by MMTers) the more the private sector will spend, for the same reason as the larger the lottery prize a household wins, the more it will spend.

Thus at some point, a rising national debt will induce extra spending to the extent that no further increase in the debt is needed in order to induce more spending.

Long term planning.

Next, Peterson says “Nonetheless, there are important lessons to be learned about the benefits of long-term planning and maintaining fiscal health and flexibility.” What – it’s an idea to “plan” the deficit in advance, is it? Out by 180 degrees!!

The basic point of a deficit is to make good a shortfall in demand coming from the private sector (or in the case of a SURPLUS, to tone down EXCESS demand coming from the private sector). But no one has much of an idea what excess or deficiency in demand the private sector will be responsible for in two, four or six years’ time.

For example the difference between exports and imports has an effect on demand. No one knows what exports or imports will be doing in four years’ time. And then there’s Alan Greenspan’s “irrational exuberance”. That tends to increase demand. But no one knows whether there’ll be an outbreak of irrational exuberance in a few years’ time or not.

In short, the idea that the deficit should be planned several years in advance is a contradiction in terms. It’s a bit like saying a good way of putting out a house fire is to pour 100% proof alcohol on the fire.

Interest on the debt.

In the next passage, Peterson worries about interest on the debt. He evidently doesn’t understand the point which MMTers make over and over, namely that a country which issues its own currency can pay any rate of interest on its debt that it likes. In fact it can turn large chunks of the debt into “zero interest debt” simply by printing money and buying back the debt. Indeed we’ve been doing that, and on an unprecedented and astronomic scale over the last five years under the guise of QE. Perhaps Pete Peterson hasn’t heard of QE.

And as for the idea that the money printing involved in QE results in inflation, where exactly is the inflation stemming from QE?


As for the “projections” to which Peterson refers, how about using this chart for the purposes of anticipating where the deficit will be in two years’ time. Rather looks like it will have shrunk to zero, not of course that I’m claiming the chart is a brilliantly reliable guide.

As for Peterson’s predictions as to where the deficit will be in 2040, well that’s straight out of cloud cuckoo land.

And finally, for a humorous take down of Peterson type thinking, see here.

Saturday, 8 October 2016

Are interest rates artificially low?

Summary.    Contrary to popular perception, rates are not artificially low because of central banks’ low interest rate policies of recent years. The reality is that rates were artificially BOOSTED by central banks in the years prior to the crisis. On the other hand there are other factors which interfere with the free market rate of interest and the net effect of all those factors is near impossible to determine. The other factors are fractional reserve banking, which artificially reduces the rate, and government borrowing which artificially raises interest rates in all probability.


When a big change occurs, it’s normal to assume there must be something odd or artificial about the new order, i.e. that the old order represented the NATURAL state of affairs. Thus people tend to assume there must be something ARTIFICIAL about the low interest rates of recent years. I.e. it’s commonly assumed, that the free market rate of interest must be above its current level.

Prof Stephanie Kelton (a leading MMTer) hinted at the flaw in that idea in these tweets recently.

So in what scenario would a genuine free market rate of interest obtain? Let’s answer that by starting with the simplest possible economy, and then add the complexities of the real world. (Incidentally I’m not suggesting Kelton would necessarily agree with the paragraphs below)

Assume the following:

1. A barter economy where the people democratically vote to create a form of money with a view to circumventing the inefficiencies of barter.

2. The new form of money will be issued by a newly formed “central bank” (CB).

3. Initially the only form of money is CB issued money (i.e. base money). That is, money creation by private banks is not allowed: in fact there ARE NO private banks – everyone just has an account at the CB (an innovation that CBs are actively considering right now, as it happens). As to whether the base money takes the form of some rare metal like gold or comes in fiat form doesn’t matter.

4. As to lending and borrowing, that takes place direct person to person (or person to firm etc) rather than via commercial banks.

5. There is no government borrowing.

Now what’s the optimum amount of money to issue? Well the larger each person’s stock of money, the more they’ll tend to spend all else equal. So as the stock of money rises, demand rises. And it will rise to the point where inflation becomes excessive. So the optimum amount of money to issue is the amount that induces the population to spend at a rate that maximises employment while keeping inflation at acceptable levels (NAIRU if you like).

As to the rate of interest, obviously that will settle down to some genuine free market level as long as the CB does not deliberately interfere with it – or in the words of Kelton, as long as the CB does not offer interest on reserves (IOR). (Reserves are not held by INDIVIDUAL PEOPLE in the real world of course, but in our hypothetical economy, since individual people have accounts at the CB, that money amounts to reserves.)

Notice that demand is regulated in our economy by a mix of fiscal and monetary means: i.e. given inadequate demand, government just creates more base money and spends it into the economy (and/or cuts taxes). That spending falls into the “fiscal” category, while the resulting rise in the stock of money falls into the “monetary” category. That is, demand is not regulated by adjusting interest rates.

How about interest rate adjustments?

But suppose it was decided that adjusting interest rates was a good idea, how would government and CB do it? Well the only way of artificially cutting rates would be for the CB to offer cut price loans to all and sundry. But that would involve the CB engaging in COMMERCE, i.e. that would involve exposing the CB to the possibility of losing money. And that in all probability wouldn’t be acceptable in the hypothetical economy just as it is regarded with suspicion in the real world.

So an alternative would be for government to spend an EXCESSIVE amount of money into the economy, and then, with a view to damping down demand, artificially raise interest rates by offering interest on reserves. Alternatively government could borrow by issuing bonds. But that would quite clearly result in an artificially high rate of interest.

Having issued that excess stock of money, the CB is then in a position to adjust interest rates by for example altering interest on reserves.

And that, lo and behold, is what happens in the real world, as intimated in Stephanie Kelton’s tweets.

To summarise, if demand is going to be adjusted by altering interest rates, interest rates have to be maintained at an above free market level – at least in our simple hypothetical economy. So the next question is: does that also apply to the real world once we’ve added the complexities of the real world?

Government borrows.

With a view to making our economy more realistic, let’s now assume that government borrows so as to fund infrastructure investments etc rather than to artificially raise interest rates.

Does that infrastructure borrowing artificially raise rates? Well it’s hard to say because it’s not clear whether government ought to borrow for that purpose or not.

Certainly the conventional wisdom is that the latter borrowing is justified. On the other hand Milton Friedman advocated a zero government borrowing regime as does Warren Mosler. I also set out several of the flaws in the latter conventional idea here.

(For Friedman, see his American Economic Review paper "A monetary and fiscal framework…”, para starting “Under the proposal…”. For Mosler, see his Huffington article “Proposals for the banking system”, 2nd last paragraph.)

At any rate, if infrastructure borrowing is NOT JUSTIFIED then by definition, the effect of government borrowing will be to artificially raise interest rates.

Alternatively, if such borrow IS JUSTIFIED, then the effect of government borrowing will be to artificially raise interest rates.

Fractional reserve banking.

Having said that in the hypothetical economy private banks are not allowed, what happens if they ARE allowed? Well fractional reserve banking tends to reduce interest rates and for reasons set out by Joseph Huber in his work “Creating New Money”. See passage starting “Allowing banks to create new money…”


In order to use interest rates to adjust demand, interest rates first have to be artificially raised, which is a flaw in the whole interest rate adjusting idea. However there are other factors which interfere or may interfere with the rate of interest, in particular fractional reserve banking and government borrowing. As to what the overall or net effect of all those factors is, well that’s hard to say.