A Bamboozle Too Far

Central bankers everywhere are determined to cool down the global economy. The idea is that people have too much money in their hands, and that an increase in unemployment is required in order to stop them from spending it in such a way that prices rise.

The assumption is that higher interest rates destroy jobs, so central bankers are raising rates. However, this assumption is based on one of Keynes' fallacies. It assumes that it's first and foremost credit that drives job creation. But that's not how it works.

Employment requires capital investments, and capital investments require a material surplus in the economy. Credit conjured out of thin air does nothing to boost this surplus. Only real savings provide this type of surplus. Someone has to forego current consumption for capital to be accumulated.

An example taken from one of Irwin Schiff's books illustrates this: Imagine someone living on an island, catching fish by hand in order to survive. That person will have to set aside a few fishes in order to spend time making a net. The savings required have to be real fishes, not some fish credit from a central bank.

When applied to a large economy, this logic implies that someone has to forego a few fishes in order to produce a fishing vessel.

Credit conjured out of thin air doesn't equal real savings. It only serves to rise prices.

When we combine this insight with the fact that rising interest rates makes it more interesting to save for the future, we get a situation where people do in fact set aside a few fishes more than they otherwise would have if interest rates had been lower. They forego the current fish dinner in the anticipation that they will have an even bigger fish to enjoy a few months later. The fish foregone can in turn be consumed by someone working on a capital investment project.

With more real savings in the economy, there's more room for real investments. This means that the likely effect of higher interest rates is that prices of things will come down, and that capital investments will go up. The net effect of this will be more employment and more money in the hands of the working class.

If the intent of the central bankers is to whack the little guy with higher interest rates, the ploy will backfire. The only little guys getting hammered by higher interest rates are those who've gone all in on debt and speculative assets. However, the average saver and labourer will be fine.

Assuming that there's evil intent behind the current rise in interest rates, we have an example of evil getting entangled in its own web of lies. The bamboozle has gotten to the point where the devil is starting to believe it himself. When he acts with the intent of doing harm, he ends up doing good.

Klaus Schwab

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