Should we lower the interest rate?

One of the big constant headaches of financial advisers is whether interest rates will be lowered or raised by the Federal Reserve Bank (or a related institute in any given country). If inflation is on the rise, the interest rate will be raised. If consumer spending is slow (and inflation is low), the interest rate will be lowered.

This of course is government manipulation of the market. Governments have monopolized their currencies and are in general not all to happy about "private money" such as the Liberty Dollar. Governments monopolize currencies because it gives them, in plain language, more money to spend. They back their currencies up with their power to tax. They encourage "loose" money (low interest rates) when the economy is lagging, and "tight" money when there is "too much" action in the economy.

But what does this has to do with our every day lives? Here's the reason why:

An increase in money supply resulting from loose monetary policy benefits the earlier receivers of money. With more money in their possession they have more resources at their disposal. As a result of the increase in the pool of resources of the earlier recipients of money, their cost of funding has fallen — this enables them to lower interest rates. Borrowers who previously had to pay a higher interest rate will find the lower interest rate more appealing, all other things being equal. In short, the lowering of interest rates will enable the lender to lend out a greater amount of money at his disposal.

As time goes by, loose monetary policy undermines real wealth formation — this is manifested by a general increase in prices of goods and services. Because of the erosion in real wealth formation, the cost of lending has increased (fewer ends can now be accommodated with fewer resources—leads to a higher marginal end). Borrowers discover that with a general increase in prices they require more money. All this puts upward pressure on interest rates.