In an exchange with Nebraska Republican Senator Mike Johanns during her confirmation hearing Thursday, Janet Yellen was asked about savers and senior citizens. Senator Johanns was explaining how the Federal Reserve’s policy of artificially low interest rates hurts a saver and a senior citizen’s cash deposits.
Yellen essentially retorted that the central bank needs to get the United States economy on sound footing again and that, although its policies may hurt them in the short-term, the monetary stimulus is “broadly beneficial to them.”
“But you know, if we want to get back to business as usual and a normal monetary policy and normal interest rates, I would say we need to do that by getting the economy back to normal,” said Yellen in her response. “Take into account the broader array of interests they have in a strong economy, they would see that these policies — even though they may harm them in one respect — are broadly beneficial to them as I believe they are to all Americans.”
Indeed, Yellen was not asked to defend the institution’s moneyprinting scheme and low interest rates. Instead, Yellen hinted of using additional stimulus tools and perhaps even expanding the $85 billion per month quantitative easing initiative. She believes these programs would improve the labor market.
“They may be retirees who are hoping to get part-time work in order to supplement their income,” Yellen told the primarily Keynesian Senate Banking Committee. “They may be people who have children who are out of work and who are suffering because of that or [have] grandchildren who are going to college and coming out of college and hope to be able to put their skills to work finding good jobs and entering the job market when it’s strong.”
What is quite apparent is that Yellen needs some economic lessons.
Those who save and investment are instrumental to the foundation of the U.S. economy. Instead of expanding access to credit and easy money, savers and investors provide real capital to free enterprise and the marketplace. However, due to the present state of monetary policy, people consume more than they save because what would be the point of savings if the currency’s value is eroded and interest is a penny on a $100 cash deposit?
For decades, the interest rate and money supply have been dictated by the supposed smartest men and women at the Fed. This is wrong because interest rates are supposed to be determined by the market. If not, it leads to serious distortions in the economy and resorts to the booms and busts.
Why should interest rates be established by the market? Let us permit Murray N. Rothbard to explain from his groundbreaking book “America’s Great Depression”:
“The proportion of consumption to saving or investment is determined by people’s time preferences – the degree to which they prefer present to future satisfactions. The less they prefer them in the present, the lower their time-preference rate be, and the lower therefore will be the pure interest rate, which is determined by the time preferences of the individual in society.”
Essentially, a lower time-preference rate would equate to lower interest rates, while a higher time-preference rate would lead to higher interest rates.
By artificially interest rates causes the market to invest too much in capital goods. The boom part of the business cycle is then considered to be a time of misinvestment and, therefore, a recession/depression is needed to readjust, liquidate and correct the errors of the boom period. In other words, the competent businesses take over from the incompetent enterprises.
Here is another important explanation by Rothbard:
“If businessmen are misled into thinking that less capital is available for investment than is really the case, no lasting damage in the former of wasted investments will ensue.”
If confirmed, Yellen would succeed Ben Bernanke and take the reins of the Fed on Jan. 31, 2014.