Many people consider monetary reality as “given” around the globe because they enjoy less liberty to monetarily associate in a society. Thanks to the central banking system which robs a man of his capability, ability and frugality (for example: banning the use of crypto-currencies like bitcoins, etc indicate devilish motives of the “higher” authorities). There is always an “other” story, behind what you perceive. Read my previous article: Monstrous policy.
This article is an endemic approach to classify the declassified study on the banking economics of interest rates and elaborates unseen implications of it in our Indian economy. To begin with, compared to Dr. Raghuram Rajan, other central bankers of India are not even worrying to entertain any “critical” questions of competence of their [imbecilic] monetary policies. Notwithstanding his questioning of interest rate policy, our RBI governor remains an ignoramus about the subject in terms of inflation and mondustrial policy. (Mondustrial policy is a fusion of “monetary policy” and “industrial policy”. It describes the Fed’s creation of “new” money during the 2008-2009 financial crisis in order to rescue certain firms, such as Bear Stearns and AIG, and certain markets, such as commercial paper and money-market mutual funds, at the expense of others, by purchasing securities and making loans. A term coined by John Taylor, a Stanford economics professor and developer of the Taylor Rule to guide interest-rate policy. The term describes the Fed’s management under Ben Bernanke’s leadership of the 2008-2009 financial crisis, which Taylor views as excessively interventionist. Taylor was also concerned about the future effects of this policy. Source: Investopedia.com)
First, you have to resuscitate and understand that the market rate of interest is not just one monetary variable which RBI governor can “arbitrarily” determine at his own whims. Interest rate is one of the [most] “important” price phenomena. It is a price of time. It is determined by the societal time preference – the ratio of consumption to saving – at a given point of time. It “signals” entrepreneurs in determining whether they should allocate more resources in producing present consumption goods i.e., consumer goods sector or in future consumption goods i.e., in capital goods sector. The interest rate is determined by the market forces of demand for loanable funds and supply of those funds. This demand and supply in turn are determined by consumption and saving preferences – satisfaction in present or future – of societal members i.e., societal time preference rate. Any interference by the monetary authority, i.e., the central bank, in the name of bringing equilibrium, in this market process, will establish distortions in the consumption and production goods industries. For example: If the central bankers keep the market interest rate lower – by creating artificial credit via money printing – than its natural level as determined by societal time preference rate, then, it will generate a boom mostly in the capital goods industry. This boom will be unsustainable, because it is not backed by genuine “real” savings. It is a product of central bank’s cheap phony credit. As the boom progresses, it generates price inflation. Because consumer goods production is taking place slowly due to more resource allocation in the capital goods industry, increased income and demand for consumer goods by workers will lift prices. This price inflation will accelerate as the central bank pumps more money to keep the artificial boom going. When the price inflation goes out of hand and becomes unbearable for people and government, central bankers will have to stop their money tap. Central bank will start raising the money interest rates to arrest the rising prices, and the moment they will start raising interest rates, it will bust the prior artificial boom; economy enters recession. Recession starts to liquidate prior malinvestments. Malinvestment is a mistaken investment in wrong lines of production, which inevitably lead to wasted capital and economic losses, subsequently requiring the reallocation of resources to more productive uses. As it liquidates the malinvestments, formerly employed people in the capital goods industry will lose their jobs temporarily when the economy is adjusting.
Second thing is that you also have to grasp that Government and Central Bank DO NOT deal with monetary policy. The so called “money” or “currency” issued by the government and managed by their Central Banks are not money at all. Historically, during the World War I and World War II, the governments everywhere decided to simply print paper currencies and fraudulently refused to back it by gold or redeem gold which was why the paper currencies were accepted as a medium of exchange in the first place. Meanwhile, they ran propaganda against gold standard and this lead me to conclude that they are also aurophobic. Economics knowledge deficiency (EKD) among us is one of the cause behind unrealizing the real crisis that began with the monarchs and governments taking control of the minting of money and started establishing a hold over monetary affairs of the nation state that they ruled. This monopoly over the issuing of money allowed them to take control over banking as well. Now, the governments could control all economic affairs by: (i) direct intervention, by banning trade of certain goods or activities of certain traders (ii) direct intervention, by applying or raising taxes on trade of certain goods or individuals and (iii) indirectly, by robbing individuals of their earnings by inflating the money supply which decreases the purchasing power of their currencies.
With the monopoly over money and banking, the governments got their hands on another important aspect of trade and commerce: the rate of interest. To my knowledge, Dr. Rajan suffers from “apoplithorismosphobia“. (Apoplithorismosphobia: Fear of deflation).