Why Interest Rates are Important but not for the Reasons Commonly Assumed
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This small tweak to money creation has profound consequences on current economic theory, especially the established idea of low interest rate leading to high growth with low inflation and higher interest rates curbing both growth and inflation. In fact the higher lending rate the more money is created. This goes to explain why most of the western economies have seen very low growth since the 2008 crisis and at the other extreme why the UK's 1980 experiment in monetarism ended in failure. I explore the full consequences of this in my own book An Interesting Theory -Why Interest Rates are Important but not for the Reasons Commonly Assumed which can be down loaded from the Smashwords web site- https://www.smashwords.com... . As with these things you do have to register but you will be able to get the book free before the 1st January 2017 by using the code TU92S.
I would like to hear comment especially if is novel
To address the point you want to make about growth and money supply, analysis of official data shows a link between the two. The mechanism I believe lies in that well-worn description of inflation where it is described as too much money chasing too few goods. Another way is to look at it as the balance between the volume of goods and the volume of money available. As already stated inflation may result when there is too much money but what happens if there are too many goods? Deflation. This may be beneficial if results from a new process or currency fluctuations but it allows little room for a new product or service. In the stable example you give the money circulates between the factories and farms would end up covering little more than replacing the worn out goods or the basics, as by the terms of inflation described above any significant surplus would lead to inflation. Of course there will be some savings but any factory producing new goods would service a very small part of the population leading to low linear growth. More akin to a soviet system rather than the exponential growth we have recently seen in either western or Asian economies. Put another way if deflation is the result of increasing supply where is the incentive to grow a business if it results in no significant increase in revenue.
The example given does not even take into account of the complexities of a modern economy. We may have a limit to the amount of stuff we want, although fashion mitigates this but when it comes to services which make up 70% of many western economies the sky is the limit. Given the chance who would not want more holidays, more nights out, more experiences and because of this the growth of the service sectors is very responsive to more money.
If the money supply stays the same but prices deflate, then there is plenty incentive to grow a business as your revenue does increase. Nominally it stays the same, but really that company would have earned more money. No one cares about their nominal worth in Yen, Yuan, Pesos, or Dollars, but the spending power.
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