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Articles, Authors

Third Daily Bell Interview
The Daily Bell is pleased to present this exclusive interview with Antal Fekete.
Author: Prof. Antal E. Fekete

Daily Bell: Mises definitely did not believe that deflation could occur during a money-printing episode such as the one we are experiencing right now. Could you revisit this topic and make the process clearer? How does "economic resonance" affect interest rates?

Antal Fekete: As money flows from the commodity market to the bond market, commodity prices fall along with interest rates (because bond prices rise). Under a gold standard this process would be stopped sooner or later as commodity prices cannot fall to zero. Under our global fiat money experiment, however, the central bank is compulsively halving interest rates again and again, unwittingly causing further price declines in the commodity market. There is a vicious downward spiral in operation: falling commodity prices chase interest rates lower, and falling interest rates chase commodity prices lower. It is crazy. It is unbelievably stupid, but there it is. Everybody is expecting hyperinflation, but what we are getting is hyperdeflation.

Daily Bell: You seem to believe that the velocity of money is entirely a monetary phenomenon. Misesians tend to believe that falling monetary velocity has to do with lack of demand because economic vitality is distorted by central bank money printing. Which is it? Or is it both?

Antal Fekete: Arguing in terms of a lack of demand is a Keynesian trait. I dislike arguing in terms of the velocity also. Mises once said that the velocity of money is always zero, period. At any one moment in time money is in the cash-balance of someone, sitting there with zero velocity. I think the correct approach to the deflationary spiral is through arguing in terms of resonance between oscillating commodity prices and oscillating interest rates. Mainstream economists do not understand speculation. Post-Mises Austrian economists are no better at it. Risk-free speculation in the bond market explains everything without a hitch.

Daily Bell: Please explain.

Antal Fekete: Speculators know full well that the central bank is buying bonds hand over fist. They can also time the central banks purchases pretty accurately. In fact, central bankers shout from their rooftops about QE and other imbecile tricks. They even give the timetable for the scheduled purchases away. Speculators react by pre-empting central bank purchases. They simply buy the bonds beforehand. True, sometimes the central bank falsecards. But it cannot fool speculators who risk their own capital and face hired hands of the central bank in the poker whose losses are automatically charged to the public purse. The result is that speculators have a free ride. They profit without taking any real risk. They win big, and the merry-go-round keeps running out of control.

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