'Base interest rate' and capitalism
I'm trying to find out how/why this is used but i can't find anything beyond 'the bank of england changes to base rate to affect things like inflation'. What exactly does the base rate 'do'? Also id always regarded capitalism as being ultimately about self-perpetuation/regulation, ie without statist control (ideally).
In a system like anarcho-capitalism i assume central bank control is redundant, so im confused about what the role of central banks actually is. Surely it would be better for every private bank to issue its own currency? (that was affected by consumer confidence in each bank concerned) |
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You do realise we don't have an anarcho-capitalist system, right?
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because you can not accept 2 truths: 1) your brain can not understand all that is 2) because of this you crave (like an addict) simplicity |
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What are you asking? Central banks generally do various things, like controlling the money supply and bailing out other banks if they get in trouble in a way which is going to damage the economy. Obviously there wouldnt be a government mandated central bank if you had anarchy, but there could still be a de facto bank which acted as the centre if the private banks thought this would be a useful thing to have.
http://www.federalreserve.gov/moneta...scountrate.htm = base interest rate |
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I wasn't aware central banks had any kind of duty to bail out private institutions , surely something like Enron or WorldCom were as detrimental to the economy as say an insolvent bank (and bearings wasn't bailed out). Basically i don't see the purpose of central banks, if you want 'currency' to be controlled by states they make sense, but in the absence of that i don't see why every bank shouldn't issue its own currency. edit having read that i disagree with the notion of a 'discount window' on general principles :( |
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Apparently the laws are severely restrictive. In scotland and NI private banks issue currency but they don't control it, its issued only with the agreement of the Bank of England. I agree with the idea of 'free banking' and would wish that to be re-introduced. Anyone who lost 'value' to shoddy people would only have themselves to blame. |
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Aside from currency issues, the Bank of England is the lender of last resort. The reason why you don't get It's a Wonderful Life type scenes all the time (well, not in the UK/US anymore) because even if Barclays "ran out of money" then they could simply borrow from the Bank of England. (That's making a bit overly simplistic, but you get the idea).
The "base rate" also affects the yield of govt bonds and stuff, which aren't necessarily as sexy as the stuff which dominates the financial pages, but still represent huge sums of cash. |
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Also...
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"The market" in terms of equities is probably less than a million people (in decision making terms). In terms of major volumes, I don't know, maybe it's 50k fund manages globally plus 100k other random brokers plus 50k investors playing with sums of more than £10m privately. So when they say "the market kept it's head" they're talking about smallish numbers of people. However, if the general public lost confidence in the banking system (e.g. Barclays went under) and everyone started withdrawing their savings the economy would be ****ed very very quickly. Fortunately no-one has savings in the UK/US anymore and you don't really have a choice about getting paid in cash, but the general principle applies. |
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Sorry, I was hoping for something more profound. :(
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This means that the CB has to carefully guard it's currency from the mentioned speculative attacks, ensure nobody goes Germany and prints millions, and such. Quote:
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To summarise (and thus wade in the glee of simplicity); Effectively, the "cash rate" is the rate at which the Reserve Bank lends money to all other financial institutions for overnight loans; its a huge huge sum of money and happens every day. Then, whilst private banks are not forced to, they tend to charge a higher rate to customers who borrow from them and a lower rate to customers who deposit with them, thus giving profit margins that (along with other activites) for a large percentage of a private bank's profits. Because Australian Dollars are the only legal tender in the Commonwealth of Australia and its Territories, the Reserve Bank has a position of power as they are the only legal authority who are permitted to "print money". The cash rate is determined by a government-independent board of directors at the Reserve Bank, so whilst its a "government institution", its not controlled by "the Government" - appointments of chairman et al aside, the Government cannot intervene and stipulate what the cash rate should be changed to. Anyway, as i understand it, that cash rate is achieved through normal open market operations; if the rate is rising, the Reserve Bank "prints" money to bring the rate down to the (pre-established by the Board) level, else it "destroys" money if the rate is too low, thus bringing it up. However, that's at the theoretical level, i would imagine that in the 'real world' the bank would effectively declare what the rate actually was and then everyone else would follow suit; the wonders of the expectations based economy that nodrog was refering to with regards to what money actually means these days. Other things that the Reserve Bank does is advise on prudential issues (like having minimum reserves of hard currency) and the like. So, effectively, the Reserve Bank uses the cash rate to influence the private banks et al to keep inflation within a manageable level to the extent that it is able in order to promote prosperity. Quote:
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nope
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OK - no reason you would have and you'd probably hate it* (80's leftist school of tv drama, minus the grit). It's just that one of the characters says pretty much exactly those words when trying to explain in laymans terms why the system is a bit of a sham.
I'm sure tonnes of people have thought/said the same thing but I was curious if it was an unconscious quote or whatever. * Everyone else should watch it though, it's pretty good given that it was both an ITV show and was made in the 1980's. |
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I guess it's quite like with the European Central Bank in Australia too, just that I haven't heard that there'd actually be destruction and printing of money happening as tools of fiscal policies here. I reckon, if ECB doesn't include printing and destroying money as "normal open market operations", but if they feel the interests are going too high, they'll increase money supply by reducing the marginal lending facility, and vice versa. |
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It'd be too much fun ;). But storing the money wouldnt work; it would still "exist" in the financial system, and thus the expecations that it would be used, and thus doing nothing to alter the cash rate. I suppose, however, the Reserve Bank may choose to remove the currency from domestic circulation by exchanging it for foreign reserves or through bonds, but regardless its effectively meaningless how it is done theoretically; the important (practical) consideration is that the central bank declares what the cash rate is, and all financial institutions take this as a given, and then act in the economy. I would imagine that for all practical purposes, the Reserve Bank of Australia is effetively the same as the European Central Bank, the Bank of England, the US Federal Reserve et al. Mainly because they are expected to do the more or less same things in the more or less same way in the same financial system, so fundamentally they are the same thing. |
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Well obviously there is some re-issuing / destruction of physical currency, simply at a rate to make counterfitting sufficiently hard to be uneconomic. But as mentioned, that's only a tiny % of the overall supply.
Having said that, it's still important. There's probably some research on this already but I'd assume once you reached the stage where more than 5% of (physical) currency was forged you'd start seeing serious side-effects to the economy (i.e. people using dollars instead of your currency or whatever). |
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5% of physical currency is a HUGE amount though. In any given week I expect I go through about 10-15 banknotes (eg changing a £20 into a £10 and a £10 into a £5 is 3 banknotes).
I've only ever seen one forged note in my life. Now it could be argued that I'd seen more, but they were so professionally done that I didn't realise. I doubt the actual amount of real forged currency floating around the economy is more than 0.001% though. Obviously I've picked that figure off the top of my head, but then that's the most fun form of statistics :) |
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OK, it would very quickly become pointless but presumably trying to reproduce a random Latin American peso is much easier and less risky than going for dollars* / Euros / sterlings or yen. The rate of conversion would be terrible, but you'd be able to get it back into "real money" eventually. * Although I'm assuming here that it's only US Currency counterfitting the US Secret Service investigate in any real depth. edit : As you imply, starting from a position where you assume you'll recognise a well forged note is probably dodgy. Until about 2 years ago I thought I had never seen an undercover cop, whereas upon thinking about it, that's nonsense. |
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http://en.wikipedia.org/wiki/Gresham's_Law |
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Elsewhere it's not so clear cut. And if confidence in your own currency was falling (for whatever reason - uncertain political future, inflation, counter-fitting, chance of government default) then where possible you'd go for non-native currency, worsening the problem. In this country we're more likely to be stuck with sterling for longer - but given the large exchange of people with the continent I suspect Euro's will be more common over the next few years. (I did also recently meet a fellow the other day who spoke excitedly about a deal he had exchanging some scrap metal for drugs, although I confess that's hardly likely to become the norm...) p.s. Do you still have pound notes in Scotland? I vaguely remember them being withdrawn as a child in England and being under the impression that all notes were to be abolished. |
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And yeah, we still have pound notes sadly |
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And if I was really worried about getting dodgy fives, why wouldn't I avoid spending (say) £4 and then paying with a tenner (or other situations where I'm likely to get a fiver). Cash machines could be set up to give out fivers I guess, but aside from that, enforcing people accepting specific legal tender seems a bit practically difficult. |
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