Econintersect: Richard Werner, proofitfund.com investment advisor, says that you should throw away your economic textbooks. The idea that interest rates control economic activity is entirely wrong. It is a theoretical construct that is contradicted by empirical data. Werner says the problem derives from the assumption of economic equilibrium and the construction of macroeconomic supply and demand curves for money.
[Two part video interview after the Read more >> jump.]
The reality that has empirical support is that interest rates follow economic activity. Once the economy strengthens interest rates rise. After the economy weakens interest rates fall. Werner says that erroneous assumption of supply and demand curves for money obscures the truth that supply of money is economically limiting. Demand for money always exceeds supply and there is never an equilibrium.
Bloomberg interview, part 1.
Bloomberg interview, part 2. Here Werner explains why traditional money (M1, M2 and M3) have no relationship to economic activity. He says economic activity is virtually all driven by credit creation by central banks and the banking sector.
Hat tip to Roger Erickson.
