Scott Sumner responds

But my bigger problem is Karl’s claim that interest rates are of more interest to the average business owner than the monetary base.  Suppose Karl and I both looked into a crystal ball and saw that the fed funds rate would be 12% in 2014.  From Karl’s post, I infer that he’d advise that small businessman to hold off on the investment project, as the cost of that floating rate business loan would soar in 2014.  I’d have the opposite reaction.  I’d beg, borrow, and steal every penny I could get my hands on, and pour all the money into REITs.  That’s because the 12% rate in the crystal ball would tell me I am wrong and Bob Murphy is right—that the inflated monetary base is going to drive inflation and NGDP dramatically higher in 2014, forcing the Fed to raise rates sharply in order to hold inflation down.  I see that as incredibly bullish for real estate.

If you don’t know anything about the world then interest rates aren’t really helpful. However, one of the premises behind a world of differentiated businessmen and women is that they actually do know something about their business.

For example, I know unless something awful happens to the temperature there is some macro economic catastrophe, nominal residential rents in the Raleigh-Durham area will rise steadily over the next decade. I could cash in on this by investing in residential real estate. However, to do this I have to convince a bank to go for this and to that they mainly have to be convinced that their money won’t have commanded a higher price somewhere else.

This is what I mean, people have relatively good information about the dynamics of their local nominal revenue streams. Absent guidance from financial markets and hence the Fed they have absolutely no idea what the economy wide price of funds will be.

To put it another way, if gold were unloaded at the docks and then spread vendor to vendor throughout the country with no one knowing in advance when the mass of specie would hit then hearing that a wave was coming would be the best information that you could get.

However, in practice money leaks out of the bond market running all over the country at once through channels determined by the financial markets. In that case information on the prices of financial products – and the interest rate is just the price on bonds – is more useful to you.

Now, to be sure, I think that the most complete information the Fed could provide would be something like: We intend to hit 20 Trillion in Nominal GDP by 2017 and we predict that will require zero interest rates through 2014.

Implicit, however, is the message that you will be getting more nominal GDP come hell or high water, we are just letting you know what we think the interest rate path will be.

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