Praxeology in Current Affairs
Short notes on economic news from Europe (EU), with references to the chapters of the books and the Glossary terms that explain them.
Praxeologos
Short notes on economic news from Europe (EU), seen through the lens of praxeology. Each note refers to the chapters of the books and the terms of the Glossary that explain the topic.
The Price of Time, by Decision of a Meeting
What happened. On October 29, the Governing Council of the European Central Bank left its three key interest rates unchanged: 2.50% on the deposit facility, 2.65% on the main refinancing operations, and 2.90% on the marginal lending facility (ECB). The same day, Christine Lagarde announced that she will step down as president on February 7, 2027, instead of in October 2027, when her term ends; her successor will be appointed by the European Council (CNN Greece, ECB). The decision was taken while consumer prices in the 21 countries of the euro area were 3.8% higher in September than a year earlier (Eurostat).
The praxeological view. The interest rate is not a technical lever; it is the price of time. It tells how much more a good today counts for each of us than the same good a year from now, and at this price those who can wait and save meet those who need resources now in order to produce later. Murray N. Rothbard, in Man, Economy, and State, leaves no room for any third party:
“This pure rate of interest, then, is determined solely by the time preferences of the individuals in the society, and by no other factor.”
The time preferences of millions of people cannot be summed up in a single number decided every six weeks. The central bank does not know them; it sets only the terms on which it lends to the banks and accepts their deposits, and through these it pushes the cost of borrowing in 21 countries. When the interest rate is held lower than real savings would set it, credit expansion sends the wrong signal to every entrepreneur who is planning an investment:
“The banks’ credit expansion had tampered with that indispensable ‘signal’—the interest rate—that tells businessmen how much savings are available and what length of projects will be profitable.”
The projects started on the strength of that signal are the malinvestments of the boom, and Ludwig von Mises, in Human Action, describes how the story ends:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion.”
And the cost is not shared equally. The new money reaches the banks and those who borrow from them first, and the wage earner, the pensioner, and anyone who holds cash last (Cantillon effect). As Murray N. Rothbard puts it in What Has Government Done to Our Money?, inflation is, in effect, “a race—to see who can get the new money earliest.” The saver sees it in his account: if prices keep rising at September’s pace, even the 2.50% that the ECB pays on the banks’ deposits stays below their rise, and a euro that waits a year buys less.
In February a new face will take the top job at the ECB. But the question is not who will set the price of time; it is why anyone but those who save and borrow should set it at all.
See also: Murray N. Rothbard, What Has Government Done to Our Money?, section “Central Banking: Directing the Inflation” — Glossary: time preference · pure interest · business cycle · fiat money — Map of Ideas: interest