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how can there be shortages in a free market?

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  • how can there be shortages in a free market?

    There is a shortage of short term money...so why don't interest rates rise until there is no shortage? Commercial paper isn't being done, for instance. And interbank lending is not being done as much because of fear.

    So why don't those rates between banks rise to meet the risk?

    In 1907 there was a panic. And liquidity dried up. Securities were purchased on callable loans and the loans were called.

    But some people lent at 30% or 40% or 100% interest. Money was available to some who could pay.

    Same dealio with today's gold and silver. You're telling me that there is a silver and gold shortage...so why doesn't the price rise until there is equilibrium between buyers and sellers and plenty of gold and silver to be purchased?

    What doesn't add up here???

  • #2
    Re: how can there be shortages in a free market?

    I'm sure I'm missing something, but here is a stab at it:

    Okay, so the banks set interest rates to 40%. Lots of people deposit money, eagerly looking forward to their nice 20% returns.

    ...and no one takes out loans, due to the high interest rate and shaky economy. People who do want loans are denied as they are deemed too risky.

    The bank finds itself is a bunch-o-trouble, unable to pay the interest they promised.

    On the other hand, that would give the fed an opportunity to inject money into the system. They could cover the difference at the banks. Savings rates in the US would go up at a rate nearly matching inflation, giving people more incentive to save money.

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    • #3
      Re: how can there be shortages in a free market?

      Originally posted by grapejelly View Post
      Same dealio with today's gold and silver. You're telling me that there is a silver and gold shortage...so why doesn't the price rise until there is equilibrium between buyers and sellers and plenty of gold and silver to be purchased?

      What doesn't add up here???
      Have you ever tried to eat gold? It's not very filling. I think you are better off buying tins of tuna. At least you have something to eat when the end of the world arrives. Other than that, the problem with gold and silver is that there aren't enough nuts out there to keep the demand high enough for rising prices.
      One day the gold bugs are going to figure out that the fact that only nuts buy gold is exactly why it won't be the next reserve currency.

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      • #4
        Re: how can there be shortages in a free market?

        Originally posted by bam View Post
        Have you ever tried to eat gold? It's not very filling. I think you are better off buying tins of tuna. At least you have something to eat when the end of the world arrives. Other than that, the problem with gold and silver is that there aren't enough nuts out there to keep the demand high enough for rising prices.
        One day the gold bugs are going to figure out that the fact that only nuts buy gold is exactly why it won't be the next reserve currency.
        Sushi + gold = $ 1.000 :eek:

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        • #5
          Re: how can there be shortages in a free market?

          Originally posted by grapejelly View Post
          There is a shortage of short term money...so why don't interest rates rise until there is no shortage?
          Because there is the Fed and the Treasury to disturb everything.

          Note however that interest has two components:

          1. Time value of money
          2. Risk of default

          If 2 dominates interest rates rise exponentially without limit. In other words at one point someone does not want to lend his money for any rate of interest.

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          • #6
            Re: how can there be shortages in a free market?

            Originally posted by bam View Post
            Have you ever tried to eat gold? It's not very filling. I think you are better off buying tins of tuna. At least you have something to eat when the end of the world arrives. Other than that, the problem with gold and silver is that there aren't enough nuts out there to keep the demand high enough for rising prices.
            One day the gold bugs are going to figure out that the fact that only nuts buy gold is exactly why it won't be the next reserve currency.
            Some good points.

            I rather stick to uranium right now as the spot price is now under $50!

            It is not the end of the world and nuclear will play a bigger role in the future. And in case it happens to be the end of the world, then, well then we are all f*cked so then gold or dollars won't do any good either.

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