Central banks should stop thinking independently from reality.

The Fallacy of Causal Confusion – ECB interest-rate independence means independence from reality – Petitio principii – The Principle of Non-Contradiction

Interest rates are not, as Lord Keynes thought (1), the price of money. (2)

Interest rates are the price spreads between the stages of production. The former is only a reflection of the latter. But it requires no Keynesian labyrinths to explain this phenomenon. (3)

When those price spreads change, interest rates should follow suit.

Not so for the European Central Bank (ECB).

ECB governor Axel Weber, central bank governor of Germany (president of the Bundesbank), says that the ECB’s monetary policy is not subject to any kind of automatic mechanism. (4)

Weber’s ECB colleague Athanasios Orphanides, central bank governor of Cyprus, even argues that interest rates are tools for promoting expansion and goes on to argue that the idea that monetary policy becomes ineffective and cannot provide expansionary impetus when the short-term interest-rate is very low, or zero, is a fallacy. (5)

Orphanides’ argument presupposes that the level of interest rates causes economic expansion, c.q. economic decline.

Orphanides attributes a certain type of effect (economic expansion, c.q. economic decline) to a subject (interest rates) which, in itself, does not cause such effects. This is the fallacy of “causal confusion” which is false, precisely because it attributes certain effects to the subject of interest rates which interest rates do in themselves not cause. (6)

Prosperity is the result of hard work, savings and/or investment. Prosperity is not the result of interest-rate manipulation or use of the money printing machine. (7)

The fallacy of “petitio principii”, otherwise known as “begging the question”, occurs whenever something which the conclusion seeks to establish (8) is being used as a premise to prove the very same conclusion. (9)

Orphanides makes an argument of the fact that there is an automatic mechanism which says that  interest rates cause expansion, c.q. decline, of economic activity.

Weber says that there is no automatic mechanism.

Aristotle’s principle of non-contradiction says that is impossible to be and not be at the same time and in the same respect.

Contrary to what many authors argue, this principle, or law, is not applicable to reality, only to thought. Thought is submitted to it. Reality is not. (10)

Orphanides’ thought contradicts Weber’s thought because they both deny the nature of interest rates.

Central banks should stop thinking independently from each other and from reality.

Ivo Cerckel
Siquijor, 13 December 2008

NOTES

(1)
Murray N. Rothbard, “Man, Economy, and State – A Treatise on Economics”, Auburn, Alabama: Ludwig von Mises Institute 2001, (originally published 1962)., p. 691

(2)
George Reisman, “Capitalism – A Treatise on Economics”, Ottawa, Illinois, Jameson books, 1998. 3rd ed., p 863

(3)
Rothbard, op. cit., p. 691

(4)
ECB’s Weber says markets will have to wait for next rate cut
AFP
FRANKFURT, Dec 12, 2008 (AFP)
http://www.zawya.com/story.cfm/sidANA20081212T074325ZAQW48/ECB%27s%20Weber%20says%20markets%20will%20have%20to%20wait%20for%20next%20rate%20cut
SNIP
Influential European Central Bank governor Axel Weber [says …]
“Our monetary policy is not subject to any kind of automatic mechanism.”

(5)
ECB confident on power to fight downturn
By Ralph Atkins in Frankfurt
Published: December 12 2008 12:35 | Last updated: December 12 2008 19:44
http://www.ft.com/cms/s/0/f0313446-c843-11dd-b86f-000077b07658.htmlhttp://www.ft.com/cms/s/0/f0313446-c843-11dd-b86f-000077b07658.html
SNIP
The European Central Bank could deploy exceptional monetary measures even if interest rates fell to zero, a senior policymaker has argued, indicating that the ECB feels it still has plenty of ammunition to fight the economic downturn.
Athanasios Orphanides, central bank governor of Cyprus, argued that “the idea that monetary policy becomes ineffective and cannot provide expansionary impetus when the short term interest rate is very low, or zero, is a fallacy.”

(6)
Juan Jose Sanguineti, “Logic”, Manila: Sinag-Tala Publishers, (first published in 1982 in Spanish by the Ediciones Universidad de Navarra), 1992. p. 170

(7)
Roland Leuschel and Claus Vogt, “Das Greenspan Dossier, Wie die US-Notenbank das Weltwährungssystem gefährdet. Oder: Inflation um jeden Preis”, www.finanzbuchverlag.de, 2006, 3rd ed.,, p. 50

(8)
Madsen Pirie, “How to Win Every Argument – The Use and Abuse of Logic”, Continuum Books, 2006, p. 123

(9)
Sanguineti, op. cit., p. 171

(10)
Fernand Van Steenberghen, (F.-X. de Guibert, ed.), Philosophie fondamentale , Longueuil, Québec, Editions du Préambule, 1989, footnote p. 296:
Contrairement à ce qu’affirment beaucoup d’auteurs, ces principes [the principle of non-contradiction, the law of the excluded-middle and the law of identity] sont des lois logiques ou des lois de pensée comme telle et non des lois de l’ordre réel.