The reserve-ratio on deposit accounts is normally set by the Finance Ministry (Treasury), who should be able to anticipate when the stock-market is close to a sudden large drop in value. Unfortunately, the simulation methods for macro-economic forecasting have not achieved much success in showing when the land-market price-failure is about to occur (and as described above, its cause being due to a small random shock after a steady rise). The only method of slump anticipation which seems to work is to base them on an 18 year cycle, as claimed by the Georgist organizations, who understand better about how land-values vary [3]. However, neither the banks nor the Government are convinced of this and in common with other forecasters they cannot yet determine how big the effect of a particular slump will be.
The Treasury could instruct the banks on the necessary adjustments to be made to the reserve-ratio, but this is difficult to administer due to the technical problem of not knowing exactly the amount being held in the money reserves and the various sums and durations of the very short-term credits that the bank often use. Also, due to other smaller macro-economic regressions, it is hard to anticipate and identify which one is likely to be significant and how to frame the necessary legalisation.
3.4.2 The Reduction of the Prime-Rate of Interest
The theory behind this applies to the current group of national bond-holders (and indirectly to other savers too). After their effective interest rates have been cut, it becomes less worth-while for this group to invest in the Government bonds and they will be more inclined either to put the money into durable capital goods through the stock-market or to spend more on consumption; activities which are helpful in strengthening the demand and raising the amount of economic activity. Since the bonds for the National Debt are continuously being returned and re-issued, the effect of making a reduction in the rate of interest is likely to felt quite fast. The other group of investors, previously described as nervous, is encouraged to withdraw their liquid assets (see above) due to the greater security offered by the low-interest bonds. However, three aspects in adopting this policy are of significance.
Firstly, it relieves some of the Government's (and tax-payer's) burden in servicing the national debt, thereby helping to balance the loss of national income due to the lower production activity. The Treasury wants to have as low a prime-rate of interest as possible, in order to reduce the interest leaking from its income. It can exploit the advantage of the greater security that the bonds offer compared to the average rate of yield obtainable by alternative investment. In times of slump the
level of confidence of the investor in the stock-market is low, as well as the average obtainable yield. Consequently, even without the above considerations the prime-rate can be cut back. With investor nervousness being felt, this rate can be reduced to even smaller levels.
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