"...Conclusions
Now that we have an understanding of the how and the why Gibson’s paradox no longer applies, we can assess its importance in a new light. A central point in understanding what the paradox tells us is that monetary policy will never achieve its objective, if that objective is to somehow manage aggregate demand by varying interest rates.The function of interest rates is misunderstood. They cannot be used to regulate overall demand for money, they only regulate its use. In this way, monetary policy distorts the economy. Suppressed interest rates encourage businesses to invest in projects that cannot be sustained when interest rates are normalised. Raising rates shifts the businessman’s calculations, forcing him to abandon projects that appeared profitable at lower rates. In theory, raising and lowering interest rates only leads to shifts in productive processes, whose profitability is measured against known factors, including the general level of prices and current borrowing costs.
But by setting a credit cycle in motion, central banks end up having to raise rates to economically destructive levels when price inflation accelerates. This is why credit cycles have always ended in crisis. It is as if by using interest rates as a tool of economic management central banks only have an on-off switch, not a rheostat that can vary the current applied.
Since 1975, manufacturing has become a diminishing component of credit-driven economies. Debt is now taken up by governments, consumers, and a financial sector that feeds on monetary expansion.
Gibson’s paradox is now explained and is no longer a paradox. The relationship between bond yields and the general price level in the context of manufacturing still exists. It has only been buried, because manufacturing has become a minor part of the modern economy. The saver is euthanised, and private sector wealth has become overly-dependent on financial speculation.
It will not end well.""
