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Presented by: Dr. Frank Shostak, Chief Economist Foresight Research Solutions, LLC

THE MYTH OF THE NEUTRAL INTEREST RATE. Presented by: Dr. Frank Shostak, Chief Economist Foresight Research Solutions, LLC 245 Park Avenue, 39 th Floor New York, NY 10167 (212) 803-8130 www.foresight-research.com. Dr. Frank Shostak.

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Presented by: Dr. Frank Shostak, Chief Economist Foresight Research Solutions, LLC

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  1. THE MYTH OF THE NEUTRAL INTEREST RATE Presented by: Dr. Frank Shostak, Chief Economist Foresight Research Solutions, LLC 245 Park Avenue, 39th Floor New York, NY 10167 (212) 803-8130 www.foresight-research.com

  2. Dr. Frank Shostak Dr. Shostak has over 25 years experience as a market economist, central bank analyst, and economic modeler. His coverage ranges from analysis of stock and bond markets to thoughts on currency and commodity movements. Dr. Shostak is highly regarded among the financial community for his economic framework, which places heavy emphasis on monetary data and its effects on financial markets. He has been published in the Asian Wall Street Journal, The Washington Times, The Australian Financial Review, and The Journal of European Political Science. The Myth of the Neutral Interest Rate

  3. Disclaimer Foresight is an independent research firm registered as a securities broker-dealer with the National Association of Securities Dealers and the U.S. Securities and Exchange Commission. Foresight is also registered as a broker-dealer various states in accordance with applicable state laws, and operates under state registration exemptions where applicable for advisers providing advice solely to institutional clients. The material provided in this publication is for general informational purposes only and has been prepared from sources and data we believe to be reliable, but we make no guarantee as to its accuracy or completeness. We cannot and do not guarantee the adequacy, accuracy or completeness of any such information, or the suitability or profitability of any particular investment. This publication does not consider the specific investment objectives, financial situation, or particular needs of any specific person. Accordingly, you bear responsibility for your own investment research and decisions, and should seek the advice of a qualified securities professional, and perform your own due diligence, before making any investment. Any sale or purchase of securities or ownership interest that results from information presented herein will be on a negotiated basis between third parties, without any additional participation by or remuneration to Foresight. No information in this or any of our other publications is intended as tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as a sponsorship of any company, security, or fund. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance of any investment. Information, opinions and estimates contained in this publication reflect a judgment at its original date of publication by Foresight, and are subject to change without notice. The price, value of and income from any of these securities or financial instruments mentioned in this publication can fall as well as rise as a result of a host of factors including, but not limited to, economic, financial, and political factors, interest rates, stock market volatility, commodity price and exchange rate movements, weather, regulatory changes, changes in credit quality, acts of God, or terrorist activities. Certain members of Foresight may have relationships with broker-dealers, registered investment advisers, or money management firms. These entities may have clients with positions in various securities. Certain of these entities trade for their own accounts and distribute or provide placement of securities. In connection with these endeavors, the members of Foresight may control investments and provide investment advice to clients and make investments in public or private securities. Foresight and its members may directly own and trade public and private securities for their own personal accounts. The securities with respect to which such affiliated persons or entities engage in trading, placement, investment, advisory or other activities may be the same as, or different from, the securities discussed from time to time in this publication; and the investment or trading strategies engaged in by those persons or entities may be the same as, or different from, the strategies discussed from time to time herein. The Myth of the Neutral Interest Rate

  4. Wicksellian Process of Price Inflation Downward pressure on prices Money Market Rate NATURAL RATE Upward pressure on prices Money Market Rate The Myth of the Neutral Interest Rate

  5. The ideal setup THE ECONOMY IS PERFECTLY BALANCED MONEY MARKET RATE NATURAL RATE = The Myth of the Neutral Interest Rate

  6. Wicksellian Natural Rate Supply of Real Capital Demand for Real Capital = NATURAL RATE The Myth of the Neutral Interest Rate

  7. Dichotomy Between Financial & Real Markets Supply of Money Demand for Money Supply of Real Capital Demand for Real Capital = = Money Market Interest Rate Natural Rate The Myth of the Neutral Interest Rate

  8. Wicksellian Monetary Policy PRICE LEVEL Money Market Interest Rate Money Market Interest Rate PRICE LEVEL The Myth of the Neutral Interest Rate

  9. Meaning of Time Preference PRESENT DOLLAR BENEFITS SAVED DOLLAR COSTS (FUTURE DOLLAR) The Myth of the Neutral Interest Rate

  10. Interest Rate Calculation Dilemma in World Without Money ONE PRESENT APPLE INTEREST RATE TWO FUTURE POTATOES Exchanged ? INTEREST RATE ONE SHIRT THREE FUTURE POTATOES Exchanged ? The Myth of the Neutral Interest Rate

  11. Money Economy TEN LOAVES OF BREAD TEN DOLLARS The Myth of the Neutral Interest Rate

  12. Loan Market BAKER SHOEMAKER Lending = $10 Requires minimum return of 5% Borrow = $10 Will Borrow at a maximum rate of 15% Therefore, BAKER requires minimum return of $10.50 Therefore, SHOEMAKER willing to repay maximum $11.50 The Myth of the Neutral Interest Rate

  13. Loan Market (cont’d) Baker Lends Baker Receives $10 PRESENT for $11 in FUTURE Interest Rate of 10% Shoemaker Borrows Shoemaker Pays $10 PRESENT for $11 in FUTURE Interest Rate of 10% The Myth of the Neutral Interest Rate

  14. Benefits $11 in FUTURE is more valuable to BAKER than $10 at PRESENT $10 at PRESENT is more valuable to SHOEMAKER than $11 in FUTURE The Myth of the Neutral Interest Rate

  15. Joint Outcome Demand/ Supply of Money Time Preference INTEREST RATE The Myth of the Neutral Interest Rate

  16. Targeting Money Rate at the Natural Rate MONEY MARKET RATE NATURAL RATE The Myth of the Neutral Interest Rate

  17. Gainers from loose monetary policy Increase in 1st receivers’ wealth Money Supply 1st receivers of Money Decline in time preference Supports low interest rates The Myth of the Neutral Interest Rate

  18. Loose Monetary Policy & Pattern of Consumption Buy more luxury goods 1st receivers Producers Change in production structure The Myth of the Neutral Interest Rate

  19. Losers from easy monetary policy Last receivers of money Money Supply Prices Rise Rise in time preference Upward pressure on interest rates The Myth of the Neutral Interest Rate

  20. Maintaining Low Interest Rate Target CENTRAL BANK MONEY SUPPLY Sustain low interest rates The Myth of the Neutral Interest Rate

  21. Maintaining Low Interest Rate Target CENTRAL BANK Last recipients 1st recipients The Myth of the Neutral Interest Rate

  22. Boom-Bust Cycles Money Supply Central Bank Interest Rates Boom-bust Cycles The Myth of the Neutral Interest Rate

  23. Free Market vs. Hampered Market Cannot be neutral CENTRAL BANK POLICIES Redistribution of wealth No coercive redistribution of wealth FREE MARKET The Myth of the Neutral Interest Rate

  24. Fed Manipulation in Action The Myth of the Neutral Interest Rate

  25. Impact on Money FMS The Myth of the Neutral Interest Rate

  26. FMS and Nominal Economic Activity The Myth of the Neutral Interest Rate

  27. FMS and Future Economic Activity The Myth of the Neutral Interest Rate

  28. Fed and Price Inflation The Myth of the Neutral Interest Rate

  29. Savings Conditions The Myth of the Neutral Interest Rate

  30. Further Information • For institutional clients, Foresight’s Economic Research Suite includes: • Direct, one-on-one access to Dr. Shostak • Weekly Economic Insights reports • Discusses outlook for stock and bond markets, currencies, commodities, sectors and sub- • sectors well as other major world economies • Weekly EcoFlash report on FMS • Monthly conference calls • Customized research on regions, specific sectors • Custom economic modeling • For further information, contact Jay Sullivan: • (212) 803-8130 or jsullivan@foresight-research.com The Myth of the Neutral Interest Rate

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