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The "Natural Interest Rate" Is Always Positive And Cannot Be Negative
Submitted by Thorsten Polleit of The Mises Institute
The "Natural Interest Rate" Is Always Positive And Cannot Be Negative
Some economists have been arguing that the “equilibrium real interest rate” (that is the “natural interest rate” or the “originary interest rate”) has become negative, as a “secular stagnation” has allegedly caused a “savings glut.”1
The idea is that savings exceed investment, and that a negative real interest rate is required for bringing savings in line with investment. From the viewpoint of the Austrian school, the notion of a “negative equilibrium real interest rate” doesn’t make sense at all.2
To show this, let us develop the case step by step. To start with, one should make a distinction between two types of interest rates: There is the market interest rate, and there is the originary interest rate.
The market interest rate is the outcome of the supply of and demand for savings in the market place. It can be observed, for instance, in the deposit, bond, or loan market for different maturities and credit qualities.
The originary interest rate is a category of human action, saying that acting man values goods available at present more highly than goods available in the future. In other words: Future goods trade at a price discount relative to present goods. For instance, 1 US$ available today is preferred over 1 US$ available in one year’s time.
If 1 US$ to be received in one year’s time is valued at, say, 0.909 US$, the originary rate of interest is 10 percent. (1 US$ divided by 0.909 minus 1 gives you 0.10, or 10 percent, for that matter.) 10 percent is here the originary interest rate (disregarding any other premia).
The “Originary Interest Rate” Reflects a Value Differential
The originary interest rate is expressive of a value differential, which results from so-called time-preference.3 The term time-preference denotes that acting man prefers an earlier satisfaction of wants over a later satisfaction of wants.
Time-preference is always and everywhere positive, and so is the originary interest rate. This is, first and foremost, what common sense would tell us.
If the originary interest rate was near-zero, it means that you prefer two apples available in, say, 1,000 years over one apple available today. A truly zero originary interest rate implies that the actor's planning horizon or “period of provision” is infinitely long, which is another way of saying that he would never act at all but would continually push the attainment of his goals into the future.
The notion that time-preference and the originary interest rate could be zero, does not only sound absurd, it is also a logical impossibility: Positive time-preference and a positive originary interest rate are logically implied in the irrefutably true “axiom of human action.”
Human action is purposive behavior, implying the use of means to achieve ends. Action requires time (it is impossible to think otherwise). Thus, time is an indispensable and scarce means for achieving ends. As such, it must be economized, which necessarily implies that an earlier satisfaction of wants is preferred over a later satisfaction of wants.
For (praxeo-)logical reasons, therefore, time preference and the originary interest rate cannot fall to zero, let alone become negative. The implications of a negative originary interest rate cannot even be conceived by the human mind: A zero originary interest rate already implies no action ever into eternity.
Unconvincing Arguments
However, some argue that due to growing uncertainties related to longer life expectancy, people might increasingly prefer future consumption over present consumption; and that this could push time preference and the originary interest rate into negative territory.
No doubt, peoples’ time preference may decline over time, implying that savings out of current income increases while consumption declines. While time preference and thus the originary interest rate can fall, for logical reasons they cannot hit zero, though, let alone become negative.
Another argument refers to the issue of “saturation” and runs as follows: Let’s assume you have two apples, and you eat one of them. Your hunger is now saturated, so that you prefer eating the remaining apple tomorrow over eating it today. Doesn’t this prove that people may value future goods more highly than present goods, that time preference and the originary interest rate may be negative?
No it doesn’t. Non-consumption of the second apple today can easily be explained by the fact that the marginal utility of eating the apple now is lower than eating it tomorrow or the next day, even when the future marginal utility is discounted by a positive originary interest rate.
That said, the example above is misconstrued.4 It does not illustrate the relevant case, namely the case in which acting man considers alternative uses of one and the same good — and thus doesn’t prove at all that time preference and thus the originary interest rate can be negative.
The End of the Market Economy
What is the relationship between the market interest rate and the originary interest rate? In the loan market, for instance, the interest rate on loans is adjusted to the rate or originary interest. If, for instance, the originary rate of interest is 2 percent and the credit and inflation premia are 1 percent, respectively, the market interest rate would be 4 percent.
Market interest rates may become negative in real terms. In a “hampered market,” for instance, the central bank can push the real market interest rate into negative territory. However, this does not, and cannot, represent an equilibrium, as time preference and thus the originary interest rate cannot become negative.
Should a central bank really succeed in making all market interest rates negative in real terms, savings and investment would come to a shrieking halt: as time preference and the originary interest rate are always positive, “capitalistic saving” — the accumulation of goods designed for improving the production process — would come to an end. Capital consumption would ensue, throwing mankind back into poverty. It would be the end of the market economy.
It might be interesting to note in this context that, for instance, the German national socialists had called for the abolition, the prohibition of the interest rate. Now you know why: Without a positive (originary) interest rate, the market economy will cease to function.
The True Purpose of Negative-Interest-Rate Policy
For some reason, those who argue that the originary interest rate has become negative seem to overlook that the originary interest rate is a phenomena which is not confined to credit markets. It pervades all markets in which present goods are exchanged for future goods.5
For instance, the originary interest rate prevails at each stage of the economy’s time-consuming roundabout production. The originary interest rate also exists in the stock market, where investors exchange present money against a claim on future money (that is a firm’s dividend payment).
If they wanted to be consistent, the believers in a negative originary interest rate would have to call for a policy that does not only make interest rates negative in real terms in the credit market, but also in the markets for, say, stocks and housing.
However, a policy that advocates destroying firms’ values and peoples’ housing wealth wouldn’t be taken too kindly by the public at large; and those economists recommending it couldn’t expect being cheered.
The consequence of a policy of a negative real market interest rate should have become obvious by now: It is an actually perfidious policy for debasing the real value of outstanding debt; and it is a recipe for wreaking havoc on the economy.
Image source: iStockphoto
- 1. See, for instance, Gregory Mankiw, "It May be Time for the Fed to Go Negative," New York Times, 18 April 2009; or the talk given by Larry H. Summers at the IMF Economic Forum, 8 November 2013.
- 2. For important readings about the "pure time-preference theory of interest," see Jeffrey M. Herbener, ed., The Pure Time-Preference Theory of Interest (Auburn, Ala.: Mises Institute, 2011).
- 3. For a thoroughgoing explanation, see Ludwig von Mises, Human Action: A Treatise on Economics, The Scholar’s Edition (Auburn, Ala.: Mises Institute, 2008), Chapter XIX: “The Interest Rate,” pp. 521 – 534.
- 4. The correct example would be as follows: You are hungry and have an apple. In this case, no doubt, you would prefer eating the apple today over eating it tomorrow. In other words: You value the apple readily available today more highly than an apple readily available tomorrow.
- 5. See Murray N. Rothbard, Man Economy, and State (Auburn, Ala.: Mises Institute, [1962] 2001), chapter 6 “Production: The Rate of Interest and Its Determination,” pp. 313 – 386.
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If one invests a $100,000 in a business, he expects a return. Say 10%.
If governmnet and the Zionist banksters are stealing that 10%, and more, via taxes, regs. and printed-theft, inflation, then the business owner will have negative returns. Ditto a laborer.
Negative interest rates are just the banksters' theft dressed up as a "good for you" policy backed by the violence of government.
The banksters need to repay us.
Fraudulent-reserve banking is theft. The banksters are thieves. Guillotines are the solution.
I thought some people here where against usury? If that's the case they should really like zero interest rates.
LOL it's just a monopoly game, it can be anything we want it to be.
There is no spoon.
Fucking fuck...
I goddamned motherfucking HATE this sort of titular 'worded' headline...
'NATURAL INTEREST RATE' ~ What the goddamned motherfucking fuck?
The "natural interest rate" doesn't fucking exist [except in the minds of jew bankers]...
~~~
NIR = USURY
There's only one band of [2%] gypsies that ever in recorded annals believed in that kind of shit...
Nobody ~ Except 4 their fuckfaces, has ever benefitted from that...
Compound interest is an exponential function and we are living on a limited planet with limited resources. Natural interest rate. Incredible! How evil must someone be to claim, that interest rates were a NATURAL thing, although in nature the only thing that grows exponentially is CANCER - and how that ends everybody knows.
What this article and the evil money masters growth fetishism which Mises was an advocate of, is to make people believe that there only can be interest slavery or Communism.
But that's like almost everything from the Money Masters smoke and mirrors.
One example:
A bank can demand dividends for credit. If the first Dollar is lent into existance, it must be paid back PLUS interest - which doesn't exist. Therefore the force to exponential growth.
But that it works that way is NOT a natural law.
But who would lend money, if there was no bonus for doing so?
Answer: the question is wrong. It's a matter what the bonus is.
If I buy shares, whyt is my bonus? I am partial owner of a company. If the company makes a profit, the shares rise.
The same could be done with credit: if someone lends money, he becomes partial owner of the company. He will never receive any interest payment. In the best case the company will flourish and when he sells his equity, he will make a profit. No interest. No need to growth.
So what was the natural interest in such a system?
Natural interest does not exist! Interest is a creation of the Money Masters and was forbidden not only in Islam, but also in Christianity! (until the church itself became part of the problem, but that's another story).
"in nature the only thing that grows exponentially is CANCER..."
Humanity has grown exponentially. Ergo....cancer!!!
If you ask the animals, the chicken, the cows, the pigs, the water, the soil, the air - maybe even the Creator - indeed it is possible that the human species is not only the worst predator but even a cancer to earth. If I look at the greed and stupidity and shortsightedness and everyone hailing more growth, more planes, more cosumption, I tend to agree with you!
You seem to think "growth" as a financial term literally means physical growth. One has nothing to do with the other, that's why you talk dumb shit like "we live in a limited planet". You're being led around by the nose by marxist ideology and don't even know it.
What is too complicated and don't you understand in my simple comment?
Btw Marx had NOT understood the problem of exponential growth caused by interest. Or maybe he intentionally obscured the real problem...
Marx is dead and over rated. The only thing he proved is that central planning never works. What you don't seem to understand is that you can't have price discovery or natural interest rates when you have a centrally planned economy/society like we have today. In a market based economy, all these problems would naturally work themselves out because you would not have legislators picking winners and losers by micromanaging the economy thru taxes, regulations and preferential treatment of political friends.
Sorry, but if you even mix up interest slavery as a prerequisite to market economy or a central planned economy as result of forbidden interests, then a discussion is almost moot.
I don't know if I should laugh or cry.
If interest is forbidden private business would not exist? I showed in my first commentary that it has NOTHING to do with private economy. It's a question how money is constructed and not forbidding private ownership. I smell CHUTZPAH...
I'm not sure what your point was because you're talking about a lot of unrelated shit and trying to draw some conclusion of, I don't know what.
"Interest is a creation of the Money Masters and was forbidden not only in Islam, but also in Christianity!"
The only places where interest is/was forbidden were theocracies. Is that what you ascribe to?
What has the form of government (Theocracy) to do with the religious law?
Is a Christian Theocracy needed that lying is forbidden in that religion?
I suggest you move to California - there you can study probably sooner rather than later - how well your hailed god "market" solves sustainability and social problems for future generations...
Are you are using Commiefornia as a symbol of free market capitalism you idiot? You must have been educated in the USSA school system.
You should not call others idiots, if you don't get it.
California is an example of your hailed unleashed market: agriculture in a desert state. Look, soo much groundwater! We pump it up and make MOAR profits! And we can have pools! And any government which is not only acting from election to election but would plan one or two generations ahead, was purely evil, because it only wants to destroy our "freedom"...
Sometimes I have the impression that "freedom" is misused as codeword for ruthless egoism of parasites.
To bad your hailed god "market" only prices profits that are appearing now, while he gives a sh.t about the costs later, to be beared by others, future generations.
But who cares, as long as the nomadic devils can move on, once they have destroyed everything...
"If interest is forbidden private business would not exist?"
As long as there are DEFAULTs, INTEREST "will" and must exist. It has nothing to do with business. It has to do with mitigating a failure of a promise to deliver on a trade.
I have given you a simple example. What is so difficult to follow such a simple thought?
"As long as there are default, interest must exist." Jesus, how about an argument HOW you come to this conclusion?
If you want to open a business and I have the money, what the fuck is too difficult to understand, that I can become the owner of your business and you pay me out with the profit?! And if there is no profit and you go bust, well then I lose my money. That's private market economy!
You are not even capable to follow the light, if someone shows you a way. We need interest! Sure sheeple you need interest slavery!
You aren't paying attention and seem to be hopelessly confused. Profit is different from interest. Profit comes from production over cost. Interest comes from trading defaults ... it sucks them up thereby protecting the marketplace from inflation.
If you want to open a business and I have the money, what the fuck is too difficult to understand, that I can become the owner of your business and you pay me out with the profit?
If I want to open a business, why should I come to you for money?
And if there is no profit and you go bust, well then I lose my money. That's private market economy!
That's the capitalism model ... and it's obviously flawed. Capitalism is a con. Capitalism is "two years". Take $1M. Start a bank. Loan out $10M (10x leverage bankers privilege) at a 4% spread earning 40% on your $1M. At 40% your $1M becomes $2M in two years. Take your $1M back and let the other $1M ride. You are now a capitalist and you have nothing of your own capitalizing the system. And with the capitalist con, you demand people come to you to start a business.
Where did the $1M come from? Well, just as you complain about exponential growth of compound interest, you should realize capitalism forms in exactly that way and you should complain about it. Remember the story about the merchant who got the king to agree to pay with one grain of rice on the 1st square of his chess board, 2 on the second, 4 on the third, and so forth. Before he got to 2 raised to 64th power, the king saw he was quickly emptying his grain elevators by this trade. He cut off the merchant's head.
We need interest! Sure sheeple you need interest slavery!
Without interest collections, defaults will continue to circulate in the marketplace forever. The result is inflation. The capitalists have conned you into believing 2% inflation is the right and necessary level (albeit they deliver 4%). Go figure!
With a properly managed MOE and perfectly responsible traders, there is no default ... thus, no interest. Irresponsible traders default; interest collections recover the defaults; and inflation is zero... all the time everywhere by the relation INFLATION = DEFAULT - INTEREST. It's really a very very simple concept. Even people who resort to four letters words to make their points should get the point.
actually there can be no profit in a steady state system where the default and interest rates are equal. if youre making a profit, someone else has a loss of equal size
There is no such thing as "interest slavery", especially in the existence of another concept called "bankruptcy". If you don't like interest, don't agree to the terms of any loan which includes interest, it's as simple as that. If anyone else promises your possessions as collateral on your behalf to people whom they borrow money from without your consent, then they are the thieves and enslavers, not the ones who merely offer a contract stipulating interest payments in exchange for the privilege of borrowing their money. The lender is merely the arms dealer in this case, guns are tools, it is the actions of the user with that tool which are either good or evil.
Interest is merely the price of rent of capital. If you value capital at zero, then don't borrow money. As for the rest of us, when we lack capital, we borrow money because it is convenient to pay more later in exchange for receiving some now, and so long as we pay it off in a reasonable time period, by no means is it "enslavement".
The more I think about your dumb comments the more I believe you are just a binary thinking reactionary.
Your logic seems to work that way: Central banks created ZIRP - they follow a Marxist globalist agenda -> therefore interest rates can only be something good and those argueing that they are evil, are Marxists... LOL.
The Central banks created ZIRP is to RESCUE debt slavery to suck as much interest out from the overindebted economy it has left to bear. They lowered the interest rates to create MOAR GROWTH.
Is it really so hard to understand or are you a Shlomo and intentionally spreading lies to protect the center of your "religion"?
Oh, the irony.
Central banking is one of the tenets of the Communist Manifesto. Hence, the reference to Marxist global agenda, and rightly so.
A natural interest rate does exist because the human lifetime is much shorter than the planet or the universe. People do have time preferences for stuff today rather than tomorrow. The natural interest rate depends on the average situation of the people as a whole at the present time.
Christianity does not forbid the payment of interest - just the charging of interest to one's own tribe. Since Jews and Christians have some of the same Old Testament books that forbid usury, Jews cannot charge interest to Jews, but can charge it to Christians, and vice versa. As the Jews are a much smaller community, this gave the Jews a financial advantage over the more numerous Christians, and made them rich - and hated.
Not only that, but Jews in most of Europe were banned from engaging in most professions for a considerable period, but not finance, and finance just happened to be a very profitable field to be pidgeon holed into.
A bank can demand dividends for credit. If the first Dollar is lent into existance, it must be paid back PLUS interest - which doesn't exist. Therefore the force to exponential growth.
Ah, but if the banker decides to spend the interest received on something e.g. paying staff and suppliers, rent for buildings, or dividends to shareholders (and what else would a bank do with its income?), then it does exist.
Take a look at my example and corresponding diagram.
Short version: Normally there is enough money already in the bank for the interest owed to get back out into the economy, but if necessary a bank owner could instruct the bank to make him an interest-free loan, use it to buy goods and services, get paid a dividend when the interest is paid, and then use that to pay back the loan.
savings interest rates: 0%
credit card interest rates: 20% to 30%
what part of usury don't you understand?
You can borrow money for 30 years @ 2-3%. That's lower than the inflation rate. Ban credit cards then, there's always a gov solution to every problem.
I love pissing off fanatics with truth. It's easier to blame than to look at ones own shortcomings. It's as old as time and isn't going to help their circumstance one bit. Women blame men, Blacks blame whites, Statists blame banks, Marxists blame the rich and losers blame the jews.
I blame Disney. http://www.worldcomplex.blogspot.ca/2011/01/captain-bernanke-and-black-h...
If at the time of Jesus birth the Dollar would have already existed and one Cent would have been lent for 5% how much would it be worth today?
More than 130 BILLION EARTHS CONSISTING OF PURE GOLD!
You are supporting of the most evil system ever created.
crap. now bend over and receive some zionist cock
There is nothing that enrages the children of the devil as much as the truth.
you must have such a shit life to be soo bitter
I fully understand that the parasites try to ridicule the harm and destruction their evil system based on exponential growth is responsible for, but your rabulism even is completely stupid, too: if that's not worth to be worried, what else.
i'll take that bs as a yes
FYI- I'm a hardcore Christian contitutionalist, commie faggot. Your worst enemy.
To believe to be the crown of all life also can lead to the imagination, that nature was there to serve you and god will protect you. This will lead sooner or later to a Darwin Award...
ps: Communism is Marxism. Marxism is Jewish Materialism and claims that the laws of nature were not valid for humans - very similar to your Christian ideology, btw. As we can see from your comments and your imagination of the market as god: Jewish materialism in the form of Marxism or Capitalism leads to destruction of nature because of it's nature-hostile imagination, that earth was there to serve humans.
Communists ignore biological facts like the DNA. Just like Christians ignore them.
So it's extremely dumb if you call me a Communist. That's the binary thinking of Capitalist sheeple: what is not hailing their god mammon, is a Communist.
I cherish nature, the eternal biological laws of the Creator and I am convinced that mankind is only one species among many others and that we do not stand ABOVE nature, but are part of it - and if we will not very soon come to our senses instead to believe in stories written by people thousands of years ago, who claim to know the will of god, but didn't even know where the sun is at night, instead to look at nature and try to recongize god's will, then I believe these primitive religions putting mankind in a special role, will proove that mankind is an evolutionary dead end.
It can't work, that on one hand a species uses nano-technology, atomic-bombs and plays with the genes like god, but on the other hand believes it would have a special status and someone was protecting it from it's egoism, shortsightedness and insanity.
One common trait I noticed among leftist is they all talk a lot of long drawn out shit and say little of value. You must be a tenured professor somewhere in the system.
https://realitybloger.wordpress.com/2013/08/05/cracking-the-cult-of-the-constitution-part-i/
That applies to all fiat currency you exceptional loser.
Shlomo, I did not say otherwise, but it's important for the Gentiles to know, that money could be created without this criminal talmudic insanity.
You fail to include DEFAULTs in your analysis. Under proper and natural trade, DEFAULTs are exactly equal to INTEREST collections. Thus, DEFAULTs - INTEREST = ZERO. ZERO raised to the 2015 power is ZERO.
First and foremost a proper and natural trade is an exchange of goods or services and defaults play only a marginal role. So your statement is already false.
Secondly this is not really the place to discuss details, for examples how banks can guarantee letters of credit and that's also no honest way to discuss to throw something completely unrelated into the discussion and ignoring the argumentation.
I have presented to the debt slavery sheeple who were just fed with the lie that interest was a NATURAL LAW in the article above, that this is not true and have offered you one example. If all you can do is to defend the interest slavery without arguments instead to follow the light and finally begin to inform yourself about alternatives to this way to war and social, cultural and environmental destruction, then it's almost the proove of what "Alaric" previously had commented...
First and foremost a proper and natural trade is an exchange of goods or services and defaults play only a marginal role. So your statement is already false.
In proper trade, DEFAULTS are zero. In real trade, stuff happens.
I have presented to the debt slavery sheeple who were just fed with the lie that interest was a NATURAL LAW in the article above, that this is not true and have offered you one example.
Even a broken clock is right twice a day ... and you are right ... there is no such thing as "interest as a natural law".
If all you can do is to defend the interest slavery
Since in any properly managed MOE, INTEREST must equal DEFAULTs to obtain zero INFLATION, I suppose you could just as well be talking about "default" slavery couldn't you.
You don't need defaults for a working monetary system with interest. See this example and this diagram.
You don't need to consider such sophistry. Suppose one thousand dollars received 5% interest from the beginning of the Republic in 1789 to present - it would be worth $61.4M. In what instrument could that dollar be held to the present? There isn't any. Does any bank that existed then still exist today? Nope. Some corporations from that time could conceivably still exist, but I doubt it. The US Treasury existed, but there are no 200 year bonds, and bonds must always be liquidated when the owner dies, to satisfy probate and estate taxes. And annual income taxes would have had to be paid for the last 100 years at least, unless the investment was held by a "non-profit". The timescale of debt instruments has to be a fraction of the normal human lifetime. Even corporations don't live much longer than persons do in a dynamic system. Only Empires last many human lifetimes, and have any had financial contiguity for more than a few hundred years, let alone thousands?
Perhaps you should look up the definition of usury instead of being a retarded chimp your entire life
Well, you don't seem to get it:
1. He belives he is the crown of all life, it's god's wish his species should rule over nature and exploit it since this was written in a book by people who didn't even know where the sun is a night. He knows his species stands above the biological laws, which are valid for all others, but not his chosen species. And animals are just like things (at least he is not a follower of the two other religions from the desert, that claim it was god's wish to cut animal's throats and let them die slowly in pain...) which gives him a good feeling when exploiting them.
2. The market will solve everything and in case this principle fails, like currently in California, the profits have been made by previous generations already and the ones coming afterwards who will pay the costs are just like dumb sheeple that have bought AAA-MBS from Wall Street and deserve it and #1 comes into play.
No, who cares if it's a circular logic if you are chosen?
Maybe i'm being obtuse, but can someone explain this to me? i understand generating inflation as a means to debase the real value of outstanding debt, as the nominal interest rate rises and value of debt declines (the fixed coupon return to an investor becomes worth less and less).. but how do negative real market interest rates debase the value of outstanding debt? doesnt (and isnt it already happening) this just make the value of outstanding debt grow and grow? if real 'new issue' rates become more negative, where investors are being charged more and more to hide their capital in the instrument, shouldn't the old less negative (or dare i say positive interest rate) instruments be worth more and more?
inflating ones way out of debt makes sense to me, but unless NIRP forces people to spend-spend-spend to create inflation, which i thought was the real goal..i dont think this would happen.
First of all, serious NIRP is only possible if physical cash no longer exists. If you can refinance your debt load at a negative rate instead of a positive rate, you will do it. It will improve your cash flow. The fatal flaw is that the real value of the debt is not impaired unless you can prepay the loan. Interest rates do not stay constant. They have a direction over time. If rates are getting more and more negative, the real value of the debt could actually be increasing.
Lets take a real example. You refinance your $300K 4% 30 y mortgage with the gov't at -4%. You now receive the interest that you would have paid before. If you are allowed to prepay the loan with your negative interest, you should do so, and that will make your principal go away faster. A wrinkle is that negative interest is income and you will be taxed on it. If you are not allowed to prepay, you may be forced to spend the extra income immediately, especially if rates on savings are accelerating in the negative direction. If 5 years later, rates become -15% on savings, and rates on loans are -8%, that -4% loan can become an awful burden - if you are not allowed to prepay. If you can prepay, you refinance at -8%. In a total NIRP world, wages are probably going to be shrinking faster than the interest rate is dropping (how can it be otherwise??). Eventually, you cannot make your monthly payment, you default, and your house is sold for $100K by the bank, you still get stuck with a deficiency judgement, and still go bankrupt.
It's not inflation itself that benefits the debtors, it is when the rate of interest is lower than the rate of inflation. Negative interest rates merely allow the debtors to discharge their debt even in an extremely deflationary environment. Any situation in which the inflation is higher than the interest rate is a situation in which the debtor is at least somewhat paid to borrow, but when the interest rate is negative, they are being fully paid to borrow. It is confusing, but just think of a situation where both the inflation and the interest rate are bumped up well into the positive and work out the logic of that, then simply subtract them back such that the interest rate is negative again, and you'll see that there's little difference (other than the sustainability of such an arrangement perhaps).
Aside: Negative interest rates are unsustainable in a steady-state or inflationary economy, but somewhat possible in a deflationary economy. Most economies are deflationary if not for deliberate monetary inflation, as technological improvements are slowly reducing the cost of doing everything.
The Banksters have no risk. They have that dialed out. Risk is what any investment is about. It doesn't matter whether you are getting 10%, 20 or 30%. It all depends on the risk of the invested capital. All returns, less inflation need to be evaluated on a risk basis. It ain't easy but is necessary or at least prime on the consideration. As an example, would you buy a manufacturing company in the USA with a established gross profit of 15% and what would you pay. A lot to consider for sure..... markets, competition and expectation to getting to payback or break even day. Personally, considering now, my premium over discounted profit/return is like 2-3 years max. Most sellers of a business don't particularliy like that program. They believe it is worth more.
Banking is like Insurance. With insurance, claims = premiums. With banking defaults = interest. The money is made on the investment income. Governments allow both insurance companies and banks to cheat. They call it regulation.
"It is an actually perfidious policy for debasing the real value of outstanding debt."
I am all for that, As the debt is debased, more of the TBTF banks fail.
And I want to see those fuckers jumping off buildings, facing firing squads, and, me, personally catching heads from a gullotine.
It depends, debt debasement actually helps the bankers so long as it is the bank's debts being debased.
Negative interest rates are anathema and reflective of the retardation, desparattion, incantations of TPTB...
All I want is 6% on my saviings account, why cant i get it? oh, I know...because we are fucked economically and pushing on a string.
life leaves clues..
6% interest with a low inflation would be great. That way I can allocate less into stawks.
But Interest rate is correlated to inflation. We're in deflation right now but people can't seem to get their heads around that.
Youre sooo right, when i go shopping i cant get my head around the price of ground beef, milk, cheese, butter, veggies...or are you being sarcastic?
No. The increased cost of your produce could be related to other regulatory factors. Not inflation. Cash is valuable right now and will be even more valuable as the economy continues to turn down.
Its a gig right? no inflation is a figment of our imagination couldnt possibly be related to the amount of fiat dollars being dispensed into the economy...you fucking dumb ass. Shut the fuck UP..
I'm giving you good financial advice for your own good but you can't give pearls to swines. Do what you want, you won't make it past the next downturn.
You're full of shit and that's all you have to offer
I'm saying cash in USD is becoming more valuable than before, I dont know what currency you use. What's your suggestion, buy bonds?
My head likes to eat steak. Steaks today cost three times what they did 10 years ago and two times what they did last year. That is "not" deflation.
Here's why meat prices have gone up, not inflation.
Examiner Editorial: To protect ethanol, Obama seeks to inflate meat prices
http://www.washingtonexaminer.com/examiner-editorial-to-protect-ethanol-...
Yeah, but why is the meat inflation primarily concentrated in Beef?
It's not. Check out the price of bacon lately. A bad year for hogs has pushed it through the roof. Depends highly on where you are I suppose, beef hasn't gone up much in Canada, pork sure has, but then again our food prices were already quite higher than those in the US to begin with. Unless somewhere you're in urban California, where food is actually about the same cost as it is in Canada.
From your link: Campaigning in Missouri Valley, Iowa, yesterday, President Obama announced yet another government spending program -- this time designed to inflate meat prices in Midwest swing states. "Today the Department of Agriculture announced that it will buy up to $100 million worth of pork products, $50 million worth of chicken, and $20 million worth of lamb and farm-raised catfish," Obama explained to reporters in front of a drought-stricken cornfield.
In my county in Texas two years ago we had a serious shortage of water. Grazing and hay production were severely affected. Ranchers sold off their herds for premature slaughter because they couldn't afford to feed them. That drove beef prices down. Now that they're rebuilding their herds, there is less supply and they are needing higher prices. It's a supply and demand thing ... and that's "not" inflation.
Inflation is easier seen when that $1 you put under the mattress in 1913 would buy you 50 pounds of beef ... yet today will barely buy you one pound.
It's caused by counterfeiting the money. Governments pay their workers and suppliers with counterfeit money (they make trading promises they have no intention of keeping). Inflation results allowing them to pretend to pay back their money. It's gotten so bad now, not only can they not pay back the money (they just keep rolling over their debt ... which is default) ... they can't even pay the interest on the money.
If I had a choice of one dollar today or 10 dollars a month from now, I would choose the 1$.
If I had a choice of 10$ worth of silver today vs 10$ worth of silver a year from now (at respective exchange rates) I would take the silver now.
If I had a choice of 1 oz of silver today or 5 oz of silver a year from now, I would takethe 5 oz of silver a year from now.
The time value of money is what is being described here, the future spending power of FIAT is very uncertain, so you would ALWAYS spend what you know you have today vs. what you don't know you will have a year from now.
The great thing with metals is, even if they go down in FIAT valuation while you hold them, generally everything else does also and some purchasing power is retained.
And if profit is your motivation holding metals, if you are losing money holding the metal, it just means you have to hold it LONGER for your desired outcome.
Because ALL FIAT DIES eventually, it is a systemic flaw in the basic math behind a FIAT currency, an outcome that can not be avoided.
The odds of you using the SAME U.S. dollar you are using today , say 10 or 20 years from now is pretty low, at one point or another, the dollar will...change, its values will be adjusted dramitically to take account for years of printing and a stagnant birth rate (not enough people being born to eat the inflation and keep prices stable).
IF inflation happens, the dollar dies and changes.
IF deflation happens, the dollar . . . dies and changes.
The irony is, the dollar may actually endup being pegged to gold as a means to FIGHT DEFLATION. . .(to make sure the dollar never rises legally beyond a certain value).
Pegs work both ways, look at the swiss franc.
That's funny; I'd take the $10 a month from now over the $1 now. The chance that next month is going to be the month where the dollar falls apart to the tune of 90% is far less than 1 in 10, so this would be a profitable risk-adjusted arbitrage for me. The chance that I lose is roughly 1 in 2000, regardless of currency or time period, as fiat currencies have about a 40-year lifespan on average. Do you even math bro?
Since it's free money anyway (I assume, in this scenario), the worst that happens is I gain and lose nothing. But then again, I've already got a lot more saved up in various forms than this measly hypothetical $10 anyway, so that may be a factor in my decision.
All crap, every bit. Load these false men upon a spaceship preprogrammed for their sun god. Launch.
Arrest the Fed.
If you don't also arrest the politicos they'll just borrow from a different set of bankers to keep their game going. Chinese probably, as they will be the only ones with extra capital to lend.
On a long enough timeline the originary interest rate for everyone drops to zero.
that chart colors remind me of Russian flag?
Negative Interest Rates times Negative investment is a positive return...
See. It all balances
Cool, better wake Krugman and tell him that. Don't tell him about the part where it's only true until the last drop of capital is spent however.
In real science:
E= mc2
All other theories concerning the relationship between E, m and c have been supplanted.
The Austrian school of Economics has not supplanted all the other schools of economics because it isn't always right.
All schools of economics co-exist because each is right some of the time; nearly right some of the time and wrong the rest of the time.
Modern economics is like the scientific world when they believed in alchemy.
But Wall Street can turn base metals into gold.
or paper into gold
Bullshit! The Natural Interest Rate is >0 only in the short term.
In the long term, it obeys Green's Theorem.
Always remember that all matter and energy is merely borrowed, until ultimately returned to the global central banker that is Mother Nature.
Plan, live and drink accordingly.
...but wait...isn't entropy constantly increasing and the universe constantly expanding? Doesn't that imply positive inflation and thus a positive rate of interest?
In a fiat money regime the only way interest rates can be negative is if the money itself is a fraud.
"Yield hungry investing" now substitutes for an actual business and real cash flow. If negative rates are the answer why is Greece failing?
To me the answer is their predilection not to pay taxes...and that is indeed criminal in a Bailout Regime. Its the taxes and the debt that must be "re-hypothecated" that drives NIRP in my view.
Failure to increase current revenue streams is probably seen as a state crime actually. The irony being this works against a recovery.
Clearly the Fed has no confidence in it otherwise they would celebrate the strong dollar and normalize.
So now the dollar plunges...plunging the economy into a recession....not the other way around as all the minders say. (Strong dollar as causing a recession.)
And of course "blame Allah" as well.
thought experiment.
A bar of soap currently costs $1
Someone offers you $1 with no strings except that you have to pay him or her back $1 in one year. Would you take the offer?
If you expected that in one year a dollar would buy 2 bars of soap [deflation], you would not take the offer because at the end of a year your soap would only be worth half a dollar.
If you expected that in one year a dollar would buy only a half a bar of soap [inflation] you would take the offer because at the end of a year your soap would be worth 2 dollars.
Furthermore, if you expected case 1 [deflation] you might take the deal if he offers you a discount [negative interest rate]
if you expected case 2 [inflation] you might take the deal so long as the premium was not too high [positive interest rate]
Of course, this is a free market rational analysis so it may or may not be applicable to the current circumstances of fraud, deception and covert central bank open market operations.
You are making an assumption that the bar of soaps cost of production at .50 is still relavent as it was at 1.00. There can be no assurance of that. Maybe the producer of the soap say's fuck it I am outa here in which case the supply dynamic now changes and the market again changes based on the invisible hand but this is all due to a different cause than one involving any semblance or reaction to "monetary" policy. Otherwise Venezuaela would be swimming in product.
To show this, let us develop the case step by step. To start with, one should make a distinction between two types of interest rates: There is the market interest rate, and there is the originary interest rate.
These poor Mises Monks. They are totally clueless about money. So in their attempt to explain themselves, they double the meaning of all the terms.
The originary interest rate is a category of human action, saying that acting man values goods available at present more highly than goods available in the future. In other words: Future goods trade at a price discount relative to present goods. For instance, 1 US$ available today is preferred over 1 US$ available in one year’s time.
And proper management of any Medium of Exchange (MOE) guarantees and delivers zero inflation and freely certifies "all" new trading promises (i.e. lets traders create money which are their promises to complete their trades). This is guaranteed by observing the governing relation: INFLATION = DEFAULT - INTEREST.
When a trader delivers as promised, there is no DEFAULT ... thus no need for INTEREST collection to yield the proper ZERO INFLATION.
If the trader fails to deliver as promised there is DEFAULT. This leaves his certified trading promises circulating and devaluing reliable trader's promises. To reclaim that DEFAULT and protect the responsible traders, INTEREST of like amount is collected, thus "guaranteeing" ZERO INFLATION by the governing relation.
In a properly managed MOE, the trader accepting $ in trade gets them immediately. No saver is needed to supply the $. No capitalist is needed to supply the $. The trader delivering $ in trade is trusted to keep his promise and deliver them monthly as promised (i.e. return them to the MOE manager where they are extinguished). If he fails, he and his class of deadbeat traders pay INTEREST to balance their propensity to DEFAULT (just like the high risk insured pay higher premiums to meet their claims as a class).
With such proper management of the MOE, money serves its purpose of allowing simple barter trades to be efficiently carried out over time and space.
Note: If the Mises Monks are to continue this new term creation nonsense, they need to tell the spell checkers about their newly invented words ... like "originary"!
"to make money by usury is exceedingly unnatural."
Aristotle (Polit. i, 3)
See also:
http://www.newadvent.org/summa/3078.htm
The present value of money must be a positive interest rate unless deflation occurs
We have had inflation the past 6 years so how could the interest rate logically be zero?
Don Levit
What BS our world is. inflation and interest are tricks of the money changers! one ounce of gold today is the same ounce of gold one year from now.
If you buy today, you get a discount. only cause I want to clear out inventory or free up capital.
Interest rate is only for RISK ie. if someone may not pay you back... therefore it is risk rate.
At least muslims charge no interest. That's why they are always the enemy
A roman soliders pay per day was one tenth of an ounce of silver. This is the same pay that many people of the world make today!!
Silver and gold by weight are NEVER affected by the money changers tricks. Bring your own scales!
http://www.amazon.com/The-Final-Crash-Addictive-Deformation/dp/095552170X
http://www.mortgagebrokers.ie/blog/book-review/the-final-crash-by-hugo-b...
http://www.birchassets.com/
Interesting (Pun Intended)
In the scientific method, if there is an experiement done that refutes the theory, then the theory is invalid.
There is no recogntion in this article of Silvio Gesell and the practical application of demurrage. Gesell's ideas were carried out as an experiment in the town of Worgl.
So, I call B.S. on this author. If a theory does not comport with all of monetary history, it is a bogus theory.
Also, with private banker Credit as a money type, there is no "time preference" for money. Credit is created on a keyboard by a banker; banker did not have any money to lend to begin with, and it is upon signature authority of new debtor that this credit popped into existence.
Now, if we are talking about wealth money, it is a different form of money, and then time preference notion might be considered. Time preference, and hence interest on money was codified at the School of Salamanaca, which was populated by Crypto Jews. Consider the source and their in-group desires to control humanity.
So much depends on the money type, and money system. Sometimes negative interest rates are required, especially if velocity has collapsed to zero and no new volume of money should be introduced into supply.
Banker's don't want to admit it, but they control volume of credit in money supply by turning an interest rate valve. Less credit is higher interest rates, and more credit is lower interest rates. Alternatively, zero interest credit could be issued, but it would need to be volume controlled - in that case it could be interest free. Of course, bankers don't want interest free money, as then they wouldn't make their profits.
"The implications of a negative originary interest rate cannot even be conceived by the human mind: A zero originary interest rate already implies no action ever into eternity."
I do not see why not. I can conceive of that easily.
As far as I am concerned in the real world if I have an asset no matter what, cash car house and you want to borrow (rent it) and it has real value, I demand a payment for that, interest (rent)
If someone offers me something at close to zero cost house car etc to rent and they claim it has greater value than the rent they ask then I reject that .
It means they are trying to rent me a shit hole and not a house, a clunker and not a car, or worthless fucking fiat and NOT a strong store of value.
Now if that fucking shit hole they claim to be a house is so worthless or the clunker so worthless that instead of asking rent they offer to pay me, (negative interest) that just tells me that the so called asset is not only worthless but a fucking liability they trying to fob off on me. And have want me pay the liabilitys of their shit asset.
Same with cash, if that cash is offered at negative yield then the fucking banking scum know it is not only worthless but a fucking liability to hold and they are even prepared to pay you to hold onto it.
Of course there is a catch, as always with fucking bankers.
They want their fee no matter what, and they also want in exchange to hold your valuable assets to put on their books.
It is simple equation folks, As interest tends to zero the asset or cash becomes ever more more worthless, As it goes negative it carries ever higher liability for the future.
Therefor never borrow at interest rates below what a real market would offer, and any negative yield asset is therefore not only fucking worthless but will cost you dear in the future. And the time dependency then becomes the longer you hold the toxic shit, the more exposed and more it will cost you.
Nothing now in Europe has any connection to, in terms of real value to the fucking fake ponzi shite coupon called the euro, not a currency, it is nothing more than a voucher to do business in europe and its is fundamentally, as proven by every single bond market except Greece to be not only worthless but a an ever increasing liability.
That is why the fucking ass wipe in little sheets called the euro can never survive.
When UST yields flatten ever more and start to sink below zero you know the fucking ponzi $ is also now utterly worthless for all intents and purpose.
It is why those that say store all your wealth in hard assets are right, whether gold silver or cans of beans, but fiat is now stuffed with banker cancer and is almost dead.
So fucking worthless even the banks have to give it away or pay you to get rid of it.
So any bankers out there want to ofer me a non status unsecured loan of at least $1 million, I might just be interested, maybe.
Otherwise I wouldnt let you have my goldfish as security and you can fuck off
Austrian economic theories are only to be applied to free markets. The banking market is not a free market, its captured by politicians or by the state if you like. If people want to save their money, it could be for various reasons. Not only because of time preferences but building up reserves (pensions/loss of future(!) income) could be an other reason.
Indeed negative rates don't exisit in real life. If i would borrow money at a negative rate of 10%, i would be rich soon !!.
But what is a rate ? A rate consists of market rate + costs and profit for the bank: MR+Bank=R. The bank always sells money for a higher price than it buys in. If selling price were lower than buying price there would be no bank ! So MR is alway higher than R. The bank must earn some money too, you kown. The rate a bankclient receives is not really a real rate. Its a market rate ( received from lenders) minus costs and profit.
When there is a glud of savings and there are no investors. People can/will still bring their money to the bank. With no investors in sight, the bank will then only sell storage facilities. So now it seems you have to pay to stall your money. But that has always been the case, there is nothing new. You can call these costs "negative rates" but they really are costs ! Costs + profits and a very low market rate are causing the 'Rate" to be zero or negative.
Is a negative rate of 10% possible ? Yes of course ! We live in a corrupt banking world. anything is possible. Even confiscating all your property ! Even confiscating your life.. and that of your loveones. There are fascists under us. But before rates are -10% people won't need banks anymore but storage compagnies will rise. Vaults will be bought.
Minus 10% could only be established by taxation by a monopolist. - 100% could be reached when you are about to be sent to die for the state.
Don't blame the banks for it, they are in the hands of the state via the central bank. Blame your people, they voted the current political leaders. Yes, we can ! Laws could be changed long ago, Banks could be free long ago. So save your lives, free the banks from government !
No you wouldn't be rich. A -10% interest rate on a loan is only possible if the interest rate on savings is even more negative, and only if the system does not allow currency to be withdrawn from the system. Where would you put the cash that is thrown off by the loan? If withdrawal of currency is not allowed, you must keep it in a bank, and they would pay you -15%. Regardless of what the interest rate is on loans, the safe interest rate on savings will always be lower. And yes you can buy commodities with the cash, but the cash doesn't go away. Someone else gets it. And property taxes will certainly be levied on any commodity widely used as a store of value.
What negative interest rates do is to make money a hot potato. Cash must be spent immediately or it is taken away from you. And this is particularly true if negative rates are accelerating in the negative direction. Your only choices are to spend money immediately or put it in a long term bond at a negative rate before the rate goes even more negative.
Currency is a means of transactions and a store of value. Negative rates eliminate the store of value part, and make currency a purely transactional entity. It is a symptom of an imploding system and an imploding civilization.
Hmm.
There is something wrong with that headline.
I always thought that "interest rate" is a human construct.
There is nothing natural about it.
Benign Neglect of the Long Term Interest Rate by Philip Turner (2013)
http://www.bis.org/publ/work403.pdf
Interest Rates by Valentino Piana (2002)
http://www.economicswebinstitute.org/glossary/interest.htm
The natural interest rate is only positive in an Austrian (commodity based) monetary system. Natural resets must also happen because interest is an exponential function, but the short human lifetime makes resets natural as well. In a fiat currency system, whether debt-based or direct-issue, there is no natural rate of interest. Everything depends on the sum total of government policy in such a system.