Reply To: interest rates


Low time preference means a person places a small premium on the present or has a small discount of the future. This discount of the future is the (pure) rate of interest. So, lower time preferences means a lower (pure) rate of interest.

Low time preference implies that a person will save and invest more and consume less.

Money holding, e.g., hoarding cash, affects the purchasing power of money and not the interest rate. If people hold more money as a good in their stock of goods, then they are reducing their demand for other goods. As a consequence, prices of good fall and money’s purchasing power rises.

If demand for consumer goods declines, then their prices will fall and the quantity purchased will decline. As a result, the revenue earned by entrepreneurs selling the goods will decline. With less revenue their demand for producer goods will fall. The decline in demand for producer goods will cause their prices to fall. Cheaper inputs will restore the profitability of production even at lower output prices.

In the current downturn, business investment in capital capacity has collapsed, just as it did in the great depression. The reason is heightened uncertainty of the future, which has been aggravated by government policies. Here is the great Bob Higgs on regime uncertainty: