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March 11, 2014 at 11:36 am #18280patriciacollingParticipant
When there is lower time preferences (or lots of savings), interest rates are not necessarily lower, right–then times of higher time preferences? I mean if people are hoarding their cash (or is this a “high demand for money” and different from lower time preferences?), it’s not being lent–so interest rates will have to rise, no?
Also, I was just thinking about wealth effect and paradox of thrift…if consumer spending is down, then producers may want to try to lower their prices by producing more to make the product more enticing (so borrow to invest into production factors) or they may reduce expenditures because of lack of revenue by producing a lesser amount of goods that is more aligned with the demand (or lack thereof).
I’m not sure, after all this time, what the laws of economics are about this. Sometimes I forget what I have learned when I have thoughts about the economy.
Is it that a lot of companies now are not investing in the factors of production; and, thus, consuming capital because they are hoarding cash as an asset and/or servicing debt or buying back stocks to keep the asset prices high in order to, perhaps, protect what wealth, as they perceive it, is left…?Are these behaviors indicative of a coming collapse?
These are a few random thoughts that I can’t quite put together but was wondering what the laws of economic say.March 12, 2014 at 7:42 am #18281jmherbenerParticipant
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:March 13, 2014 at 12:50 am #18282patriciacollingParticipant
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