[kbxcoop]

Why is there a lot of talk about the yield curve? What is it? What does it mean?

[jmherbener]

The yield curve is a graph plotting the relationship between the time of a loan and its rate of interest. The yield curve normally slopes upper to the right, shorter-term loans have lower interest rates than longer-term loans.

Periodically, the yield curve “inverts” and short-term rates rise above long-term rates. Yield curve inversion occurs before the bust phase of the business cycle. Although a bust does not follow every yield curve inversion.

Here is Gary North on yield curve inversion:

http://www.garynorth.com/public/department81.cfm

[kbxcoop]

So in the ERE, the yield curve would be flat?

[jmherbener]

That is Murray Rothbard’s conclusion. See his book, Man, Economy, and State, pp. 445-450.

https://mises.org/system/tdf/Man%2C%20Economy%2C%20and%20State%2C%20with%20Power%20and%20Market_2.pdf?file=1&type=document

[kbxcoop]

During the 50% sale, I bought Roger Garrison’s “Austrian Macroeconomics: A Diagrammatical Exposition”. The entire model makes sense, except that he gets into the part about the demand for money vs the shift in the curves. From my understanding of the graph, he aggregated the supply of present goods vs the demand of present goods throughout the entire economy. He gets into explaining (pages 22-23) that a shift in the demand for present goods must correspond with a shift for the supply of present goods with no change in the demand for money.

My understanding is that the Demand for present goods (DPG) and the supply of present goods (SPG) is that it can only come from its reciprocals (the demand for future goods (DFG) and the supply of future goods(SFG)). I can only DPG in the time market if I SFG, and I can only DFG in the time market if I SPG. From our discussion above, it makes sense that money demand cannot affect the interest rate, and that prices will adjust to the demand and supply of money, so the affect of the time market from an increased demand of money, all else equals, does not change except for the prices of consumer/capital goods. So is Roger Garrison wrong on this point? Is he mistaking the allocating of resources from consumer goods as present goods in the time market?

What are your thoughts on the model (pg 23)? The usual models I have seen in graphical form is something like https://mises.org/library/marginal-efficiency-capital on Figure 9, with using the Production Possibilities Frontier. Garrison’s model seems better at incorporating the use of time in production (Aggregate production time, increased capital investment increases time, all else equals) and does a good job at showing that the Keynesian consumption function doesn’t make sense.

Thank you for taking the time to answer my tedious questions, but I want to make sure that the reasoning is sound, and that I myself can understand why it makes sense. I don’t like reading about stuff and taking it face value, I like to go through the reasoning so I can draw my own conclusions/defend the logic.

[jmherbener]

Garrison’s categorization of money demand as part of the demand for present goods in the inter-temporal trade-off of present money for future money is controversial. People save to earn interest. Holding money itself earns no interest. Holding on to something is not lending it to someone else who uses it productively to generate a rate of return.

Consult Rothbard’s book, Man, Economy, and State for more on this view.

https://mises.org/library/man-economy-and-state-power-and-market

Rothbard’s diagrams (Ch. 6) dispense with the Keynesian comparison and present just the Austrian view.

[kbxcoop]

In the financial media, I noticed that people tend to say that gold goes down when interest rates rise because the opportunity cost of gold goes up. What I’ve seen is that the opposite tends to occur. When the Fed raises rates, gold goes up. Why does this occur?

[jmherbener]

Here’s the data:

https://fred.stlouisfed.org/series/FEDFUNDS

http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

I’m not sure your observation holds as a general rule.

One explanation for why it might hold in some cases is that investment is speculative. Investors may speculate that monetary tightening is done by the Fed because the Fed is expecting price inflation.

[kbxcoop]

I should have clarified and said it wasn’t really a general rule, and that gold doesn’t always go up with interest rates, that was my bad. My observation is that gold sometimes go up with interest rate hikes, and sometimes it doesn’t. But I do not really see the opposite happen that much at all (where the price goes down). The argument I hear is that the opportunity cost to hold gold goes up as interest rates rise, but that doesn’t seem to be the case, and there are cases where it seems gold goes, even when the spread between interest rates and inflation increase (real interest rates increase). The argument makes sense when it comes to gold as a consumer good, where if rates were to rise, people would save more and demand less gold. But it looks like the reason that gold doesn’t seem to drop all the time when rates rise is because a portion of demand for gold seems to come from a function of a medium of exchange, so people hold gold to sell later to buy dollars instead of actually holding dollars itself.

[jmherbener]

Gold is not money in our day and age. It is a commodity. And like other commodities, people invest in gold to earn a rate of return. The rate of return on gold, or investment in anything, conforms to the general time preference rate of interest. Rates of return in the various lines of investment conform by changes in the prices paid to buy into the investment relative to the anticipations of future prices to be realized when selling out of the investment.

Of course, there is consumer demand also for commodities as well as investor demand. But that doesn’t change the basic incentive of the investor, which is to earn a rate of return on investment. An investor thinks that the rate of return on buying gold now and selling it a some point in the future will be at least the same as any other investment of the same maturity and in the same risk class. If investors didn’t think this, they would invest in other lines which would lower the price of gold and raise the price of assets in the other lines. This arbitrage will cease when the anticipated rates of return are the same.

When the Fed pushes short-term interest rate down through monetary inflation and credit expansion, it sets in motion the arbitrage process across the different lines of investment. Then rates of return will also decline in these lines as investors move to buy their assets. Asset price inflation is the result.

How investors see the variations in changing demands across the different lines into the future will determine how asset prices will change relative to each other over time. Since gold is a traditional hedge against price inflation, investors are sensitive to changes in the purchasing power of money overall when assessing investment in gold. If investors anticipate price inflation, then gold prices will move up disproportionately to prices of other assets.

The claim that the rate of interest is an opportunity cost of holding an asset applies only to cash itself. Buying and holding goods is done to earn the rate of interest. And the rate of interest on all investments (loans, production, assets, commodities, etc.) will be brought into conformity through arbitrage.

[kbxcoop]

How would negative interest rates work in the real world? If interest rates are always supposed to be positive due to time having value, than can there be a capital structure in a negative interest rate environment? Would it theoretically mean that we would prefer less goods in the future to more goods now? If that were true, in a theoretical capital structure, would that mean that we would transform goods of more value to less value?

I was curious on how negative interest rates would look on the capital structure. I used Edward Fuller’s graph for Net Present Value (https://mises.org/library/marginal-efficiency-capital) in his last picture. I made a graphical representation of what I think negative rates would look like. I don’t know if I did it right, but it doesn’t make any sense for the capital structure to go negative. Hopefully the link below will work:

https://scontent-dft4-2.xx.fbcdn.net/v/t1.0-9/14492563_1172022406198680_3958184669870752941_n.jpg?oh=77fdbf9ba9438b73515fb0cf9e239c32&oe=58ADD279

Looking at the graph, it tells me a few absurdities already. One, any project’s cash flows that are below the initial cost to produce have a value. Two, looking at the PPF, it would suggest that there is negative consumption goods production, which tells me that somehow there is some sort of conflict between production and human capability of living forever and needing nothing to consume, which begs the question if humans need to produce in the first place.

[jmherbener]

Indeed. A negative pure rate of interest leads to absurdities. Time preference cannot be negative for temporal beings.

Ludwig von Mises, discussed the absurdities of non-positive time preference in his book Human Action, ch. 18.

https://mises.org/library/human-action-0

[kbxcoop]

This is a little off topic, but what jobs are out there for a major in economics? I want to go to medical school to become a doctor, but I am still deciding on a major and I do not know if I want to get into economics (I am very interested in economics) or go into something like biomedical engineering. I do not know what I can do with an economics degree.

[jmherbener]

Economics majors with BA and BS degrees get hired in all business fields, especially finance. Economics is a top major for law school. Holders of MA and MS degrees in economics teach in community colleges, do research in think tanks, and entry-level forecasting. PhD economists teach and do research in universities, do high-level forecasting and consulting.

Here’s what the AEA says about careers:

https://www.aeaweb.org/resources/students/careers

[kbxcoop]

I read Human Action and Theory and History, and I am curious on the determinism and free will doctrine. If I read Mises right, he states that determinism is correct in that there is cause and effect that leads up to the current state of affairs (environment, physiology, and experience) while free will doctrine is correct in that people rationalize all actions they can take and choose the action the actor believes will best suit him. He further goes on to say that both of these doctrines neglect the role of ideas and the ability of the human mind to think of cause and effect. It seems like he is saying that the range of actions an individual will rationalize and choose to take is determined by the actions that happened due to prior events and actions that took place before, but at the same time it is ideas of individuals and prior ideas that humans experience from past individuals that guide humans to take certain actions.

For example, a person 100 years ago has an idea of the automobile and how it works, and now today, due to the circumstances and knowledge that has been learned, a person has the ability to think of the idea of working at a car factory and rationalize the action to see if it is the best action to take. Is this a correct way of summarizing his point?

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