[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

[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.

[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.

[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.

[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

[jmherbener]

For more on credit money, take a look at Guido Huelsmann’s book, The Ethics of Money Production:

https://mises.org/system/tdf/The%20Ethics%20of%20Money%20Production_2.pdf?file=1&type=document

[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

[jmherbener]

Capital consumption is manifest during the liquidation and reallocation of the bust. One could examine the extent of capital consumption empirically by looking at the bankruptcies, stock collapses, etc. Because the boom is a period of over-consumption and mal-investment, the greatest lines of mal-investment are in particular consumer goods, e.g., houses, and cars, and the higher-stages of production, e.g., commodities. The degree of mal-investment in any particular line depends on how the boom-level capital capacity lines up with the recovery-level capital capacity. You cannot determine that by comparing mal-investment in one line during the boom with mal-investment in another line during the boom.

[jmherbener]

Yes, all arbitraging activity is an entrepreneurial investment. Scalpers can and do suffer losses periodically. No matter how small the time element involved in an arbitrage or how seemingly secure the pending sale might be, losses could ensue from arbitrage. Of course, Mises is not referring to that point in the quote. He is making a contrast between situations in which a person could earn a profit or suffer a loss from an investment, e.g., a capitalist-entrepreneur in the market, and situations in which a person can only earn a profit while the loss is suffered by someone else, e.g., a bureaucrat in the government.

Walter Block lists ticket scalpers in his rogues gallery (Ch. 12):

https://mises.org/system/tdf/Defending%20the%20Undefendable_2.pdf?file=1&type=document

[jmherbener]

If everyone counterfeited $1,000 and spent it in one day, some entrepreneurs would run down their inventories, others would raise their prices, and others would suffer excess demand. Then the new money would be earned by producers and disbursed according to their time preferences pushing up demands more generally. In the end the purchasing power of money would decline and income and wealth would be redistributed. The only difference between a case in which people know and a case in which they don’t know that others are counterfeiting is that if they know, they will attempt to buy things before others and so the impact of the three possibilities will be felt earlier in the day. However, with more money, their demands must increase and with them, prices of goods must go up. (We are ignoring the possibility of building up money holdings.)

In the case of $1,000 disappearing from everyone’s money holdings in one day in which they reacted by reducing their demands by $1,000, some entrepreneurs would build their inventories, others would lower their prices, and others would suffer excess supply. Then the incomes of producers would fall and they would reduce their consumption and investment expenditures according to their time preferences pushing down prices generally. If people thought everyone has less money to spend, they would try to delay the reduction of their demands until after others reduce their demands and so the impact of falling prices would be felt more heavily at the end of the day. However, with less money to spend, their demands must decline and with them, the prices of goods must also decline. (We are ignoring the possibility of running down existing money holdings to fund demands.)

[jmherbener]

Here’s a useful discussion of Ricardian Equivalence.

http://www.econlib.org/library/Columns/Teachers/ricardianequiv.html

There are two important points. First, no matter how the government finances its command over resources, the inefficiency of transferring resources from entrepreneurs in the market to bureaucrats in the government occurs in the present. Resources are taken out of the realm of decision-making with economic calculation and pulled into the realm of decision-making without economic calculation. Neither debt financing nor monetary inflation delay this burden into the future.

Second, the methods of financing a government expenditure (taxes, borrowing or monetary inflation) have different secondary effects on the efficiency of economic activity as it plays out into the future.

[jmherbener]

The key point, as you note, is that an increase demand for money raises the PPM, that is prices fall from the concomitant decrease in demand for goods, both consumer and producer goods. If time preferences stay the same, then the price spreads between consumer and producer goods must stay the same, i.e., the rate of return in production must stay the same. The extent to which the PPM rises, then, will depend upon maintaining the same price spread between the now lower prices of both consumer goods and producer goods. To put the point more generally, prices are flexible enough to adjust throughout the economy to maintain both a unchanging interest rate of return on production and a lower overall price structure in the face of an increase in money demand.

[jmherbener]

What is unseen is the alternative valuable goods that would have been produced by the resources that have been drawn into the counterfeiter’s operation. The only way to ensure that the value of goods produced in one line of production exceeds those produced in other lines of production with the same resources is to have the expanding line of production compensate for the value in other lines by paying prices for the resources that are greater than what would have been paid for them in the contracting lines of production.

Because the future is uncertain, capitalist can only predict which investments in the various lines of production by entrepreneurs will pay off. The only way to ensure that the allocation of capital funding is done efficiently is to have entrepreneurs cover the cost of funding their projects by paying back their loans with interest.

Obviously, not everyone who has a project can be funded with newly produced money, whether counterfeited or handed out by the state. There are only so many real resources to go around. Therefore, some process of picking who gets funded, besides the foresight of capitalist who aim to fund projects that will generate a rate of return, would have to be used. Just because a person is good at counterfeiting doesn’t demonstrate the likelihood of their investment project paying off. Likewise, joining the ranks of politicians or bureaucrats doesn’t demonstrate a superior ability to pick successful investment projects. Capitalists, on the other hand, have their own wealth on the line when they fund projects and earn monetary gains for superior foresight and suffer monetary losses for inferior foresight.

Take a look at Mises’s article, “Profit and Loss.”

https://mises.org/library/profit-and-loss-0

[jmherbener]

There is no critique in the class material of the concept of “velocity” of money. The Austrian analysis of the purchasing power of money or price inflation is in the lecture on the “Money Market” in the course on Austrian Economics.

Mises has a critique of the quantity theory of money in his book, The Theory of Money and Credit:

https://mises.org/system/tdf/The%20Theory%20of%20Money%20and%20Credit_3.pdf?file=1&type=document

The basic point is that nothing more can be learned about the price of a good by using the concept of velocity. The price of cars is determined by demand and supply. We don’t need to know anything about the “velocity” of cars to understand how the price is determined. The price of money or its purchasing power is also determined by demand and supply. Velocity of money adds no additional insight to the analysis.

[jmherbener]

Here are the categories of Goods:

1. Present Goods
a. Consumer Goods
b. Media of Exchange
2. Future Goods
a. Producer Goods

Income = Consumption + Saving-Investing

Here are the categories of Saving-Investing:

1. Plain Saving-Investing: Storing existing goods.
2. Capitalist Saving-Investing: Diverting resources from more direct to more indirect production.

Time preference determines the ratio of consumption to capitalist saving-investing and the interest rate of return on production. Capitalist saving-investing earns a rate of interest.

People hold money balances to deal with the uncertainty of the future. Money holdings are plain saving-investing. Plain saving-investing does not earn a rate of interest.

In the ERE there would be no money holdings at all, yet there would be capitalist saving-investing and a capital structure of production for producing consumer goods. Also, all production would earn the interest rate of return, but there would be no profits or losses.

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