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jmherbener
Participant(1) Here is a story that claims the BOJ has realized that pushing interest rates down across the yield curve has removed the incentive for banks to lend long-term. As a result, less spending on capital capacity takes place and aggregate demand slumps. The story has a Keynesian bias, but makes a valid point about the supply of credit.
(2) The Fed desires to control the broader money stock and credit supply in society, but it only directly controls the monetary base. The monetary base = currency + bank reserves. The banks have discretion in issuing fiduciary media (i.e., checking account balances) on top of their reserves. Bank checking accounts, as money substitutes, are part of the money supply. In normal times banks tend to stay fully loaned out, carrying almost no excess reserves. They do so because they earn interest on their loans and do not feel the need for liquidity beyond their required reserves. In such times, the Fed can control the money supply fairly well. But when the financial crisis hit, the Fed bailed out banks with QE1 and QE2, buying their MBS and paying with reserves. The banks desired liquidity and given the collapse of demand for credit and consequent low interest rates and heightened uncertainty of the investment climate, they built up their excess reserves to levels not seen since the Great Depression. In such times, banks can increase the money supply independently of Fed policy by issuing more fiduciary media via new loans to customers. Doing so will reduce their excess reserves, but they can continue to expand until they are fully loaned up again. The Fed instituted payment on reserves to manage that process. The Fed has one rate it pays on required reserves and another rate it pays on excess reserves. So, if banks are issuing too much fiduciary media and converting their excess reserves into required reserves too vigorously, then the Fed can raise the rate it pays on excess reserves to entice banks to slow down the conversion.
Here is the official Fed release on interest payments on reserves.
https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm
ParticipantHere are my thoughts.
1. This argument rests on a false premise. Tropical fruit can, in fact, be produced anywhere. Entrepreneurs in Norway, for example, could build greenhouses, import soil, install misting equipment, heaters, artificial lighting, and so on. The only reason they don’t do this is comparative advantage, i.e., their relative costs are too high compared to costs in tropical areas.
Of course, if the critic of comparative advantage means that there are cases in which one country has a natural resource unavailable in another country, say diamond deposits, then his criticism misses the point. The theory of comparative advantage addresses only cases in which various goods can be produced either domestically or in foreign lands because there is no difficulty in explaining why people in different countries who desire goods produced exclusively in other countries would trade with each other, selling what they produce domestically for what they cannot produce domestically. It is a more difficult case to analyze when the various goods can be produced either domestically or in foreign countries.
2. This arguments fails to recognize that entrepreneurs build the consequences of catastrophic events into their production costs. Including the costs associated with catastrophic events occurs in all lines of production. There is nothing distinctive about agriculture in this regard. If a manufacturing area is subject to earthquakes, then entrepreneurs will including re-building costs or the extra expense of sturdier construction into their costs. If an agricultural area is subject to drought, then entrepreneurs would include in their costs, the expenses of irrigation equipment and other drought mitigation. They would store some of their product during good times to have it available to sell during droughts. Alternatively, they could pool some of their income during good times to get them through droughts. In fact, other entrepreneurs would start up insurance companies to make the pooling more efficient.
3. This is a form of the old “infant industry” argument advanced in the late 18th century by Alexander Hamilton. It overlooks the fact that the corollary of free trade in goods is free movement of capital funding. Entrepreneurs in the world economy invest in technology and capital capacity that will be profitable. So, production of technology and capital capacity is also subject to comparative advantage. The entrepreneurs in the developed world have the expertise and the saving to invest right now. They will do so in underdeveloped areas if it is profitable. Witness western investment in China over the last 30 years.
ParticipantThe reserve held by a bank is either cash or a deposit at the Federal Reserve. Suppose, then, that a bank has $1,000 in cash. It can extend a loan to a customer for $10,000 and credit the customer’s checking account for $10,000. The bank would be meeting a 10% reserve requirement. The customer’s checking account balance cannot serve as a reserve for another bank. Another bank would have to obtain either cash or a credit by the Federal Reserve to the bank’s account at the Fed. A bank normally does this by selling securities to the Fed.
Take a look at Murray Rothbard’s book, Mystery of Banking.
ParticipantWhat Mises says in Human Action is that in our current state of knowledge we must accept methodological dualism. The deterministic cause-and-effect in the material world and the scientific method of discovering the quantitative magnitudes of cause and effect relationships in the material world have not been successfully applied to the realm of human action. There is no theory describing the quantitatively precise relationship between material factors in the world and ideas in the mind that has been established, or not falsified at least, by the scientific method. We must, therefore, conceive of the cause and effect relationships between ideas in the mind and things in the world in a different way and discover cause and effect relationships between the mind and the material world with a method other than the scientific method. Mises calls this method, praxeology.
ParticipantI suggest Murray Rothbard’s books:
For a New Liberty
https://www.mises.org/library/new-liberty-libertarian-manifesto
The Ethics of Liberty
ParticipantEconomics 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:
ParticipantIndeed. 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.
ParticipantGold 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.
ParticipantHere’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.
ParticipantGarrison’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.
ParticipantThat is Murray Rothbard’s conclusion. See his book, Man, Economy, and State, pp. 445-450.
September 28, 2016 at 10:44 am in reply to: Theory of Money and Credit – Credit Money Question #18818ParticipantFor 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
ParticipantThe 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:
ParticipantCapital 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.
ParticipantYes, 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
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