[kbxcoop]

Thanks for linking the paper, but it has caused more questions than answers.

1. “Yet virtually everyone would agree that the banks have much more control over short-term than long-term rates, so “the” interest rate in the standard
exposition of ABCT should be interpreted as short rates.” (31-32)

A. Why must this be so? Why does the Fed’s credit expansion only push down short-term rates? Why aren’t long-term rates affected by this (why isn’t there downward pressure on long-term rates)?

B. Does QE affect long-term rates?

C. If conventional monetary policy (Fed Funds Rate) does not put much or any downward pressure on long-term rates, how does a bubble form? Aren’t mortgages and commercial loans typically long-term loans?

2. “A third—and far more speculative—observation is that Austrians may be able to explain periods such as the early 1980s and again the early 1990s when short-term rates (the blue line) spiked, and yet no recession ensued. What is interesting in these two periods is that long rates spiked just as much, keeping the term spread intact. It is possible that these shifts upward of the entire yield curve were due to more fundamental changes in savings behavior, rather than bank policy. In that case, it makes sense that the spike in short-term rates did not lead to a recession, as it so often does at other times in the period surveyed.” (33)

A. Why do higher long-term rates not cause a recession?

B. If long-term and short-term rates are going up (causing the spread to stay the same), how come that does not cause a recession as well? It makes sense that credit expansion is still going on, but if rates go up, doesn’t that make a lot of these projects unprofitable?

I know this is a lot to answer, but I appreciate the responses! Let me know if I need to clarify my questions.

[kbxcoop]

So I was reading Part IV about your critique of Rothbard’s explanation of the yield curve in the ERE. It makes sense that, all else equals, people prefer to have their money tied up for shorter lengths of time than longer lengths of time. Most people may prefer to have a 1 year 5% bond rather than a 5 year 5%, so there may be a premium (or differential) in the interest rate to entice people to hold longer term bonds. My question would be, can’t these bonds be bought and sold though? Even in an ERE, wouldn’t an investor buy a 5 year 7% bond and sell it when he needs the money? This would seem to be a tendency to keep the yield curve horizontal in the ERE.

[kbxcoop]

Ok, that makes sense. I was sort of thinking the same thing but I didn’t know if it was correct.

“It may be that it’s current price is driven by what proves to be wild speculation”

– I am not too familiar with reading charts like this. How does the chart show wild speculation?

“Lending at a negative interest rate would be like selling a product at a negative price. No one would do so there would be no supply of credit at all and therefore no loans and no rate of interest at all. It could be the case, as you suggest, that the most urgent borrowers might be willing to pay an interest rate that more than compensates for the price deflation, say 10%. In this case, the inefficiency of an excessively deflationary money is partial instead of total. There are many willing lenders and willing borrowers at the pure rate of interest who would supply and demand credit and thereby, satisfy their time preferences. But many lenders will not do so given the extent of price deflation.”

– Where can I learn more about the affects of inflation/deflation on credit transactions?

[kbxcoop]

Im also trying to understand, in a growing economy, the prices of goods would fall, but does the demand for money increase in a growing economy? If the economy grows but the demand for money doesnt increase, how can more be produced?

[kbxcoop]

Also, what were to happen if the economy became so productive in a gold standard that prices fell excessively compared to gold produced? Would it become less desirable for gold to be momey and something like silver to take its place?

[kbxcoop]

“

[kbxcoop]

So Rothbard was not making the case that a capped money supply is the most efficient one, but any supply of money will do to perform its function as a medium of exchange? Also, do you know what book that was from? I do not remember.

So it makes sense that Bitcoin may not be a desirable money due to the excessive price deflation, but there are other cryptocurrencies like Ethereum that do not have a supply cap. There is a certain algorithm (the difficulty) that regulates how much is produced. When more people mine for cryptocurrencies like Ethereum, the difficulty rises, and each person mines less and less slowly over time. In order to find the “perfect” cryptocurrency, it seems that there must be a good algorithm, one that doesn’t allow so much do be produced at once, and at the same time not produce enough.

But there are a few other things that may make it hard for any cryptocurrencies to become money. One is the amount of people that currently trade it. While gold has a very wide market and many people trade it, the market for cryptocurrencies is way smaller and way fewer people trade it. Is a good that isn’t widely traded make it less likely to become a money?

Also, if something is not traded widely were to try to become a money, wouldn’t the value of that good have to increase dramatically? For example, Bitcoin is not widely used right now as a money, and it is valued above $2000 right now. If it were to become a widely used money, it seems that the value would have to increase dramatically, making it to where prices fall rapidly, leading to the problem with economic calculation.

[kbxcoop]

“With a fixed money stock, as under bitcoin, it might have been. For example, if an interest rate in the absence of price inflation or price deflation was 2% and price deflation under bitcoin was 6%, then there would be no loans. Lenders would hold money instead of lending it at a -4% rate of interest.”

Another question, actually. If this were the case, wouldn’t the supply of credit fall and cause the interest rate to be positive again? Or would the holding of money cause prices to fall too fast?

Also, Rothbard has stated that there is no need for a larger money supply, that any will do. What did he mean by this?

[kbxcoop]

Thanks professor!

[kbxcoop]

“It’s not the Treasury selling more bonds, it’s investors who bought them in the past and have been holding on to them until now.”

Sorry, the question was poorly worded. I meant to say potential inflation/spending.

My understanding is that the only way for the government to spend more than revenues is to sell treasuries. But, where would the price inflation come from that bondholders are expecting? My thought was that the potential increases in government spending is what people are thinking will cause price inflation.

“Furthermore, a person who shows no outward sign of action is not by that fact alone demonstrably incapable of action. He can still act, potentially.”

Can you go a little further in this? How exactly can an unconscious potentially act? Is it that, even if to us they are not demonstrating action, that unconscious people are still acting but fail to achieve their ends?

[kbxcoop]

Over the past couple weeks, one of the reasons people say treasuries are selling off is because of inflation due to more government spending. How can there be more inflation if of the government is selling bonds in the market? Do banks lend to the government by credit expansion?

Also, I had an interesting discussion regarding human action. I said “all humans use means to achieve ends” and he stated “people in vegetative states, such as those hooked up to machines and cant do anything, cannot act, so are they not human?”. I was curious about this, because, although economics is the study of purposeful behavior, and therefore a vegetative state would not be in the study, Rothbard (Man economy and state pg 2) states (not in exact words) that it is the nature of man to act purposefully, and incomprehensible for humans to not do so, therefore they cant be human.

[kbxcoop]

Is there a relationship between treasury rates and interest rates on other things (mortgages)? For the past week, I have noticed that, since bond yields have gone up, so has interest rates of other things such has mortgages. Is it arbitrage?

[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?

[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.

[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.

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