Topic: Lending at negative interest rates. (People like bigger numbers.) (Read 17903 times)

The needs of the society depends on the hand ofbpeople thus have different needs too. The economics status will surely on the top if the status of individual will increasing. If we are going to talk about the banking system it will be greater in borrowing that turns to investment by other people. That is totally true also that it will increase of consumer suply because of high demand.

You answered yourself as to why society is "obsessed."  Its because fractional reserve banking lowers the cost of borrowing, thereby creating a greater incentive for people to produce, and thereby serving more people and increasing the consumer surplus.

The fed makes a profit for its owners and that profit they can spend on anything they want.

Me hoarding coins does not limit economic production in ANY WAY.  The resources required to produce are still out there and can be bought and used to produce by those with money or something else of value to trade (labor,gold,etc).  The only difference is *who* gets to buy those resources to produce and at what *price* they get to buy them. 

If you let the Fed lend money into existence to someone then that money bids up the price of the goods required to produce and creates an interest burden on the production that is paid to the bankers and the fed.   Thus lending money to produce makes sense for really profitable ventures if the lending comes from someone else's saving and not from the fed printing press, but in a stable economy it should make more sense to first *save* so that you can produce without the interest burden.  Furthermore, the fed and bankers are earning interest on the debasement of the savings of society.

I do not know why our society is so obsessed with the need to "borrow" to produce instead of "save" to produce.  The reason people cannot "save to produce" is because those who borrow money into existence simultaneously debase the savers investment and get to market first.  This "advantage" to the borrower can only exist by fractional reserve lending and the Fed.  Otherwise the saver would be earning interest (via deflation) and the borrower would have to be even more profitable to justify borrowing instead of saving.

While I doubt I would call it "the true price inflation rate", I understand what you mean. I would call it "the change in relative value between two commodities."

And as in my prior post I claim that is "a good thing". Quoting myself below: (yes this is obnoxious, I know. But it was a long previous post)


So back to your points again.


Yes, I completely agree that in this situation the fed creates more competition for HOARDERS. It can out compete you because it is in a very real sense, an endless hoard. This competition drives what you could charge for lending out BTC from your hoard.

In the same very real sense it "steals POWER" from the hoarders. (Meaning those whose BTC is not circulating and thus not affecting the production or consumption of new commodities.) And it gives that power to those who will affect production directly, or influence production through consumption.

I agree, and I make the claim that this is "a good thing".


I disagree with this because by its very nature, the Fed cannot benefit from receiving interest. As discussed above, the Fed represents an infinite hoard. It is of zero benefit if the hoard becomes "infinite+1".

Now if the fed demanded to be paid in corn, or cows then you would have reason to be suspicious. But it sees no benefit from more FRN.

The true price inflation rate is the difference between what goods would have costed at time T+1 with new money and a time T+1 without new money.   Thus even with "price stability" you still have a transfer of wealth from the savers (those who chose to hold currency and not spend) to the individual who got a loan and paid interest to the bank which paid interest to the Fed.   Thus the increase of purchasing power was transferred from the saver to the Fed.

I'll answer this, but I think your next post was much more interesting. I'll draw from that here as well.


This is the second time I've seen the line "The people whom receive the new money first benefit the most". I don't know if it was you or bytemaster that said it previously.

Who are these people? I've really never heard of the people who receive the money first.

The BEP makes the money and delivers it to the federal reserve. The federal reserve doesn't "spend it" in the any consumer like sense of those words. They simply keep big piles of it for banks to borrow. Those banks borrow it with interest. Granted, now the interest is very low. It's almost like borrowing it without interest, but it still has to be accounted for and repaid according to the loan terms.

So those would be "the people" who get the money first. But the banks don't take the money unless they can lend it out at a profit. Otherwise, the additional money would just be a liability. Yes, they get a lower interest rate, but interest rates always consider cost & risk. The large banks are *supposed* to be low risk. And the fed is *supposed* to monitor them to make sure they are. Lending only to a few low risk customers keeps costs down for the fed. Banks compete for borrowers but lend to riskier clients than the fed. That comes with additional costs and a higher rate.

I'm still not seeing "the evil people" who get an advantage. Unless you consider all banks that deal with the fed as those people. I'm also not seeing how anyone can take advantage of lower prices in the marked. Perhaps I'm dense.

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"Money spent into existence alters the price structure into something different than what it would be if that money had not been created."

I agree with that statement. After the money has been loaned and it is actually spent, thus entering circulation, then prices are different then if that money was hoarded out of circulation.

"By the time the money filters through the economy and raises the general level of prices due to more money chasing the same amount of goods, the non-recipients of this new money are left with less purchasing power than before."

We are not far apart on this point.

However, if the Fed does its job perfectly (according to its mandate) then the new money entering circulation, keeps the PRICES from deflating and they remain perfectly stable. If there were not ALREADY an increasing amount of goods trading, there would be no need for the fed to encourage more currency to circulate.

So with a perfect fed, existing dollar holders have exactly the same purchasing power as they had before the new money. But you are correct, they would have less purchasing power than they would have had if prices had been allowed to deflate.

And for complete clarity, in my view that is a good thing.

Money, when used in country, should not a commodity to be invested in. Specifically, you should NOT gain value by holding money in your piggybank or your mattress. That doesn't do anyone any good. You shouldn't necessarily lose value either.

I know you disagree, you consider it a benefit of delayed gratification. I read the other post.

But hoarding money OUTSIDE of circulation is fundamentally different than investing money in an interest bearing account. Saving's accounts pays interest because the money is not hoarded. Instead it circulates to people who use to create more commodity or service value. This additional created value IS "the time value" of money. It's the alternative to hoarding that is worth MORE than hoarding.

When money doesn't circulate, it is worth zero to the economy. I've heard the argument that "it's an investment in the economy" but that can't be correct.

If you and I each have $100 dollars and we both put them in our piggybanks we have both helped the economy none at all. Sure we are not competing for goods, so others might buy more with their money than if we competed with them. But "the economy" does not increase in commodity value. And if instead of putting my $100 in my piggybank I decided to burn the bills, I would still have exactly the same effect on the economy as you. Zero. There is no effect until the money starts to circulate again.

If we reward people for having no effect on the economy. Things will go badly. Hoarding money over time has no positive effect on commodity production, so it should not be rewarded by value creation.

Red, we could debate as I love to debate... but I am going to have to "let it rest" and get back to developing my bitcoin apps.   At least we can agree that bitcoin is a good thing even if we disagree about some economic theory.

I just answered this here.

https://bitcointalksearch.org/topic/m.7621


But as for the housing crisis, I didn't mention fractional reserve banking at all. I gave an coherent explanation of how it happened that didn't involve the fed printing money or even the banks making recursive loans.

You ignored that and replied, "it was fractional reserve banking", because you don't like fractional reserve banking. If you want to dispute me. At least show how what I said was not possible or even not probable.

By the way, the last paragraph is gibberish. Or is it just me?

How can the total debt of society be greater than the total savings?

Joe deposits $100 bank can lend $90 of it
Bob borrows $90 from the bank and spends it at Jill's store.
Jill deposits $90 bank can lend $81 of it
James borrows $81
..

Eventually you end up with accounts that amount to $100 + 90 + 81 + ... = $1000 from Joes $100 deposit.  At any given point in time there is more money chasing goods than actually exists.   If all depositors attempted to claim the money that is in their checking account (payable on demand) the system crashes.  

When you go to the bank and take out a mortgage the bank does not have enough money from depositors to fund your loan.  When you sign your "loan document" you create an interest bearing asset which they put on their books.  That interest bearing asset serves as the "reserve" used to back the creation of the notes they lend to you.   In effect, the new money is backed only by your promise to pay.  If you do not pay the bank eats the loss as they have a non performing asset on their books.   Thus there is no limit to mortgage money that can be lent, particularly when banks can borrow short term from the Fed in unlimited amounts and then lend long-term (another fraud).

Anyway, the housing bubble was only possible because of more money made available by cheap loans chasing the housing market.  The same thing is going on in education.

Few people actually have "money" in their retirement account.  Instead they hold assets (stocks, bonds, etc) that have a current market value.  This is not money, it is potential money.  If everyone tried to sell their asset and get the money then the demand for money would grow dramatically yet the supply of money would be fixed (for the day everyone tried to sell) and thus the price of assets falls.  So there is a clear difference between "notional value" of a retirement account and actual money.  

The proof that money was created to fund the housing bubble is when you consider that the real price index should include the price of housing as well as the price of stocks and anything else that can be purchased for money.  If something does fall in proportion to the price increases in other areas you have a net "price gain" and thus monetary inflation.  Thus the housing bubble on the scale observed could only happen with monetary inflation.

Hell, I predicted the crash.

I also listened to mortgage brokers on the phone in California. Realtors and other locals who made huge sums of money before the crash explaining why it could never happen.

"They are not making any more real estate! It is always going to go up in value! Look at the history, it's been up every year since world war 2!"

But the problems weren't caused by monetary inflation. The problems were caused by bad banking. And they weren't caused by creating money. They were caused by taking money from people's retirement accounts and "investing it" in California, Florida, Nevada, and Arizona pooled mortgage funds.

It was simple supply and demand. Investors wanted to buy pooled mortgage funds because they were safe and profitable. (Initially they were.) However, the initial well vetted mortgages got pooled first and sold to the smart guys who invented the concept.

Because of demand to buy these funds, mortgage brokers lowered all the vetting rules, so they could quickly close new mortgages to sell into the pools. A mortgage broker could loan mortgage money in the afternoon, and sell the mortgage into a pool before close of business. The buyers didn't do any checking so who cares if the brokers did any?

They loaned 9X people's annual salary with no money down. Then sold the mortgages as low risk investments. That is where the criminal fraud was. The big fund managers were irresponsible for not checking up on their suppliers. It was "bad banking" pure and simple. No money need be printed to create the inflation. It could have easily happened with a gold backed currency.

I met my first Libertarian roughly 35 years ago. But I've been hearing people advocate for going back the the gold standard for longer than that. I agree with the pragmatic nature of Libertarianism that says less government is better. However, often find distasteful many people who call themselves Libertarian but use it as an excuse to argue that police and drug laws are bad. Ones I actually know personally, do this because they use drugs irresponsibly and exhibit anti-social behavior which antagonizes the police. I prefer not to be lumped in with them, even though I have some of them as friends.

While I'm well aware of complaints about inflation and FRN, I had not heard it called Austrian economics. I disagree with the proponents of going back to the gold standard. I also find idiotic those who claim going off the gold standard was some sort of secret conspiracy. (I'm not claiming you are one of these Bitcoiner. I'm not so sure about Bytemaster though.) There were issues with gold backed money. It was publicly discussed, passed by congress and in all the papers. It was no secret. Lots of people didn't like it and many of them were rich. Poor people by definition had nothing to lose in the switch. So unless it was a conspiracy of the poor to steal value from the rich by causing inflation, it doesn't seem plausible.

It is like calling Obama-care a secret conspiracy. I disagree strongly with that, but it certainly wasn't a secret conspiracy. Yes it benefits some and disadvantages others. Yes, it institutionalizes the concept that there is a service you are entitled to but not responsible for paying for. But it wasn't a secret, and it wasn't a conspiracy of the insurance agencies, hospitals or medical professionals.


I pasted the quote because it was exactly what I was going to write about bytemaster's arguments on this site. Mainly this part:

"generally lacks scientific rigor,... theories are not formulated in formal mathematical form, but by using mainly verbal logic and what [he] claims are self-evident axioms."

also

His explanations are "contradicted by the evidence." At least by my experiences.

Communism in theory uses fatally flawed concepts. If ever we are to have communism on this world it will be in the form of vast material wealth that will leave nobody wanting for basic goods. Scarcity (and therefore economics) will always exist up until the point we can create new universes, or something like that. Maybe it will exist even then.
Communism in practice... 'nuff said. In my personal experience, the people I've encountered who support those ideals tend to argue with emotion, dismiss ideas out of hand, and blindly assert facts without backing them up. No wonder the methodology tended to be so violent. Communism is the perverted offspring of folk economics, a dead philosopher's ideals, and the power of the state.


Economics != Philosophy. Austrian economics does not say what ought to be, but it does tell you what happens. Are you a libertarian who's unfamiliar with the Austrian school or were you just joking around? Whether you agree or disagree, I recommend you at least do the research. Go over to the Mises forums, ask your questions there, and then feel free to disagree with the people who respond to you. At least have an open mind about it. Once you read more, you'll also find that there is actually plenty of empirical support for it, as well.


A copy/paste of something refuting something you admittedly are very unfamiliar with does not a valid criticism make

The criticisms there aren't very strong and misunderstand much of the Austrian School's points, like the whole "unscientific" thing. People who claim that don't really understand what it's about, and "a priori" are used in mathematics and geometry as well.


For the record, I agree with that one criticism that states that Austrians overplay their differences. There is nothing strange or unusual about the Austrian school of economics once you learn what it's all about, except perhaps the name.

Well, your theory that your loan could "increase deflation enough" to make negative interest rates work is clearly unfounded unless your loan represents a majority of the money supply.

You lend 100BTC and cause 10,000BTC worth of goods to enter the economy because your loan was going to cause deflation you "gave" -2% interest and thus lost 2BTC.     The entire BTC economy was worth 23,000,000 BTC before your loan and thus adding 10,000 BTC would cause .0004% price deflation to distribute 23,010,000 worth of goods over 23,000,000 units of exchange.   Clearly there is no way any individual could stimulate enough economic production to generate a profit from the resultant price deflation.  Even if said person had an investment that returned 100x startup costs.

Economics is not about math, it is about HUMAN ACTION.   There is no math that can explain human action because there are too many variables and people do not think like computers.

Besides, if austrian economics was so bad then why have they been predicating this crash while the "scientific economics" were promoting theories that depended upon exponential growth functions to stay solvent.   It is trivial to prove their equations false. 

It is like school kids manipulating algebraic equations to calculate area or volume without knowing what the numbers actually mean.

I don't think so. I think you understand this correctly.

However, let me give it to you as a deductive reasoning chain:

1. You loan 500 BTC to Fred for manufacturing improvements.
2. Manufacturing improvements increase productivity.
3. Increased productivity creates more commodities to trade.
4. More commodities trading compete for a fixed number of bitcoins to trade with.
5. Competition for bitcoins increases their value.
6. Increased value of the repaid coins means commodity value break even is less than the principle of the loan.

Seems perfectly logical via deductive reasoning. You can always finish the chain by saying it is up to the lender how much less he is willing to take.

The problem with all this deductive reasoning is that it is completely pointless. No where did I give you any math that attempted to show how much deflation the given investment would/could cause.

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Thought about more mathematically, a loan with negative interest is equivalent to two separate transactions.
1. The amount of the loan that requires repayment (at zero percent interest).
2. A gift for the rest of the amount.

Deductive logic would say, there might exist cases where I might donate money with the hope of increasing deflation. And if I would give money away for that, then there is no loss in loaning money for that.
Therefore, the proposition is again reasonable.

====

Inductive reasoning however says.
1. Take the loan.
2. Repay the loan.
3. Keep the difference.

That makes a lousy business model for a bank.

Just be careful of bad math that cause you to believe in something that isn't true. Your map does not correspond to the territory and all.

You don't want to be like Paul Samuelson with his economic textbook touting the idea that the Soviet economy will surpass the USA's economy. He didn't understand how they work at all.

The Austrian schools merely derive their economic from deductive logics. So there is a way to disprove them. Just explain their logical mistakes.

Market - not central bank - interest rates will always be positive to reflect risk and the time preference.  Unless the loan is such that it would significantly affect total productivity in the economy surrounding the given currency - very unlikely - then negative interest rates make no sense.

Am I missing something?

I was going to summarize my criticisms of your point of view but wikipedia already did it better.

It is enough to say that I concur.

By the way, just because people put extensive thought into something doesn't imply it is correct. The communists had lots of theories about why that model was better. Empirically, they didn't prove out. Many people saw the consequences of communism as mathematically obvious. That did not make them closed minded.

For the record, I'm a pragmatic libertarian. Believe but do your own math. Math works. Empirically validated functions rule. Philosophy is easy to twist to any whim. That is my philosophy! :-)

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Criticism of the Austrian School

Critics have concluded that modern Austrian economics generally lacks scientific rigor,[10][12] which forms the basis of the most prominent criticism of the school. Austrian theories are not formulated in formal mathematical form,[107] but by using mainly verbal logic and what proponents claim are self-evident axioms. Mainstream economists believe that this makes Austrian theories too imprecisely defined to be clearly used to explain or predict real world events. Economist Bryan Caplan noted that, "what prevents Austrian economists from getting more publications in mainstream journals is that their papers rarely use mathematics or econometrics."
A related criticism[5][108] is applied to Austrian School leaders; these leaders have advocated a rejection of methods which involve directly using empirical data in the development of (falsifiable) theories; application of empirical data is fundamental to the scientific method.[109] In particular, Austrian School leader, Ludwig von Mises, has been described as the mid-20th century's "archetypal 'unscientific' economist."[110] Mises wrote of his economic methodology that "its statements and propositions are not derived from experience... They are not subject to verification or falsification on the ground of experience and facts."[111] Murray Rothbard was also an adherent of Mises's methodology, and though Rothbard assigned a quasi-empirical description to it, he comments that "it should be obvious that this type of 'empiricism' is so out of step with modern empiricism that I may just as well continue to call it a priori for present purposes".[112] Additionally, the prominent Austrian economist, F. A. Hayek, stated his belief that social science theories can "never be verified or falsified by reference to facts."[113] Such rejections of empirical evidence in economics by Austrian School leaders have led to the school being dismissed within the mainstream.[5]
Another general criticism of the School is that although it claims to highlight shortcomings in traditional methodology, it fails to provide viable alternatives for making positive contributions to economic theory.[114] In his critique of Austrian economics, Caplan stated that Austrian economists have often misunderstood modern economics, causing them to overstate their differences with it. He argued that several of the most important Austrian claims are false or overstated. For example, Austrian economists object to the use of cardinal utility in microeconomic theory; however, microeconomic theorists go to great pains to show that their results hold for all monotonic transformations of utility, and so are true for purely ordinal preferences.[10][23] Caplan has also criticized the school for rejecting on principle the use of mathematics or econometrics.
There are also criticisms of specific Austrian theories. For example, Nobel laureate Milton Friedman, after examining the history of business cycles in the US, concluded that "The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false."[6][103][115] In addition to Milton Friedman's criticism, Nobel laureate and neo-Keynesian economist Paul Krugman argued that Austrian business cycle theory implies that consumption would increase during downturns, and cannot explain the empirical observation that spending in all sectors of the economy fall during a recession.[7]
Economist Jeffrey Sachs has pointed out that when comparing developed free-market economies, those that have high rates of taxation and high social welfare spending perform better on most measures of economic performance compared to countries with low rates of taxation and low social outlays. He asserts that poverty rates are lower, median income is higher, the budget has larger surpluses, and the trade balance is stronger (although unemployment tends to be higher). He concludes that Friedrich Hayek was wrong when he said that high taxation would be a threat to freedom; but rather, a generous social-welfare state leads to fairness, economic equality, international competitiveness, and strong vibrant democracies.[116] In response to Sachs' article, William Easterly states that Hayek, writing in 1944, correctly recognized the dangers of large-scale state economic planning. He also questions the validity of comparing poverty levels in the Nordic countries and the United States, when the former have been moving away from social planning toward a more market-based economy, and the latter has historically taken in impoverished immigrants. Easterly also argues that laissez-faire countries were the leaders of "the ongoing global industrial revolution" which is responsible for abolishing much of the world's poverty.[117]

Red, considering you have shown your ignorance of the subject of austrian economics by not even knowing its origin I would recommend that you visit mises.org and read Mises on Money (http://mises.org/money.asp)  where you can gain a full understanding of the theory and thus can discuss more in depth.  These are not half-baked ideas thrown out by random bloggers or "conspiracy theorists".   

Most people who know austrian economics also fully understand keysian economics (because we are bombarded with it by the government and banker controlled media and education systems).  However, few people who promote keysian economics can even explain what austiran economics is or the foundational principles upon which it is built.  They hear the conclusions and interpret them through Keysian glasses.

Bottom line is that "conventional economic theory" depends upon and enables big government and the inherit violation of individual liberty.  It also failed to predict the current crisis.  It is because of a need to "rationalize" government power and to "fund" endless government deficits and to justify "spending yourself to prosperity" that mainstream economics is so popular with government and their propaganda outlets (universities, media). 

Bitcoiner: I disagree with your viewpoints but they are worth the discussion value.

My previous comment referred to the prior post by another and related video in another thread. I'm done there. Sometimes not trying to convince people of their ignorance is the most valuable choice.


If I failed to respond to particular points it was because I was replying from a cell phone with limited keyboard. I will reply in depth as I get access to more efficient devices.


In the meantime, why is it called austrian economic theory? Last I checked the austrians were part of the EU common currency? No one claims the euro is a fixed currency system do they?

PS: this is a thread about the likelihood of people, banks or groups lending with negative interest. I think I responded very coherently about that. In this thread please feel free to refute my premise that PRICE inflation encourages lending, and PRICE deflation makes lending much riskier for the lender and more expensive for the borrower. Therefore it is highly unlikely that widespread lending at negative rates will evolve.

I could say the same thing about your worldview. Are you unwilling to continue the discussion because you realize you are standing on a house of cards, or is it simply because it is your own mind that is closed and is unwilling to learn, which is why you simply dismiss ideas that you do not understand?