Re: Economic Rent in Terms of Risk Free Interest Rate

>>The natural rate of interest is the interest rate that would exist in a
>>market devoid of inflation and risk.

>Inflation we can ignore, but no risk? How unnatural is _that_?

It's necessary if we are to make an objective comparison.

>>It simply reflects the time
>>preferences of lenders and borrowers.


>That's simply gobbledegook. The time preferences of borrowers and
>lenders are imponderable, and whatever they are (and I note you cannot
>prove they produce a positive interest rate) actual interest rates
>show no systematic relationship to them. None. IMO the most
>important factor in determining actual interest rates is the
>availability of rent collection privileges for purchase -- i.e.,
>borrowers must compete with rent collection privileges for money
>owners' money.

Do you have any empirical data that shows a positive correlation
between the interest rate and the relative availability of "rent
collection privileges"?

>>It will tend to be positive for the simple reason that if my time
>>preference is for money in the future and I possess this money in the
>>present, I need not do anything (e.g., I need not loan it out), and I
>>will still have the money in the future.


>Wrong. You _might_ have the money in the future, and you might not.
>You might also die before you get to spend it.

Those are all risks.

>Furthermore, if you
>prefer your money in the future,
>_you_will_be_willing_to_take_less_of_it_then_ in exchange for your
>more of it now -- i.e., accept a negative interest rate --

Nonsense. If you have the money now and eliminate risk from the
equation, then you have the money in the future as well.

>and in fact
>that is exactly what people do in accepting the risk that their cash
>will be stolen, inflated, squandered by crooked bankers, or otherwise
>made less valuable in the future than it is now.

The "natural rate of interest" assumes a risk free environment.

>The point is, money holders don't want any of the things their money
>can buy now, but they believe they might want something it will be
>able to buy in the future.

Right.

>So _their_ natural rate of interest is
>negative.

Wrong.

>If negative interest was absolutely unavoidable, they
>_still_ wouldn't spend the money now, unless the negative interest
>rate was so high that they saw their expected utility declining.

Except that negative interest is avoidable - they can just sit on the
money rather than lending it out at negative interest.

>>On the other hand, if my time
>>preference is for money in the present and I do not possess this money
>>in the present, I will have to pay someone else who has either a time
>>preference for money in the future (and would be neutral based on the
>>above) or a time preference for money in the present (who would have to
>>be compensated in order to part with the money he wants now) to lend me
>>the money in the present.


>Right. Interest comes from the competition among those who want money
>now, not the preferences of those who want it in the future. If it
>were the latter, interest rates would be negative, as proved above.

Competition to get the money from whom? Those who have it now but
prefer to have it in the future. Of course, as I have shown, if you
have it now, it doesn't really matter what your time preference is
since you can do nothing and still have it in the future.

>>In any event, the possibility that the money will be stolen or
>>destroyed represents a risk, and we are discussing the risk-free rate
>>here.


>No, we are not. You talked about a "natural" rate of interest. A
>risk-free interest rate is not only unnatural, it is purely
>theoretical.

Then we have a terminology difference. When I say natural rate of
interest, I mean the theoretical rate of interest after eliminating
all risks (including inflation risk).


>>They could do any manner of things with it - spend it,

>Nope. If they wanted to spend it, they would. They have no immediate
>use for it.

That depends. If faced with permanently losing some of the money, they
may change their time preference and decide to spend it instead.


>>invest it, etc.
>>By loaning it out they forego those potential options.


>Loaning it out at interest is effectively the same thing as investing
>it: foregoing (unwanted) current consumption in favor of potentially
>more -- and potentially less -- desirable consumption later. So they
>basically only have three choices: spend it, invest it, or stuff it in
>a mattress and hope it doesn't burn. We already know they don't want
>to spend it. The mattress does inherently carry a risk of loss, even
>if it is only the risk that the owner will die before spending the
>money. So lending or investing is the only outlet.

>Now, if nobody wanted to borrow, or borrowers were not willing to pay
>any interest (in fact charged negative interest, like the Swiss
>banks), the money's owner would have to weigh the risk of the mattress
>against the negative interest. If the mattress (and all the best
>equivalent storage factilities) had some probability of total loss,
>then the money owner _would_in_fact_ be willing to pay negative
>interest to a risk-free borrower, up to a rate dependent on his risk
>tolerance.

It's become clear that we are using two different definitions of the
natural rate of interest here, with mine being far narrower. To be
clear, I will use the phrase "natural risk-free rate of interest" going
forward.

.

Relevant Pages

  • Re: OT: NOT EVIL JUST WRONG
    ... Insurance against the wrong problem is ... If you disagree with teh analogy, ... Federal money ... A risk is perceived, and peopel choose how to respond. ...
    (sci.electronics.design)
  • Re: northern crock dies....clown dithers for six months....bear stearn taken over in 2 days....
    ... Similar terms were on offer with regard to NR They do involve public ... risk but with risk goes potential reward. ... The US government spends US money as it sees fit. ... jpm own bear stearns.... ...
    (uk.politics.misc)
  • Re: Does Greece produce anything?
    ... decent university education has left the country thanks to National Service ... So if you get rid of National Service then jobs will be created? ... It takes a special person with a risk tolerance, ... I can get more in interest from a bank and my money will be safer. ...
    (soc.culture.greek)
  • Re: TURMEL: Ben Franklin, Prof. Flaherty, on Death gamble
    ... > provide is the same between a small loan and a large. ... > outstanding principal are a risk premium, ... > amalgamated to the power of government. ... that Congress shall have the power "To coin Money, ...
    (sci.econ)
  • Re: Economic Rent in Terms of Risk Free Interest Rate
    ... >>>protection costs are likely to exceed the natural rate of interest. ... >market devoid of inflation and risk. ... >preferences of lenders and borrowers. ... borrowers must compete with rent collection privileges for money ...
    (sci.econ)