Under a stable purchasing power, I would want a positive return on a loan (interest); otherwise what’s the point in lending it out? I lend 100 gold dollars for 105 gold dollars in a year.
In a deflationary period, where purchasing power increases, I would want a positive return; if I held the money myself it would gain purchasing power, and if I loan it out I could earn purchasing power on top of that.
In an inflationary period, where purchasing power decreases, I would want a positive return; if I held the money myself it would lose purchasing power, and if I loan it out I could earn purchasing power to regain some or all of those losses. But would I always be able to demand an interest rate that at least covers the inflation rate? If 100 dollars today would have the equivalent purchasing power that 110 dollars in the future would have, would I loan out for 105 dollars or only for 115 dollars?
I think I have an answer to this myself, but I want to make sure of this because of a lecture I’ll be releasing by someone else.
You can demand any rate (and at any risk level) you want but there’s no guarantee that the market will give it to you. You hit on an important and oft neglected aspect of inflation. It forces you to take on risk to keep your purchasing power constant. You must keep running just to stay at the same spot.
This doesn’t answer the question though. Loaning out money at a positive interest rate, even if that doesn’t cover the inflation, is beneficial to you; right?
If you just sit on your money, it will lose value over time. I guess that makes you want to spend more now than in the future, and raise your price a little bit for lending money. But still, there is nothing you can do about your money losing value. At best you could try to have not lose as much as it otherwise would? Isn’t that pretty much what most people nowadays do? I have a decent interest rate, but I know prices are going up a lot faster than the government is telling people it is.
There is a fairly simple strategy that savers/lenders can use for overcoming this problem [i.e. loss of purchasing power of long- term savings or loans].
Although “past performance does not guarantee future performance”, this system has worked for me for 20+years.
To learn more just click on my user name “onebornfree” and take a look at my user profile, or private message me .
It looks like this thread was heavily moderated for some reason.
My question has to do with this video by Hans Hoppe. If you start at the 18m27s point (and listen until 20m56s) you’ll hear him point out that the interest rate under inflation would have to cover the inflationary losses. I think that’s wrong and I think he probably made a temporary judgment error:
He is absolutely correct. But remember, this applies to the ERE. In the real world, during a particular duration of time, this may not be the case. But it is also possible that during a particular duration of time, the interest rate would more then cover inflation, that is, the error would be in the other direction - to the benefit of the depositor.
I don’t know for sure, but it probably didn’t get deleted. The server at this site sometimes doesn’t allow posts to send for some reason. It’s a technical difficulty. Nothing that has to do with the content of any particular post. Anymore I copy my posts before I hit the button “Post”, so, if it doesn’t go through I don’t lose what I typed and simply paste it back on a new post and try again.
Yes. Even if inflation is 50%, lending your money at 1% beats sitting on it at 0%.
More importantly, the’re is no such thing as a risk-free rate/loan in a free market. The interest rate you receive is (should be) dependent on the riskiness of the loan you are making. So there’s no ONE interest rate to speak of. I also believe that there will be no such thing as inflation/deflation in a free market, as well. Those aggregate terms are only relevant when a central bank has the power to manipulate (and a government to allocate) immense amounts of money into an economy, but I digress.
No, there was definitely something deleted. The thread went from 8 or so posts to 3 posts the next day. I suspect some moderator thought a certain post was not relevant enough, and then deleted it, which caused it’s follow-up posts to be deleted as well (even if they were meant as responses to the main line).
There are no guarantees in life - it is possible you will lose your money completely. Your question is really whether the market interest rate can always maintain “purchasing power”*. I think the answer is no. You could have a natural disaster that makes money in low demand and high supply (perhaps looters can raid vaults) and of much lower relative value than other things, such as food, water and shelter. In such a situation, the market will not maintain the “purchasing power” of money, money will lose its purchasing power far faster than any investment could recoup the losses.
In a relatively stable, natural order economy, however, I think that inflation would be relatively rare and mild. Since natural money is a commodity, the supply of the monetary commodity can only be greatly increased by technological breakthroughs, so you do not have to worry about inflation resulting from massive increases in the money supply. Inflation can also occur as a result of flight out of money but you have to ask yourself what are the circumstances in which this can be expected to happen? It would only happen in a socio-political context that makes it safer to hold real goods than money, namely, in high-tax, heavily collectivist and wealth-punitive social orders.
Clayton -
*I’m placing quotes around it because it is a dangerous term which gives the appearance of objective meaning when it, in fact, has none
Thanks. But I don’t think that answers the question at all. It seems to me that Hoppe (see the link above) makes a specific claim, namely that a loan with interest, and so ‘the interest rate’, would at least cover inflationary losses.
Everlasting Rotating Economy. Or what the mainstream economists call equilibrium state.
A person will lend out money only for a positive interest. If he expects his money to lose in value due to inflation, he will factor that into his calculation. Arbitrage operations in the market between the various alternatives for investment will bring the interest rate to be uniform for all types of investments. This means that if there is inflation, then that will have to be factored into the interest rate.
The problem though is that many do not know specifically what the percentage of loss will be in his purchasing power. He can only make a speculative guess.
That’s why I said that Hoppe is talking about the ERE. In the ERE there is no more uncertainty.
In the real world, the problem you are talking about is not unique to inflation or interest rate. It is simply the “problem” of uncertainty. That’s why the market is a process. A process of entrepreneurship.
Hoppe is correct then. Perhaps he should have said that the rate will tend to cover for inflation. But you know, economists like to simplify life sometimes by referring to the ERE.
But why? Hoppe explains that if you sit on your money and there is no inflation/deflation, you have the same value. So to loan it out you want compensation. I understand that; simple. Now, under inflation, don’t we also have to compare loaning out money with sitting on it? Because if we sit on it it will lose value. So wouldn’t getting more monetary units back in a year be better, even if we can’t beat inflation?
Ahh yes good point. I didn’t think of that. On a side note though in HA Mises seem to warn against generally making widespread blanket assumptions based on the ERE model. Perhaps Hoppe is still making a generalization error.
Mises pretty states that Human action in and of itself necessarily implies a state of change, a state where there is no equilibrium, for if there was there would be no need to change, no need for human action. So he basically states that an ERE is great only is so far as it helps us understand various concepts. But as a whole is a fallacy, an economy changes just as human action implies change. Prices, action, exchange, and all variants of praxeology necessarily imply instability.
Considering that I somewhat missed the point I may be off basis but perhaps it’s worth mentioning anyways. Thanks!
Errmm.. this is a fairly brilliant point I had never thought of. But when a consumer has a high expectation of heavy inflation he has incentive then to move his investments away from low yielding securities, into high risk high gain vehicles. The problem though is that IS additional incentive which also drives the malinvestment bubble. So not only is it the excess credit which drives too much risky investment, it’s the incentive to no longer invest in lower yielding securities but instead send your money to more risky ventures. And since everyone is doing this it drives more risky entrepreneurial behavior.