Savings and Interest Rates

[John_James]

First off, welcome to the forum! Always good to have curious new visitors. Definitely check out the welcome thread and the rest of great content listed in the Ultimate Beginner meta-thread.

Yeah, Tom’s pretty busy. And as you might imagine, you’re not the first guy to email him for help. Definitely check out his post there. I think he has a point.

So I’ll help with some clarification, but I do feel apprehensive about basically making your arguments for you. The boxer doesn’t run out and get his trainer to step in the ring because he himself doesn’t know enough about boxing. He trains until he’s ready to step in the ring. And sure, some learning comes with actual experience in the ring, meaning eventually you just gotta get in there and mix it up, and maybe get your ass handed to you. But that will give you an idea of where your weaknesses are, (and therefore in what areas you need to train), as well as what you’ll find in the realm of opponents.

So don’t be afraid to get into debates, but don’t go looking for them either, if you’re not prepared to either have a good showing, or come out feeling and looking bad.

That being said, I can see why you came looking for help. This guy was really trying to intimidate you. He starts off with his resume, and then proceeds with a bunch of needless verbiage to make himself sound smart, almost to a supercilious degree:

Secondly signals interest rates are, but more importantly and primarily a value assigned to the currency based on future expectations via intertemporal costings and constraints are what interest rates signify. People save because rates are high, arbitrage in both the triangular and spatial sense fully state that equalisation of returns occurs in the long run.

People don’t talk like that unless they’re trying to make a display of some kind. “signals interest rates are,…” Who is he, Yoda?

He’s not even making a point there. He ends the paragraph alleging that it’s nonsense to say that interest rates naturally fall when savings are high, but in the very same sentence (next clause) admits that that’s the case: “IRs are high and they will continue to be until investment returns have equalised to that level”…i.e., interest rates will fall when consumer preferences are such that the price of borrowing is so costly so as to make it too unattractive for lenders to maintain that rate…i.e. when savings are high).

Inflation doesn’t make people poorer it makes the value of the currency deteriorate.

Ah. I see. And fire doesn’t make things hot, it “makes molecules undergo a physical change.”

His quote from Friedman has absolutely nothing to do with (let alone support) his assertion that inflation doesn’t make people poorer. Friedman was meaning to merely point out that inflation (that is, what people understand as “a general rise in prices”) is not caused by some government mandate or regulation on the price of gasoline or an increase in the demand for corn, or something of that sort. Friedman was simply trying to erase the fallacious notion that “a general rise in prices” can occur from anything other than an increase in the supply of money. (Look up “demand pull” and “cost push” inflation and you’ll see why Friedman was so adamant as to make a statement “always and everywhere a monetary phenomenon”…as in, it’s determined by money supply…not by all these other factors that morons have come up with.)

This has nothing to do with the fallacious notion that "a devalued currency “can boost exports and business and make people relatively richer”. See here and here.

And I can’t believe he actually went the extra mile and claimed wages rise at the same rate prices do. (Granted he gave himself an escape hatch by including the word “can”, but still.) Not even the Keynesians go that far. Indeed, a big part of their model (if you can call it that) relies on price/wage “stickiness”.

Money is not centrally planned it is a commodity good with a derived demand that has significant impacts on the economy and so is regulated. Central planners would stupidly set the base rate and high powered money supply and wonder why it didnt work

Uh. That’s exactly what has been happening.

the free market is working well here with the Central Banks monetary policy acting within a free market set up.

There’s multiple laughs within this single clause:

1. The fact that he can admit the money supply is manipulated by a central banking authority, and still claim there is a “free market” at work.

2. The fact that he claims it’s “working well” (but of course I’m sure he’d claim “it’d be a lot worse…blah blah blah”).

3. The fact that he essentially claims there’s a free market at work simultaneously with central planning of the money supply. (Which is different than #1. Not only is he claiming there is a free market at work, he’s claiming that such a thing can exist at the exact same time as central planning.)

So, once again, I am averse to making arguments for you, but I felt it would be useful and helpful to point out the various fallacies with his post. What you will find is most often the opposition you face will simply be a string of fallacies…either misunderstandings of economics in general, or misunderstandings of the particular topic being discussed (for example, Austrian theory).

It is important to be attentive to the details and implications of the claims being made, but at the same time I suppose a firm grounding in reality and sound economics is a necessary part of being able to do that. So again, definitely check out the Ultimate Beginner meta-thread for some good introduction. (If you don’t have much time to read yet, scroll to the bottom for a good series of intro videos.)