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Author Topic: Lending at negative interest rates. (People like bigger numbers.)  (Read 7405 times)
bytemaster
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August 05, 2010, 04:55:55 PM
 #41

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.

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August 05, 2010, 05:28:13 PM
 #42

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.   

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)

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.

So back to your points again.

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.   

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".

Thus the increase of purchasing power was transferred from the saver to the Fed.

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.
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August 05, 2010, 07:07:18 PM
 #43

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.






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August 05, 2010, 09:38:16 PM
 #44

Quote
 ... the borrower would have to be even more profitable to justify borrowing instead of saving.

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.
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