Economics Questions

Re: Austrians, how are money and interest rates related?

Lagrange multiplier — Thu, 05 Aug 2010 01:33:45 GMT

I did!

Re: Austrians, how are money and interest rates related?

Esuric — Thu, 05 Aug 2010 01:32:35 GMT

Will you actually read and respond to my answer this time? Because you completely ignored my definition of economic bubbles and yet you continue to press the issue.

Re: Austrians, how are money and interest rates related?

Sieben — Thu, 05 Aug 2010 01:30:55 GMT

Its not any particular amount of money, its how money enters into the economy that screw things up. If David Hume's toothfairy doubled the supply of fiat money in everyone's pocket at the same time, nothing would happen.

Neoclassical:
When the money supply is increasing and prices are rising, nominal interest rates are high, not low, because lenders must be compensated for the fact that they will be paid back in dollars worth less than the ones they lent."

Which is why I would lend you money at a rate of 15% because I inspect pretty severe inflation. However, if I am a central bank and can create money out of thin air and wish to make as many loans as possible, I have to lower the interest rate, even to the point where I am paying people to take the new money.

Austrians, how are money and interest rates related?

Lagrange multiplier — Thu, 05 Aug 2010 00:57:40 GMT

Essentially, Austrians, I would you to defend or argue against the following quote from David Friedman:

"The interest rate is the rent of money measured in money. Suppose you borrow a hundred dollars at ten percent. If the price of a dollar is two apples, you are borrowing the price of two hundred apples and paying the price of twenty apples a year in interest. If the money supply doubles, prices double, including the price of an apple, you are borrowing the price of a hundred apples and paying the price of ten apples a year in interest. If you prefer, you could do the same real transaction as before by borrowing two hundred dollars and paying twenty dollars a year interest, still at ten percent.

As this example suggests, there is no connection between the amount of money in circulation and the interest rate. There is a connection between the rate of change of the amount of money in circulation and the interest rate, but it goes in the opposite of the direction implied by the error I am discussing. When the money supply is increasing and prices are rising, nominal interest rates are high, not low, because lenders must be compensated for the fact that they will be paid back in dollars worth less than the ones they lent."