Economics Questions

Re: Where does interest rate come from?

durentu — Thu, 07 Jun 2012 04:12:27 GMT

Adding to Jon Irenicus 's post above...

This is where the concept of interest comes from. The money to pay the interest ultimately comes from labor, aka wealth creation.

All things comes from land and labor. The simple act of picking up an apple off the ground and selling it to our friend is production and entrepreneurial.

- Suppose that the apple you picked up (produced) trades for 25 cents to your buddy.

- Then you pick up another apple and cleaned it with a nice shine. This trades with another friend for 35 cents.

- Then you pick up another apple, cleaned it, cored it, and served it in 6 slices. That trades for 50 cents.

- Then you perform the 50 cent apple with entertainment with the eating of that apple. This gets you $2.50

So, from 25 cents up to $2.50 - all simply coming from labor. Either directly on the product, or investing it into a capital good (like a knife to cut apples). This exrta labor, this wealth creation is how interest is paid, even though the money supply is static.

Re: Where does interest rate come from?

Andrew Cain — Tue, 20 Jan 2009 03:22:58 GMT

Mantas:

But still what is the profit to commercial banks? Commercial banks will continue to use fractional reserve banking, don't you think so?

They make profit by holding onto the people's good for a fee. Fractional reserve could continue but there would be Anti-banking leagues which educate the populace on the problems of such a tactic. (It is essentially illegal to do that now)

Re: Where does interest rate come from?

Juan — Sun, 18 Jan 2009 04:15:12 GMT

GS:
I'm just nitpicking here as opposed to challenging you, but wouldn't it be more correct to say that capital is the result of entrepreneurial activity and deferred consumption?

I guess so. In order to save wealth it must be firstly earned/produced...

Re: Where does interest rate come from?

hayekianxyz — Sun, 18 Jan 2009 02:02:22 GMT

Mantas:
But still what is the profit to commercial banks? Commercial banks will continue to use fractional reserve banking, don't you think so?

That's sort of the whole point as to why fractional reserve banking isn't a legitimate business. It confuses a loan contract with a irregular deposity contract. Which are two different and not compatible contracts (for example, one has a specified length and deferred consumption is necessary, this isn't the case with the other).

Re: Where does interest rate come from?

hayekianxyz — Sun, 18 Jan 2009 02:00:45 GMT

Juan:
But not all capital comes from savings. Capital is also created by entrepreneurial activity.

I'm just nitpicking here as opposed to challenging you, but wouldn't it be more correct to say that capital is the result of entrepreneurial activity and deferred consumption?

Re: Where does interest rate come from?

Scott Jefferies — Sun, 18 Jan 2009 00:00:45 GMT

I think the big misconception here is that banks give you interest just to hold your money in a warehouse. There would be absolutely no reason for a bank to provide you interest on money that is idly sitting in the vaults.

A major source of profit for banks is collecting interest from lending out loans. The reason why you get any of the money from their lending is because they are using your money, with or without your consent. When you draw money from your account you are not taking back what you put in, but rather taking from a collective pool of the banks capital.

While Austrians would prefer full reserve banking, all they really want is for banks to make the risks inherent in fractional reserve banking clear to the account holders.

Re: Where does interest rate come from?

Jon Irenicus — Sat, 17 Jan 2009 14:15:30 GMT

No? They can just charge a fee for storage that covers their costs. What you mean I think is loans, which come out of time deposits, where the depositor is not allowed to withdraw their funds for a specified period of time. The bank can loan out this money (provided it secures the consent of the depositor), paying the depositor an interest rate for providing them with the money and charging a higher interest rate for the money they loan out, with the difference being their earnings.

Re: Where does interest rate come from?

Mantas — Sat, 17 Jan 2009 14:10:55 GMT

Laughing Man:

I would say that banks act as more of a warehouse for the storage of people's money.

But still what is the profit to commercial banks? Commercial banks will continue to use fractional reserve banking, don't you think so?

Re: Where does interest rate come from?

Jon Irenicus — Sat, 17 Jan 2009 03:16:08 GMT

Interest rates reflect the price of time. Individuals who wish to consume more now can do so by borrowing funds from those who wish to consume more later. The less urgently the latter wish to consume in the present (i.e. the lower their time preference is), the lower the discount rate on future goods will be, and hence the lower the interest rate. The interest rate goes down as more savings accumulate, i.e. as the social rate of time preference falls. Banks coordinate the lending-borrowing process.

Re: Where does interest rate come from?

Andrew Cain — Sat, 17 Jan 2009 02:37:44 GMT

I would say that banks act as more of a warehouse for the storage of people's money.

Re: Where does interest rate come from?

Juan — Thu, 15 Jan 2009 22:33:34 GMT

Let's say you lend me some garden tools and I use them to plant a kitchen garden. After some months I give you back the tools (principal) plus some of the food I grew (interest). Easy. The same thing happens if a bunch of people get a loan to start a new factory. Or any other productive investment.

what role would play commercial banks by Austrian theory ?

Banks can act as middlemen between people who own capital and want to lend it and people who want to borrow it...

Re: Where does interest rate come from?

Mantas — Thu, 15 Jan 2009 22:13:33 GMT

Juan:
But not all capital comes from savings. Capital is also created by entrepreneurial activity. That's how interest is payed.

Could you explain this in more details?

Second question: if I get interest from successful investment in some activity, what role would play commercial banks by Austrian theory?

Re: Where does interest rate come from?

Juan — Thu, 15 Jan 2009 21:31:19 GMT

But not all capital comes from savings. Capital is also created by entrepreneurial activity. That's how interest is payed.

What libertarian economists say is that all credit must be backed by real savings, otherwise problems will arise.

And if I put a deposit to the bank so where interest rate comes from? If central banks would not print extra money, so how commercial banks will pay me a interest?

Your money is supposed to be invested in an activity which creates value. That new value will pay your interest. This is very different from interest being payed by simply counterfeiting more fiat money.

Where does interest rate come from?

Mantas — Thu, 15 Jan 2009 21:06:45 GMT

Hello,

I have a question to you all! Austrians (Austrian theory of business cycles) emphasize that all the capital must come from savings. And if I put a deposit to the bank so where interest rate comes from? If central banks would not print extra money, so how commercial banks will pay me a interest? Could you explain this?

Thank you in advance!