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"There is a natural rate of interest in an economy." Yes, and the base rate is zero. Since reserves are costless to produce and banks can't get rid of them in
by neilwilson 6y ago
"There is a natural rate of interest in an economy."
Yes, and the base rate is zero. Since reserves are costless to produce and banks can't get rid of them in aggregate the base rate should always be zero.
It is rates above zero that are unnatural since by definition they are a market intervention that reduces the price of all other assets and drives up yields artificially.
The state shouldn't be paying a Basic Income to banks in the form of interest on reserves. Banks should earn their crust by lending productively.
Beyond that the rate of interest is the one estimated by the lender to be sufficient to cover the risk of discounting your collateral into the state's liquidity.
Banks are really just pawnbrokers with shinier suits and better PR.
- 6510 6y agoHow would banks lend productively? (just curious)
- voisin 6y agoBorrow from depositors at one rate, lend to borrowers at a higher rate with losses to bad loans amounting to less than the spread.
- AbrahamParangi 6y agoThe base rate is non-zero because capital has non-zero cost. Interest is just the limit of the cost of capital. If you don’t have a fed, or if the fed does nothing then interest rates will converge on their own to a positive value.
- neilwilson 6y agoBanks have a capital cost. The central bank does not. I was talking about base rates. Banks mark up on base rate to cover the risk to their capital
- alexmingoia 6y agoThe natural interest rate refers to the interest rate in a free market of banking. In a free market interest rates would not be zero otherwise the bank can’t make any money...
- neilwilson 6y agoWhere did I say commercial bank lending rates would be Zero?