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> A currency needs to be inflationary or people hoard it instead of spending it [...] No, not at all. All you need is a sufficiently high rate of interest. The
by runeks 6y ago
> A currency needs to be inflationary or people hoard it instead of spending it [...]
No, not at all. All you need is a sufficiently high rate of interest. The higher the rate of interest, the more you miss out on if you hoard instead of lend.
- bildung 6y agoTechnically true, but outside of crises interest and inflation are heavily correlated. Have a look at e.g. the historical federal funds rate: https://tradingeconomics.com/united-states/interest-rate https://tradingeconomics.com/united-states/interest-rate and historical inflation: https://tradingeconomics.com/united-states/inflation-cpi https://tradingeconomics.com/united-states/inflation-cpi (you have to set both to "max" manually). In other words: You won't get high interest without high inflation.
- runeks 6y agoI don't think you’re including enough data in your analysis. I agree that there’s been a correlation between the inflation rate and the rate of interest for the past century, but before that there was no such correlation. It seems to be a feature of our current monetary system. Also, the correlation between a rising rate of interest and rising prices is much better than high interest/high inflation [1]. For example, from 1990 to 2000 we had relatively little inflation but the rate of interest was 5-8%. [1] https://fred.stlouisfed.org/graph/?g=DCxk https://fred.stlouisfed.org/graph/?g=DCxk
- bildung 6y agoWell before that period the federal funds rate didn't exist, so one can't compare it to the wild swings from inflation to deflation in the 19th century. (There are a bunch of studies for stock and property returns, or for treasuries like you linked, but that's something quite different).
- runeks 5y agoBill of Exchange discounting goes back many centuries. It should be possible to compare this historic discount rate to inflation. I think it would be interesting to see the result, but I don’t have the data unfortunately.
- imtringued 6y agoMost people will rightfully think that the interest paid from lending will not be high enough to reduce the risk of default. The interest rates would have to be very high.
- noxer 5y agoHoarding and lending is "the same" in this case. Someone else spends your money but he has to pay it back. He can only do that if whatever he "produces" makes a profit which means someone else must buy something aka spend money. Why would someone spend money if hoarding/lending makes him buy more later? Also if lending becomes more profitable than hoarding everyone offers to lend which obviously pushes lending returns down. So in the end there will be a balance between lending and hoarding but both will return profit so there is no reason to buy something today if you could buy it cheaper tomorrow. The effect for this is exactly the same with or without lending. It wrecks the supply chains because it becomes financially acceptable to run out of stuff rather than buy reserves and any long term investment becomes high risk. Maintenance becomes irresponsible waste of money you'd rather wait until something breaks than pay upfront to keep it running. Essentially it slowly slows down and destroys the economy as we know it. All while people get "rich" and think it doesn't affect them because "money can buy you anything" until something essential can no longer be bought no matter how much money you have then the whole thing collapses because the money turn worthless if the real buying power turns out to be zero.