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I can see the logic of this statement, and it is in line with a lot of economic thinking... but I disagree with the jist. First, the "price of money," is not s

I can see the logic of this statement, and it is in line with a lot of economic thinking... but I disagree with the jist. First, the "price of money," is not set by markets if by "price of money" we mean interest rates. Interest rates are set by a central bank, which is a monopoly. IE, only the ECB can make euros. Only the Fed can make dollars. Exchange rates are set by the market, but the interest rate is a decision made in a boardroom. Money is not a commodity, like other commodities. It's price (interest rates) is not determined by supply and demand. It's determined by monopoly price setting. Pegged currencies work the opposite way. CBs set the exchange rate, but they can't control interest rates. You could make the argument that the "price of money" is represented by exchange rates in the former, interest rates in the latter. But semantics aside, I think it's important to start with a recognition that CBs set interest rates as they see fit in most major currency markets today. Fed interest rates are not market determined. This is also (a not unrelated) thing that has changed since 1980. There was also a shift from pegged and semi-pegged currencies to floating exchange rates. Second, interest rates are not the actual return on savings in most cases. Most "savings" are in assets. Pension portfolios, private wealth funds, real estate, etc. These are the returns that "justify forgoing consumption," not interest rates. Returns on such investments have been high in recent years. CB interest rates translate relatively directly into the cost of borrowing, and the cost of repaying old debts. Interest rates do not determine the return on savings. Third, and this is where Thomas Picketty makes his controversial points... there is not much give in the "money now vs money later" market. For the most part, ordinary people spend their income. Wealthy people save/invest their money. When wages rise, the volume or price of goods may rise. When investment returns rise, the value of assets rise and inequality is increased. Regardless of profits, losses, taxes or such, Bezos' lifestyle will not change. Only the value of his assets will change. At the extreme end, poor people spend all their money and have no assets. Rich people save all their money and have negligible spending. The fact that market returns, the real "savings rate" have been high has not, on average, encouraged middle class guy to save more. That said, if you aren't already, you may interested in Hayek. His most famous work is all about interest rates as prices, and choosing between money now and money later. I disagree, at least in regards to 2021, but he was a clear writer and worth looking up.

quotemstr 5y ago
> Exchange rates are set by the market, but the interest rate is a decision made in a boardroom Only partly. One of the points the author makes is that central bank interest rates, while conceptually set arbitrarily "in a boardroom", are constrained to a narrow range by market realities, and attempts by "the boardroom" to set interest rates outside this range result in various forms of economic dysfunction that central banks try hard to avoid. > Returns on such investments have been high in recent years. CB interest rates translate relatively directly into the cost of borrowing, and the cost of repaying old debts. Interest rates do not determine the return on savings. Yes and no. We've been in a bull market for so long that people such as yourself have begun to think of investments as simply savings with high yield. You're neglecting to account for risk. CB interest rates set the risk-free savings rate. Of course you can get higher returns by taking more risk, and for most people, taking a bit of risk is the right thing to do.
- dalbasal 5y ago
  Re: CB interest rates I realize this is controversial, and many economists still disagree. I do think that wind is blowing in my direction though. IMO, this is Monetarism's big mistake. Now that floating exchange rates are the norm, this becomes more clear. Interest rates are not constrained to a narrow range by market realities. CBs can set them to 0%, as we now see. They could set them to 1000% if they chose, since CBs can print arbitrary sums to pay interest. Interest rates have consequences in the economy, but not restrictions. Those exist in a pegged currency world, not in floating exchange world. If depositors don't want to own CB bonds, they can redeem them for dollars/euros. The CB will always have dollars/euros available to make good on that.
imtringued 5y ago
>First, the "price of money," is not set by markets if by "price of money" we mean interest rates. Interest rates are set by a central bank, which is a monopoly. ... It's determined by monopoly price setting. The alternative is free banking and it is unlikely to work with a shared currency. Each bank would need to issue its own currency. > Interest rates do not determine the return on savings. Technically a high interest rate competes with investments for capital. It means someone is borrowing money at high interest and wants you to make enough room in the economy for that investment. The interest isn't the return, it's the compensation for the inconvenience of delaying spending. If the interest rate is higher than what solvent borrowers would pay then the interest rate on bank accounts directly competes with investments for capital. An investor getting 5% on a bank account will not spend the money on an investment that returns 4%. The absurdity of this choice is that if there are no borrowers at 5% interest no investments will actually be made. The investor is creating a hole in the economy for no reason.

quotemstr 5y ago

> Exchange rates are set by the market, but the interest rate is a decision made in a boardroom Only partly. One of the points the author makes is that central bank interest rates, while conceptually set arbitrarily "in a boardroom", are constrained to a narrow range by market realities, and attempts by "the boardroom" to set interest rates outside this range result in various forms of economic dysfunction that central banks try hard to avoid. > Returns on such investments have been high in recent years. CB interest rates translate relatively directly into the cost of borrowing, and the cost of repaying old debts. Interest rates do not determine the return on savings. Yes and no. We've been in a bull market for so long that people such as yourself have begun to think of investments as simply savings with high yield. You're neglecting to account for risk. CB interest rates set the risk-free savings rate. Of course you can get higher returns by taking more risk, and for most people, taking a bit of risk is the right thing to do.

dalbasal 5y ago
Re: CB interest rates I realize this is controversial, and many economists still disagree. I do think that wind is blowing in my direction though. IMO, this is Monetarism's big mistake. Now that floating exchange rates are the norm, this becomes more clear. Interest rates are not constrained to a narrow range by market realities. CBs can set them to 0%, as we now see. They could set them to 1000% if they chose, since CBs can print arbitrary sums to pay interest. Interest rates have consequences in the economy, but not restrictions. Those exist in a pegged currency world, not in floating exchange world. If depositors don't want to own CB bonds, they can redeem them for dollars/euros. The CB will always have dollars/euros available to make good on that.

imtringued 5y ago

>First, the "price of money," is not set by markets if by "price of money" we mean interest rates. Interest rates are set by a central bank, which is a monopoly. ... It's determined by monopoly price setting. The alternative is free banking and it is unlikely to work with a shared currency. Each bank would need to issue its own currency. > Interest rates do not determine the return on savings. Technically a high interest rate competes with investments for capital. It means someone is borrowing money at high interest and wants you to make enough room in the economy for that investment. The interest isn't the return, it's the compensation for the inconvenience of delaying spending. If the interest rate is higher than what solvent borrowers would pay then the interest rate on bank accounts directly competes with investments for capital. An investor getting 5% on a bank account will not spend the money on an investment that returns 4%. The absurdity of this choice is that if there are no borrowers at 5% interest no investments will actually be made. The investor is creating a hole in the economy for no reason.