4 ms·

> interest is what causes ups and downs in economies. That is an extraordinary claim. If government set or controlled allowable interest rate or set it to zer

> interest is what causes ups and downs in economies. That is an extraordinary claim. If government set or controlled allowable interest rate or set it to zero there would be no business cycle? The downturn in 2020 was caused by interest?

yCombLinks 3y ago
The link between interest rates and the business cycle is a core tenet of Austrian economics. The boom bust cycle is made worse by government policies mispricing time preferences, ie setting the interest rate to the wrong value.
- largbae 3y ago
  Is there a knowable "right" value? What should it be now? Otherwise this sounds like a circular "no true Scotsman" situation.
  - yCombLinks 3y ago
    The natural market price. Just like people / businesses decide what they are willing to pay for a good, they can decide what price they are willing to pay to lend / borrow money. Not sure where it goes no true Scotsman. Currently our interest rates are set by the government. Austrian theory says this leads to the business cycle in the following way : Businesses want to borrow money and it's cheap to do so. This signals that it is a good time to invest, there is excess capital (otherwise people would be competing more for scarce capital, pushing interest rates higher). If there is indeed excess capital that's fine, it is a good time to invest. But if there was not excess capital (rates were set artificially low, sending a bad signal), these are bad investments. When the truth comes out (rates start raising, or demand for your goods drops), all the bad investments become apparent at the same time. Capital is now so expensive I am losing money on these investments.
    - andsoitis 3y ago
      > The natural market price. When money is free, it leads to very destabilizing dynamics such as elevated PE ratios and currency volatility.
      - throwawaymaths 3y ago
        The irony is that with freer money money might actually be more expensive. And a lot of the destabilizing dynamics exist because money is cheap, at the same time that people must participate in the gulag casino to stay afloat
      - HPsquared 3y ago
        Not free as in beer.
    - notahacker 3y ago
      > Just like people / businesses decide what they are willing to pay for a good, they can decide what price they are willing to pay to lend / borrow money You mean like... now? Banks, non bank financial institutions and individuals are free to choose what interest rates they set, to set interest rates for a sector they thinks is at risk well above market levels or to cease lending activity altogether. The fact they choose to lend at low rates is because market participants are pretty bad at predicting the future and market dynamics encourage cutting credit prices, not because the government forces them to lower rates (it doesn't) And the reality of banking timescales is that a shortage of capital available at a price isn't a nice little hint to change lending activity, it's a signal that since they can't borrow any more to meet obligations they'd best stop honouring depositors' withdrawals. Which is why we have central banks stepping in to make capital available, and before they did that we didn't have stability, we had a lot more ordinary people losing their savings to bank failures and more volatile business cycles.
      - yCombLinks 3y ago
        No, they're not. There's a reason that when the federal funds rate started going up last year, mortgage rates(and other borrowing) have went up in lockstep with each fed rate rise. Rather than being forced to lend according to the capital available to them, banks have a giant bucket of cash they can borrow and profit from, but only by lending it out with interest higher than what they borrow at. This pushes everyone to lend money at the same rate, or no one will take their offer. Sure, the sectors and risks are taken into account, but the base price is basically = fed_fund_rate + my_cut + risks
  - throwawaymaths 3y ago
    No there isn't. What you consider to be "right" encodes a lot of individual preferences as to what you'd like it to be (and a presumption that your prescriptive action would have the effects you desire). Perhaps a better society would have higher employment, perhaps a better society could afford for one spouse to stay at home and take care of the kids, perhaps a better society would have lower income disparity, perhaps a better society would have more innovation, perhaps it would have more ecological conservation. It's impossible for a single economic lever to square the circle on all of those outcomes for everyone.
    - HPsquared 3y ago
      There's a conflict there, though. Free markets are "one dollar, one vote", as compared to government which is (nominally) "one man, one vote".
      - throwawaymaths 3y ago
        Free markets are not one dollar one vote. I don't know where you got that idea from. Each person has a schedule of preferences, and a dollar may mean something different to two different people, or even one person from one day to the next. The other half of your premise is also completely mistaken. Voting power is not linear in number of votes you get.
- throwawaymaths 3y ago
  Unfortunately people often oversimplify the Austrian stance to take it to mean boom/bust only exists due to interest. But interest aside, the activity of lending itself exacerbates boom/bust because people depending on the money lent out coming back to them are at a higher risk of default, and if they default, they put more people at risk... If anything the generic austrian stance too generous. Their knee jerk anti state stance leaves some weird window of the state being able to manage things if it were only smart enough.
  - HPsquared 3y ago
    It comes down to "relative smartness". How smart is the state compared to the complexity of the economy? Centrally planned economies tend to be "simplified" by placing strict restrictions on what types of trade are allowed. Can't have people behaving unpredictably!
    - wanderingbit 3y ago
      Maybe one day there will exist a happy medium between centrally-planned Zerg economy and a free “Ebay for organs” market.
    - throwawaymaths 3y ago
      Let's be honest though the market is often really stupid so the bar is low for the state. And see, you have made my point about the "if only the state were smart enough" thesis. The point is, markets should be more independent of the state for other reasons that have nothing to do with any given outcome. (Though I'd claim that some subset of desired outcomes, like income inequality reduction would still come to pass).
- landemva 3y ago
  > The boom bust cycle is made worse by government policies Government meddling does make it worse. Governments fighting the business cycle is perverted and should not be the task of government. Paul Volker rediscovered the business cycle and wrote a book about it. https://archive.org/details/rediscoveryofbus0000volc https://archive.org/details/rediscoveryofbus0000volc Interest rates naturally vary across time, space, lenders, and borrowers. Leave rates to the free market and have government enforce anti-discrimination.
  - RandomLensman 3y ago
    Alas, there are no free markets as far as human societies are concerned, so how far should governments go?
coralreef 3y ago
Possibly. Who would be more efficient at pricing money: the market or the government?

yCombLinks 3y ago

The link between interest rates and the business cycle is a core tenet of Austrian economics. The boom bust cycle is made worse by government policies mispricing time preferences, ie setting the interest rate to the wrong value.

largbae 3y ago
Is there a knowable "right" value? What should it be now? Otherwise this sounds like a circular "no true Scotsman" situation.
- yCombLinks 3y ago
  The natural market price. Just like people / businesses decide what they are willing to pay for a good, they can decide what price they are willing to pay to lend / borrow money. Not sure where it goes no true Scotsman. Currently our interest rates are set by the government. Austrian theory says this leads to the business cycle in the following way : Businesses want to borrow money and it's cheap to do so. This signals that it is a good time to invest, there is excess capital (otherwise people would be competing more for scarce capital, pushing interest rates higher). If there is indeed excess capital that's fine, it is a good time to invest. But if there was not excess capital (rates were set artificially low, sending a bad signal), these are bad investments. When the truth comes out (rates start raising, or demand for your goods drops), all the bad investments become apparent at the same time. Capital is now so expensive I am losing money on these investments.
  - andsoitis 3y ago
    > The natural market price. When money is free, it leads to very destabilizing dynamics such as elevated PE ratios and currency volatility.
    - throwawaymaths 3y ago
      The irony is that with freer money money might actually be more expensive. And a lot of the destabilizing dynamics exist because money is cheap, at the same time that people must participate in the gulag casino to stay afloat
    - HPsquared 3y ago
      Not free as in beer.
  - notahacker 3y ago
    > Just like people / businesses decide what they are willing to pay for a good, they can decide what price they are willing to pay to lend / borrow money You mean like... now? Banks, non bank financial institutions and individuals are free to choose what interest rates they set, to set interest rates for a sector they thinks is at risk well above market levels or to cease lending activity altogether. The fact they choose to lend at low rates is because market participants are pretty bad at predicting the future and market dynamics encourage cutting credit prices, not because the government forces them to lower rates (it doesn't) And the reality of banking timescales is that a shortage of capital available at a price isn't a nice little hint to change lending activity, it's a signal that since they can't borrow any more to meet obligations they'd best stop honouring depositors' withdrawals. Which is why we have central banks stepping in to make capital available, and before they did that we didn't have stability, we had a lot more ordinary people losing their savings to bank failures and more volatile business cycles.
    - yCombLinks 3y ago
      No, they're not. There's a reason that when the federal funds rate started going up last year, mortgage rates(and other borrowing) have went up in lockstep with each fed rate rise. Rather than being forced to lend according to the capital available to them, banks have a giant bucket of cash they can borrow and profit from, but only by lending it out with interest higher than what they borrow at. This pushes everyone to lend money at the same rate, or no one will take their offer. Sure, the sectors and risks are taken into account, but the base price is basically = fed_fund_rate + my_cut + risks
- throwawaymaths 3y ago
  No there isn't. What you consider to be "right" encodes a lot of individual preferences as to what you'd like it to be (and a presumption that your prescriptive action would have the effects you desire). Perhaps a better society would have higher employment, perhaps a better society could afford for one spouse to stay at home and take care of the kids, perhaps a better society would have lower income disparity, perhaps a better society would have more innovation, perhaps it would have more ecological conservation. It's impossible for a single economic lever to square the circle on all of those outcomes for everyone.
  - HPsquared 3y ago
    There's a conflict there, though. Free markets are "one dollar, one vote", as compared to government which is (nominally) "one man, one vote".
    - throwawaymaths 3y ago
      Free markets are not one dollar one vote. I don't know where you got that idea from. Each person has a schedule of preferences, and a dollar may mean something different to two different people, or even one person from one day to the next. The other half of your premise is also completely mistaken. Voting power is not linear in number of votes you get.
throwawaymaths 3y ago
Unfortunately people often oversimplify the Austrian stance to take it to mean boom/bust only exists due to interest. But interest aside, the activity of lending itself exacerbates boom/bust because people depending on the money lent out coming back to them are at a higher risk of default, and if they default, they put more people at risk... If anything the generic austrian stance too generous. Their knee jerk anti state stance leaves some weird window of the state being able to manage things if it were only smart enough.
- HPsquared 3y ago
  It comes down to "relative smartness". How smart is the state compared to the complexity of the economy? Centrally planned economies tend to be "simplified" by placing strict restrictions on what types of trade are allowed. Can't have people behaving unpredictably!
  - wanderingbit 3y ago
    Maybe one day there will exist a happy medium between centrally-planned Zerg economy and a free “Ebay for organs” market.
  - throwawaymaths 3y ago
    Let's be honest though the market is often really stupid so the bar is low for the state. And see, you have made my point about the "if only the state were smart enough" thesis. The point is, markets should be more independent of the state for other reasons that have nothing to do with any given outcome. (Though I'd claim that some subset of desired outcomes, like income inequality reduction would still come to pass).
landemva 3y ago
> The boom bust cycle is made worse by government policies Government meddling does make it worse. Governments fighting the business cycle is perverted and should not be the task of government. Paul Volker rediscovered the business cycle and wrote a book about it. https://archive.org/details/rediscoveryofbus0000volc https://archive.org/details/rediscoveryofbus0000volc Interest rates naturally vary across time, space, lenders, and borrowers. Leave rates to the free market and have government enforce anti-discrimination.
- RandomLensman 3y ago
  Alas, there are no free markets as far as human societies are concerned, so how far should governments go?

coralreef 3y ago

Possibly. Who would be more efficient at pricing money: the market or the government?