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Because you can invest it in the riskless asset and have a dollar and some interest tomorrow.
by satellite2 3y ago
Because you can invest it in the riskless asset and have a dollar and some interest tomorrow.
- ebb_earl_co 3y agoForgive my naïveté, but if it’s riskless, how are you getting interest from investing in it?
- ahepp 3y agoIsn’t that confusing cause and effect? You’re getting interest because they’re paying it to you. They wanted to borrow, and even if there’s no risk, you won’t lend it out for free.
- jaredhallen 3y agoOne might argue about the relative value of interest rates vs risk, but all lending incurs risk. Maybe very little, but non-zero.
- JackFr 3y agoBut as an academic exercise, you can stipulate risk free lending as axiomatic, and still see that a natural interest rate comes from different inter temporal marginal preference for money among entities in the economy. It’s only zero if everyone’s preference is identical.
- ahepp 3y agoNonetheless, I think you can derive a “time value of money” from the data?
- JackFr 3y agoIf I have 10 pounds of blueberries and you have 10 pounds of strawberries there will be a natural price for one in terms of the other based on our different marginal preferences for the two commodities. Think of a dollar today as one commodity and a dollar tomorrow as a separate and distinct one. There is a difference in our marginal preferences and that is where the interest rate comes from. Just as both of us can be made better off trading blueberries and strawberries without actually creating anything new, the difference in our inter temporal marginal preference will reward the lender with a return even in the absence of risk.
- ebb_earl_co 3y agoThank you for an example with fruit. I am not trying to be thick, but your last paragraph confuses me. My point of reference is, say, lending $1,000 to a sibling who will pay me back within 2 weeks when he gets his paycheck. I gave him $1,000 and he will return me $1,000 so when and how would interest arise here? What axiom am I missing that makes his debt increase? Is it a choice by me to demand it?