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I suspect this is in part a side-effect of the Anglo-American (maturity-mismatched) banking system, which keeps long-term interest rates artificially low, leadi
by lexcorvus 11y ago
I suspect this is in part a side-effect of the Anglo-American (maturity-mismatched) banking system, which keeps long-term interest rates artificially low, leading to higher time preference.
- princeb 11y agothe discount rate applies to utility, which may or may not have any relation to the discount rate of money.
- eru 11y agoWouldn't a lower interest rate cause us to value the future more? (Or you mean, the natural interest rate should be higher?)
- lexcorvus 11y agoLower interest rates increase your relative propensity to spend by lowering the opportunity cost of consumption. For example, if you have $10K and can get only a 1% annual return, you might as well take that trip to Vegas. If you could get a 15% return, though, you might rather stay home and rake in the interest.
- eru 11y agoOK, you basically have to compare your own internal discounting rate of consumption with the public rate of interest offered on savings. If your own internal rate is higher than the public one, then indeed you should borrow to consume (or put off saving). Companies only care about the public rate---if they have a higher rate of reliable return internally, they can keep borrowing money to invest until there's an equilibrium. A low interest rate makes companies more forward looking.
- parasubvert 11y agoSince interest rates are a man-made concept, one must wonder what a "natural" rate of interest actually is. Words like "Artificial vs. natural" attempt to ascribe illegitimacy to what is mostly a policy difference.