The Natural Rate of Interest Is Zero (2004) [pdf]
cfeps.org
cfeps.org
- taxes create demand for money but don't fund government.
- 'money' doesn't exist till the federal gov spends it into existence
- interest rates are determined exogenously by the fed.
- large deficits tend to drive down , not up, interest rates because of the excess reserves created.
That is unless your country does not issue it's own sovereign currency. Then it is debt.
So it does't apply to France, Germany, Italy, Spain, perhaps Poland.
That debts and savings are two sides of the same coin is tautological and doesn't require a state or fiat currency. Your current account with the bank is a debt the bank owes you. All savings are debts.
"Deficit spending will result in net central bank reserve credits in the aggregate banking system, which will drive the short-term overnight inter-bank lending rate to zero."
Also, we now pay interest on reserve balances which goes against one of the paper's assumptions.
"While government security sales may be used to drain the excess reserves to maintain some positive overnight rate, or the central bank may pay interest on reserve balances, absent such government intervention the base rate of interest is zero. In other words, the natural rate of interest is zero."
This means banks need to pay the SNB on their funds deposited there. Many of them pass that on to their customers: Deposits don't earn any interest to speak of, and for large sums (starting from 1M or so), banks commonly charge interest. At some points, the yield on Swiss Gov't bonds was even negative.
If you can offer a safe (and bank-accepted) way to store that money, you stand to make a killing.
On the other hand, even in that environment, mortgages aren't free. Rates range from 0.5 to more than 2%. Part of that is the banks' margin, part of it comes from fixing the interest rate for some (2-10) years.
[1] https://www.snb.ch/en/iabout/stat/statpub/zidea/id/current_i...
When they were legally forced to do so, the government prevented them from being sued to do it anyway, by destaffing the only judicial office where such procedures could be started.
Also, banko Santander was sold to external investors, with direct involvement from the central bank and the Spanish government, and ... failed to mention these negative-interest-rate obligations. If anyone else ever did anything remotely approaching this they wouldn't just be nailed to the cross, people would be talking about it for decades too.
Oh and despite all this cheating, banks and governments not respecting their own laws (nor even taking the time to change them, or even so little as involve the legislative branch in the process), despite violating every precept of democracy on both the Spanish and European level ... all large Spanish banks are a hair away from bankruptcy.
https://www.nytimes.com/2016/12/21/business/spain-banks-mort...
If there were risk free investments (I don't think there are), wouldn't people invest in those directly instead of letting you do it with their money?
Of course, there is always arbitrage.
This loan has an extremely short term (5 minutes) and is extremely low risk (it's a small amount of money and we are friends). So all real loans should have a non-zero interest rate, but the rate should asymptotically approach zero as we decrease the term and the risk. If not zero, then what would you choose? What should be the floor on interest rates?
If we think about the interbank lending market, once the aggregate supply of reserves is beyond what is necessary to settle daily payments, the interest rate falls to the floor (the rate the Fed pays on reserves). In this case, why should the Fed choose a non-zero floor? There are many answers the Fed could provide, and they do. But they definitely need to provide that answer, which is what the paper is claiming. And the paper also suggests that zero works pretty well, for a variety of reasons.
This assumption is where things break. You could have an interest rate whose nominal contribution for five minutes that rounds down below 1 mil, the smallest unit of currency. A five-minute interest rate of 0.00098% would result in rounding the interest on $5 to zero. However, taken over the course of 5 minute increments through a year, and you arrive at $14.01 dollars:
$5 * ((1 + 0.0000098)^(12 5-min increments/hour * 24 hours/day * 365 days/year)) = $14.01
Plenty of folks would love a 280% annual return.
If I were in the business of making five minute loans, I’d charge an astronomical interest rate to cover the fixed transaction costs.
For a start, considered in the context of formal loans, lending money to a friend in that situation is far from a risk-free bet - because my friend might have got it wrong and left his wallet at home, not in his car in which case in 5 minutes time he'll default on payment. Of course I'll almost certainly get my money back eventually (since otherwise I'd either have just said I'd give him the money or declined to either lend or gift it), but now your talking about the risk that I'm deprived of my money for longer than I had anticipated as well as having the the cost of using my time in chasing him for it, so I'd want some interest to compensate for that risk.
In reality, what we do is (to some extent) to agree a social convention that "next time it will probably be the other way around" so that those potential losses even out between us and it makes sense that we reduce our administrative burden by not charging each other for them in the form of interest.
What is true is that as the time a loan is outstanding reduces, ability to judge the repayment risk is likely to improve to some extent in most cases. However even this isn't universal - for example if I lend against you receiving payment on an invoice just issued and where yuou have given your customer 30-day payment terms, I'm likely to have better certainty lending on a 60-day repayment term than a 1-day repayment term.
The historical average duration of empires, republics, dynasties, and monarchies is 349 years. The assumptions we make about financial markets in the developed world seem to completely ignore political factors, as if issuing governments or unions that exist today will always exist - as if history has somehow ended.
When you buy a 30y US Treasury bond at auction, you are getting paid 3.13% to assume that between years 231 and 261, representing 8.6% of the average lifespan of empires, no existentially threatening political upheaval will occur in the United States.
Seeing the political division of the populace in the 2016 election, I wonder if this is a prudent assumption.
So even when you put it like that - the odds don't seem too bad.
- San Marino has been a republic for over 1000 years
- The Netherlands was a republic from 1581 until 1806
- Switzerland has been a republic since 1648
- Paraguay, Chile, Argentina, and a dozen other Latin American countries have been republics continuously for over 150 years. Not without their share of upheaval, but even in the case of Venezuela I don't know that you can argue that the country stopped existing in sudden crisis.
And that's all I can find, for "modern" republics >= 150 years old at present or at cessation. The next closest is France, which is also still a republic. We don't have too much data but I would listen to an argument that modern republics seem to be unusually long-lived compared to more traditional government types. With no better information available, you can choose either to trust the examples we have, or to adopt the doomsday prepper mentality. When trust is cheaper, it's not any surprise to me that people trust the government to continue existing.
And for nonpayment risk you obviously count the time between large defaults. Whether the person/company/country/empire/dynasty/... "dies" or not is irrelevant.
Private companies, mostly because they have no such choice, actually do better than states.
Also, it’s not guaranteed profits if the interest rate were negative, which happened during the financial crisis. As well, real interest rates, vs inflation, are negative. So it depends on your perspective.
This isn't really true. The risk-free asset doesn't have to exist, we just have to agree on what its value would be. For example if Tesla sold a one-year bond paying 20% interest, and everyone agreed Tesla had a 10% chance of being bankrupt within the year, it's fair to agree the risk-free rate is 10% per year.
It's true that if the US government were at risk of defaulting on Treasuries, the market would be a bit of a mess. But it happens in other countries all the time and the markets eventually continue to function without an asset considered risk free.
Temporarily forgo the use and accept a nonzero risk of never seeing it again. This is one reason why there is a range of interest rates.
A "US Dollar" is defined constitutionally as being "gold or silver". However you can no longer redeem a FRN for a USD....only for more FRN's.
It raises several interesting legal questions when pondered, for instance when you pay taxes you are being taxed on USD earnings, although technically you've never been paid this.
The restrictions in article I section 10 bind the states, not the federal government.
Since the suspension of convertibility into gold in the 70s, dollars are essentially a pure fiat currency - whether in FRNs, dollar coins or otherwise.
The dollar was a unit of measure prior to the existence of the United States. Saying the dollar was not defined is like saying an ounce is not defined. A "dollar" was 550 grains in weight.
And the first Bank was not set up by the Constitution - it was set up in 1791 by Act of Congress after a political fight between Hamilton and his critics.
The Spanish dollar existed at the time of the US's founding, as did various other countries' (differently weighted) dollars; the US dollar wasn't defined until 1792 (when it was, indeed, defined as given weights of either gold or silver - the Spanish dollar was silver only). But the US dollar was defined by Congress and can be redefined by the same. And they have.
So what is the issue people have with "fiat" currency? Is it simply because it is created and managed by the government?
The fundamental question is: Should we represent the value of real finite things (carrots, oil, land, etc) using an abstraction which is also finite or one that is infinite?
Exponential growth curves can't continue forever. This is the fundamental reason why all fiat currencies eventually fail.
All successful forms of money share the following characteristics: counterfeit resistant, rare, fungible, easily transportable, little to no carrying cost, and high value per unit (another way to say rare). Its no accident that human society settled upon gold as representation of this ideal since it closely fits all these criteria. Its possible that crypto will change this however...