Economics Questions

Re: Full reserve banking and interest rates

banned — Tue, 25 Nov 2008 00:18:08 GMT

ktibuk:

But the price inflation premium maybe zero or a negative number, in which case it would be a price deflation premium.

And this negative number may force the nominal interest rate to zero or even a negative number if it is higher than the sum of natural rate and risk premium.

Of course this is in theory but even if this was the case the markets would function. People would still lend money, etc.

No, because the marginal cost of lending an asset to holding the asset would be negative. It would be silly to lend at a non positive interest rate in any circumstance.

Re: Full reserve banking and interest rates

szh — Mon, 24 Nov 2008 17:38:10 GMT

Well, safekeeping is not expensive that you have to lend to cover it. For example UK based Bullion Vault charges 0.12%. and GLD ETF 0.4%.

But I really saw nominal short-term negative rates in fiat asset JPY in the interbank market. You know BOJ under quantitative easing charged banks for exess reserves and banks charged their customers on liabilty side. It was profitable to lend at slightly negative rate because they paid even more negative rate.

I read russian press - there is huge demand for safekeeping service so banks raised fees. People draw money and put it in deposit boxes sacrificing sort of 10% interest in 12% inflation environment. See there is market for full reserve banking its just not connected with payment system yet.

Re: Full reserve banking and interest rates

PeterWellington — Mon, 24 Nov 2008 14:49:56 GMT

ktibuk:

PeterWellington:

ktibuk:
By lending one would assume the risk of default but would get rid of the maintenance expenses which would eat at the value of the stuff that is hoarded.

If there's a cost to holding and protecting money, then giving it to someone else does not dissolve that cost, it simply transfers it. If you sell an old beat up car to someone, the bad brakes don't somehow get fixed during the transfer. The new owner now has to pay for maintenance and repairs, and he'll account for those costs when he decides how much he wants to pay you for it.

The same is true with money transfers. What you're looking for is a cheaper provider of safeguarding services, not really a loan.

Yes but the debtor doesnt want to hold the money. He wants to use it, invest with it. So he doesn't have to face the cost of "holding the money".

So there would be some incentive for people to lend out money even in a zero interest enviroment.

If the original debtor purchased something with the money, then someone else has the money and that person is now saddled with the cost of safeguarding it (and has also charged for it in their transfer). This is true no matter how many times the money is transferred, just as in my car example where the bad brakes don't somehow fix themselves no matter how many new owners the car is transferred to. Also consider that whatever is purchased with the money also has its own cost of protection, unless it's used for immediate consumption but think about the default risk of such a loan. There's no way to escape these costs. You can only find a cheaper safeguarding service. By loaning your money out, you're only *adding* a default risk. If someone can protect your money cheaper than you can, then use that protection service.

Re: Full reserve banking and interest rates

szh — Mon, 24 Nov 2008 14:32:24 GMT

Correct logic (Yen is good example) for the present monetary system. But in gold standard nobody will expect inflation premium in the long run so that you won't see zero nominal rates.

Re: Full reserve banking and interest rates

ktibuk — Mon, 24 Nov 2008 12:16:11 GMT

Nominal interest rates are comprimised of 3 things.

Natural rate of interest + Risk premium.+ Price Inflation premium

Natural rate can never be zero (or a negative number) because it is the price of time and time is always scarce. At least in this universe.

Risk premium can never be zero (or a negative number) because future is always uncertain.

But the price inflation premium maybe zero or a negative number, in which case it would be a price deflation premium.

And this negative number may force the nominal interest rate to zero or even a negative number if it is higher than the sum of natural rate and risk premium.

Of course this is in theory but even if this was the case the markets would function. People would still lend money, etc.

Re: Full reserve banking and interest rates

szh — Mon, 24 Nov 2008 11:34:21 GMT

In gold standard "insuficient risk premium" will be quickly killed by keeping gold in safe deposit box and reducing money supply. In current system "insuffcient risk premium" is possible because your choices are tougher - loose slowly via inlfation in safe deposit box or US Treasuries or buy hard assets and get all that volatility. Those who can't bear (seems most can't) high volatility of hard assets accept negative yield and nominal stability.

Re: Full reserve banking and interest rates

ktibuk — Mon, 24 Nov 2008 09:52:24 GMT

szh:

There is little to debate even with zero growth money supply. Bad debt wont' be repaid plus part of equity ( btw nobody mentioned here that equity is also part financing ) will be wiped out so losses will be sourse of interest for good debt and source of dividend for good business. Of course total wealth will only grow via population and productivity growth. I saw US statistics where in 19th century there was (although volitile) deflation -0.4% with real 4+ pct growth.

Also what you imply is a zero-sum game. And you may be right on nominal monetary zero-sum game. But wealth increase is not dependent on the monetary situtaion. Thus even if the monetary total is fixed and a zero-sum game, the wealth would increase anyways.

Re: Full reserve banking and interest rates

ktibuk — Mon, 24 Nov 2008 09:48:56 GMT

szh:

There is little to debate even with zero growth money supply. Bad debt wont' be repaid plus part of equity ( btw nobody mentioned here that equity is also part financing ) will be wiped out so losses will be sourse of interest for good debt and source of dividend for good business. Of course total wealth will only grow via population and productivity growth. I saw US statistics where in 19th century there was (although volitile) deflation -0.4% with real 4+ pct growth.

True. There will always be uncertainty of the future thus a positive risk premium on the pure rate of interest. But it might happen that positive risk premium is not enough to carry the rate to a positive teritorry. At least for some very creditworthy institutions.

Re: Full reserve banking and interest rates

ktibuk — Mon, 24 Nov 2008 09:46:18 GMT

PeterWellington:

ktibuk:
By lending one would assume the risk of default but would get rid of the maintenance expenses which would eat at the value of the stuff that is hoarded.

If there's a cost to holding and protecting money, then giving it to someone else does not dissolve that cost, it simply transfers it. If you sell an old beat up car to someone, the bad brakes don't somehow get fixed during the transfer. The new owner now has to pay for maintenance and repairs, and he'll account for those costs when he decides how much he wants to pay you for it.

The same is true with money transfers. What you're looking for is a cheaper provider of safeguarding services, not really a loan.

Yes but the debtor doesnt want to hold the money. He wants to use it, invest with it. So he doesn't have to face the cost of "holding the money".

So there would be some incentive for people to lend out money even in a zero interest enviroment.

Re: Full reserve banking and interest rates

szh — Sat, 22 Nov 2008 16:12:00 GMT

There is little to debate even with zero growth money supply. Bad debt wont' be repaid plus part of equity ( btw nobody mentioned here that equity is also part financing ) will be wiped out so losses will be sourse of interest for good debt and source of dividend for good business. Of course total wealth will only grow via population and productivity growth. I saw US statistics where in 19th century there was (although volitile) deflation -0.4% with real 4+ pct growth.

Re: Full reserve banking and interest rates

PeterWellington — Thu, 20 Nov 2008 18:10:55 GMT

ktibuk:
By lending one would assume the risk of default but would get rid of the maintenance expenses which would eat at the value of the stuff that is hoarded.

If there's a cost to holding and protecting money, then giving it to someone else does not dissolve that cost, it simply transfers it. If you sell an old beat up car to someone, the bad brakes don't somehow get fixed during the transfer. The new owner now has to pay for maintenance and repairs, and he'll account for those costs when he decides how much he wants to pay you for it.

The same is true with money transfers. What you're looking for is a cheaper provider of safeguarding services, not really a loan.

Re: Full reserve banking and interest rates

szh — Thu, 20 Nov 2008 17:17:18 GMT

In "Mystery of banking" M Rothbard suggested to allocate gold amongst banks against M1 ( I arrived to $5166 per ounce). But what happens if CD holders after maturity will want to reduce (M2-M1) in favour of M1 so that M1 increases. How then banks will back these new demand money? Will right solution be to allocate gold against M2 at $28,000 per ounce. Thoughts?

Re: Full reserve banking and interest rates

banned — Wed, 19 Nov 2008 13:32:45 GMT

ktibuk:
the interest rate might be nominally 0 or even a negative number depending on the general time preference.

No, and here's why:

If the increasing value of money assets is so great that banks can loan money out at negative interest rates and not lose anything, they would gain that much more by simply holding on to their money, there would be no reason to loan it out.

If the interest rate were 0% on the loan, you, as a lender, would be just as wealthy once the loan had been paid off as you would have been if you simply held onto the money. Why risk the loan then? The whole point of investing is because the potential ends outweigh the risk.

Re: Full reserve banking and interest rates

ktibuk — Wed, 19 Nov 2008 13:15:41 GMT

Interes rate doesn't have to be a nominally positive number.

In a constant money supply economy, the interest rate might be nominally 0 or even a negative number depending on the general time preference.

You may loan 100 dollars for 5 years and get back 100 dollars and you would still be paid a real positive interest because 100 dollars 5 years later would have more purchasing power. The law of time preference says that every one would prefer the same good sooner than later. But 100 dollars today and 100 dollars 5 years from now doesnt have to be the same good. Especially where the money supply is constant and demand to hold cash rises due to increased production and population.

You may ask why any one would lend any money instead of hoarding it if the nominal interest rate is 0. And that would be a good question.

Real interest rate is not only made of time preference. It must also include risk premiums.

Hoarding is also risky and costly. There is always a risk of theft and that is why it is always costly to keep valuble stuff in posession. Buying a safe, hiring guards, even paying insurance premiums are all costs.

By lending one would assume the risk of default but would get rid of the maintenance expenses which would eat at the value of the stuff that is hoarded.

Just like keeping a Van Gogh at home by putting an expensive alarm system and paying for insurance. Yes in 20 years the painting would be nominally more valuable but if you calculate the expenses over those 20 years, that increase in value might not be real.

Anyways in a free market economy even gold money supply is increased by mining, although very slowly. Maybe a very dispursed and slow increase of the supply of the gold is one of the subtle reasons while it is pciked as free market money.

Re: Full reserve banking and interest rates

scineram — Wed, 19 Nov 2008 11:13:19 GMT

We usually mean fractional reserves by frb. You might want to refer to full reserves as full reserves.