Backwardation - Negative Interest Rates
Posted by CircuitGuy 9 years, 1 month ago to Economics
Excerpt:
"Thus in a weak economic environment like this, with low inflation, banks and other financial institutions that want certainty of payment in the future are willing to pay interest to get their money back later.
Part of the problem here is that the fiat currencies of the world exist only to be units of account, and not stores of value. Thus in this unusual environment, they behave like any other commodity, where the prices for futures are often higher than the current spot price, which is known as backwardation."
My comments:
I recall reading 20 years ago about this in happening Japan because their banking system wasn't fully capitalist but had cronyism fueled by vestiges of ancient Japanese values. I remember wrongly thinking that could never happen in the US and Europe.
I would like to see a return to stable 3% inflation, a balanced budget, and positive real rates of interest with a normal yield curve. For the past few years I've started the year thinking we would be heading back to that by the end of the year, but we stay in this bizarre zone of tepid expansion and loose monetary policy year after year.
"Thus in a weak economic environment like this, with low inflation, banks and other financial institutions that want certainty of payment in the future are willing to pay interest to get their money back later.
Part of the problem here is that the fiat currencies of the world exist only to be units of account, and not stores of value. Thus in this unusual environment, they behave like any other commodity, where the prices for futures are often higher than the current spot price, which is known as backwardation."
My comments:
I recall reading 20 years ago about this in happening Japan because their banking system wasn't fully capitalist but had cronyism fueled by vestiges of ancient Japanese values. I remember wrongly thinking that could never happen in the US and Europe.
I would like to see a return to stable 3% inflation, a balanced budget, and positive real rates of interest with a normal yield curve. For the past few years I've started the year thinking we would be heading back to that by the end of the year, but we stay in this bizarre zone of tepid expansion and loose monetary policy year after year.
I'm tempted to give you the benefit of the doubt due to some of your comments elsewhere but on this thread... Your left is showing and it hasn't been pretty.
If the Fed expands the money supply, I expect it to increase aggregate demand, causing unused production capacity to be put into use. If there really isn't unused capacity in the economy, then there will be more dollars chasing the same number of goods and services, and we'll have inflation. That's not happening though. We live in weird times.
And again, you're right about the politicians. Analyze their arguments and it boils down to "I agree with my opponent, but I can do it better." It will work if it is just done by the right people.
An appropriate quote from The Peoples Cube; "We are the ones we have been waiting for"
I'll be the first to admit reading Economics is an acquired taste, or more likely just depends on your personal interests. I took one course in high school biology (required) and yuck! I guess I'd rather dissect Marx than a fetal pig ;=)
Actually, reading most economists IS dreadful (it's not called "the dismal science" for nothing), but I enjoy Mises not just because his theories are correct, but his writing is clear, logical and straightforward. Not unlike Rand's non-fiction.
Anyway, to your point about "angels", I think his assumption about "good, well-intentioned" planners in his writings was to avoid/defuse ahead of time the argument (which is very common) that "it's not that socialist planning doesn't work, it's just that THIS plan or THESE planners were wrong. Elect us and we'll do a better job on say, the next "5-year plan." And don't we hear that from a lot of US politicians, too?
And whether it was a typo or intentional, you are correct in that there are certainly more "angles" in a planned economy than "angels"...
I am no expert on Mises. Actually economics discussions tend to leave me behind but I can see your point about bad ideas. I would say, however, that it is the planned economy that requires the assumption of "angles" and therefore puts further discussion into the realm of fantasy and makes a physical application of it an effort in futility.
Why Mises would feel the need to waste his time making that argument would seem to indicate an inability or an unwillingness to say that "angels" do not exist. Especially/even in the context of government related entities.
As I've made clear in another comment, deflation (as long as it comes about as a result of an expanding free market) is a great thing for everybody.
What I am saying is that it cannot, not be corrupt. They have power over peoples lives backed up by the might of the US Government. This is a situation that breeds corruption. Necessitates it, even. It chooses favorites. It benefits one at the expense of another. The highest bidder gets the benefits.
I agree the gov't should not forbid trade with any medium of exchange.
In his proofs of why these policies won't and can't work, Mises always (sometimes maddeningly so) assumes or grants for the sake of argument that the government functionaries in charge are scrupulously honest, and then proves their policies still fail.
But, on the I believe somewhat reasonable assumption that you add some corruption and cronyism to the mix, that only makes the failure worse.
And please don't say The Fed is in any way, shape or form independent of this administration or any other. I've had my laugh for the day.
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