Commentary
Individual Time Preferences and Interest Rates
According to thinkers like Carl Menger and Ludwig von Mises, interest arises from individuals valuing present goods over future goods (time preference). This preference is not arbitrary but rooted in the necessity of sustaining life in the present to ensure a future. Menger stated, “Human life is a process in which the course of future development is always influenced by previous development…”
Life Sustenance and Zero Interest Rate
Expanding savings allows individuals to work towards long-term goals, enhancing their quality of life over time. Limited savings restrict individuals to short-term goals, while more savings enable the creation of advanced tools. With higher savings, individuals can consider investing in better tools.
No individual pursues a goal without expecting returns. Maintaining life beyond survival requires savings and production growth, providing positive returns. Increased savings allow for more production and investment, leading to further savings expansion. Interest rates guide entrepreneurs on capital projects feasibility, with lower rates indicating more available savings for projects.
Changes in interest rates reflect the valuation of present goods over future goods, influenced by money supply fluctuations. Artificially increasing money supply weakens saving and capital formation, raising present consumption preferences. Conversely, a decrease in money supply strengthens saving, lowers time preferences, and allows for capital formation.
Does Lowering Interest Rates Foster Greater Capital Formation?
Artificially lowering interest rates through inflation doesn’t necessarily boost capital investment. Business decisions respond to interest rate changes, but a decrease in interest rates due to inflation may not lead to increased capital formation.
The stable expansion of capital goods is not facilitated by lowering interest rates through inflationary money and credit expansion, but rather by an increase in the pool of savings. This greater allocation of savings contributes to the development of infrastructure and capital goods by reducing people’s time preferences. Therefore, it is saving and capital investment, not just the lowering of interest rates, that allows for sustainable growth.
The monetary interest rate, when left untouched, serves as a vital indicator to businesses regarding the availability of savings for building a productive structure of production. However, when the central bank artificially manipulates interest rates through inflationary policies, it distorts this indicator, leading to a misallocation of resources and a boom-bust economic cycle. This malinvestment in certain capital goods at the wrong time eventually results in a bust when the malinvestments are liquidated.
In his writing, Rothbard highlights the consequences of government manipulation of interest rates, stating that businesses end up investing too much in capital goods and not enough in consumer goods due to the artificial lowering of interest rates. This leads to a misallocation of resources and a deviation from desired consumption/investment proportions.
In conclusion, as long as individuals prioritize basic life sustenance, they will naturally value present goods over future goods. Any attempts by central bank policymakers to override this natural inclination will ultimately harm individuals’ living standards.
Please note that the views expressed in this article are the opinions of the author and do not necessarily reflect those of The Epoch Times.
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