Special Guest: Thorsten Polleit, PhD is chief economist of the
precious-metals firm Degussa and co-founder of the investment boutique
Polleit & Riechert Investment Management LLP. He is honorary professor at
the Frankfurt School of Finance & Management and associated scholar of
the Mises Institute.
28 Minutes
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The "Natural Interest Rate" Is Always Positive and Cannot Be
Negative
Some economists have been arguing that the "equilibrium real interest
rate" (that is the "natural interest rate" or the
"originary interest rate") has become negative, as a
"secular stagnation" has allegedly caused a "savings
glut." The idea is that savings exceed investment, and that a negative
real interest rate is required for bringing savings in line with investment.
From the viewpoint of the Austrian school, the notion of a "negative
equilibrium real interest rate" doesn't make sense at all.
The market interest rate is the outcome of the supply of and demand for
savings in the market place. It can be observed, for instance, in the
deposit, bond, or loan market for different maturities and credit qualities.
The originary interest rate is a category of human action, saying that
acting man values goods available at present more highly than goods available
in the future. In other words: Future goods trade at a price discount
relative to present goods. For instance, 1 US$ available today is
preferred over 1 US$ available in one year's time.
If 1 US$ to be received in one year's time is valued at, say, 0.909 US$,
the originary rate of interest is 10 percent. (1 US$ divided by 0.909 minus 1
gives you 0.10, or 10 percent, for that matter.) 10 percent is here the
originary interest rate (disregarding any other premia).
The "Originary Interest Rate" Reflects a Value Differential
The originary interest rate is expressive of a value differential,
which results from so-called time-preference. The term time-preference
denotes that acting man prefers an earlier satisfaction of wants over a later
satisfaction of wants. Time-preference is always and everywhere positive, and
so is the originary interest rate. This is, first and foremost, what common
sense would tell us.
The notion that time-preference and the originary interest rate could be
zero, does not only sound absurd, it is also a logical impossibility:
Positive time-preference and a positive originary interest rate are logically
implied in the irrefutably true "axiom of human action."
Human action is purposive behavior, implying the use of means to achieve
ends. Action requires time (it is impossible to think otherwise). Thus, time
is an indispensable and scarce means for achieving ends. As such, it must be
economized, which necessarily implies that an earlier satisfaction of wants
is preferred over a later satisfaction of wants.
For (praxeo-)logical reasons, therefore, time preference and the originary
interest rate cannot fall to zero, let alone become negative. The
implications of a negative originary interest rate cannot even be conceived
by the human mind: A zero originary interest rate already implies no action
ever into eternity.
The End of the Market Economy
Should a central bank really succeed in making all market
interest rates negative in real terms, savings and investment would come to a
shrieking halt: as time preference and the originary interest rate are always
positive, "capitalistic saving" -- the accumulation of goods
designed for improving the production process -- would come to an end.
Capital consumption would ensue, throwing mankind back into poverty. It
would be the end of the market economy.
The True Purpose of Negative-Interest-Rate Policy
For some reason, those who argue that the originary interest rate has
become negative seem to overlook that the originary interest rate is a
phenomena which is not confined to credit markets. It pervades all markets in
which present goods are exchanged for future goods. For instance, the
originary interest rate prevails at each stage of the economy's time-consuming
roundabout production. The originary interest rate also exists in the stock
market, where investors exchange present money against a claim on future
money (that is a firm's dividend payment).
If they wanted to be consistent, the believers in a negative originary
interest rate would have to call for a policy that does not only make
interest rates negative in real terms in the credit market, but also in the
markets for, say, stocks and housing.
However, a policy that advocates destroying firms' values and peoples'
housing wealth wouldn't be taken too kindly by the public at large; and those
economists recommending it couldn't expect being cheered.
The consequence of a policy of a negative real market interest rate should
have become obvious by now:
It is an actually perfidious policy for debasing the real value of
outstanding debt; and it is a recipe for wreaking havoc on the economy.
