The Weird Obsessions Of Central Bankers, Part 2

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The Negative Interest Rates Abomination

Our readers are probably aware that assorted central bankers and the economic advisors orbiting them occasionally mention the “natural interest rate” (a.k.a. “originary interest rate”) in speeches and papers. It is generally assumed that it has declined, which is to say, time preferences are assumed to have decreased.

This is actually an understatement…

Although interest is generally associated with money, the original interest rate would exist even if there were no money and regardless of the type of economic system that is in place. It is the manifestation of time preference, i.e., it simply is the discount of future goods against present goods – and that is all it is. As long as time passes and the terms “sooner” and “later” have meaning, the natural interest rate can never decline to zero or go negative.

Hypothetically, if the natural interest rate were to decline to zero,  all action would become future-oriented and there would no longer be any present consumption – people would literally starve to death and never live to see the future they were provisioning for. Obviously, such a state of affairs is unthinkable.

Conversely, the natural interest rate can, in theory, rise without limit. For example, if we were to know with absolute certainty that a giant asteroid was going to destroy the planet in two months time, all provisioning for the future would cease (since there would no longer be a future) and time preference and consumption would soar.

Ludwig von Mises wrote extensively on the natural interest rate in Human Action (p. 522-534 of the scholar’s edition). We have excerpted several quotes below.

Ludwig von Mises wrote on this:

“We cannot even think of a world in which originary interest would not exist as an inexorable element in every kind of action. Whether there is or is not division of labor and social cooperation and whether society is organized on the basis of private or of public control of the means of production, originary interest is always present.” […] “Originary interest cannot disappear as long as there is scarcity and therefore action.”

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