By Keith Weiner
The Wrong Approach
This question is no longer moot. As the world moves inexorably towards the use of metallic money, interest on gold and silver will return with it. This raises an important question.
Which interest rate will be higher?
It’s instructive to explore a wrong, but popular, view. I call it the purchasing power paradigm. In this view, the value of money — its purchasing power —is 1/P (where P is the price level). Inflation is the rate of decline of purchasing power.
American economist Irving Fisher, of “permanent plateau” fame. He inter alia came up with the “quantity theory of money” and the infamous “equation of exchange” (as Hayek once remarked, every student of economics should know about these, and then immediately forget about them again; we know exactly what he meant to convey…). Fisher was quite the busybody. Like so many economists of his time, he became fascinated by the possibility to collate statistics and “measure” things in the economy. We have to thank him for index numbers like CPI as well, and it is probably fair to say that Fisher is the bedrock on which much of US mainstream economics rests (only things he was right about are rejected). In the early 20th century the erroneous idea began to take hold that economics should become more akin to the natural sciences. The data of economic history (i.e., statistics), would so the speak provide the numerical wherewithal to put some flesh on equilibrium equations previously only used as theoretical constructs which were understood not to apply to the real world of constant change. Why did economists so readily fall for this methodological lunacy? It was yet another momentous error – the growing belief that the economy had to be steered, or somehow centrally planned by “wise men”. No doubt tempting for those imagining themselves to be among the planners, and a catastrophe for the rest of us. [PT]
This view treats the quantity of goods you can buy as intrinsic to the money itself. This is a mistake, and it leads to a false theory of interest. Before I can present this wrong theory, let me define some terms.
The Nominal Interest Rate means the rate at which lenders lend and borrowers borrow in the market. The Real Interest Rate is the Nominal Interest Rate – inflation. Notice the switcheroo. The actual rate charged by actual lenders to actual borrowers is dismissed as merely nominal. A fictitious rate which is not used in any transactions is elevated to the status of real. Got that?
The theory asserts that interest is determined by inflation, that is, real interest > 0. With nominal rates below zero in Europe and elsewhere, this view is tempting and convenient.
According to this view, which metal has the higher interest rate comes down to which will have a faster-rising purchasing power. Most people would say silver, especially when silver is so cheap compared to gold by a long-term historical perspective.
Suppose silver’s purchasing power rises at 5% per …read more
Source:: Acting Man
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