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The interest rate

DanT
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7/18/2013 12:20:47 PM
Posted: 3 years ago
Utility is maximized when Marginal Utility = 0.
The nominal price of money is the nominal interest rate.
According to the quantity theory of money transactions are the utility of money.
According to the optimal purchase rule, transactions are maximized when the marginal utility of money = the nominal interest rate.
0 = change in transactions / change in money = the nominal interest rate.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
ZakYoungTheLibertarian
Posts: 253
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7/19/2013 11:30:41 PM
Posted: 3 years ago
The price of money is expressed in an amount of a good or service. Interest is the cost of borrowing money, not the price of money itself. On the market interest rates reflect the degree to which consumers are choosing to save rather than consume.
ZakYoungTheLibertarian
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7/19/2013 11:36:01 PM
Posted: 3 years ago
Interest rates must rise. While we cannot predict with exact certitude what interest rates should be (just as no one can tell you what the real price of corn should be, this can only be determined through the market place and buying and selling of this commodity) it seems clear to me that the market interest rate is much greater than it appears to be. Artificially low interest rates fool entrepreneurs into thinking there is a greater supply of funding for capital than actually exists and thus creates malinvestment in capital good industries. If consumers had been saving more, thus lowering interest rates naturally, as the supply of funds for capital investment increased, then it would be right to pour more resources into capital goods industries, as this would represent and serve consumer demand. But since the lowering of interest rates is artificial what you have is a false boom, in which resources are poured into investments (capital goods) but the demand for these goods (as represented by savings) isn't there. Eventually these malinvestments are scrapped and you have the resulting bust.

Just say no to artificial manipulation of interest rates!
DanT
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7/20/2013 12:42:14 AM
Posted: 3 years ago
At 7/19/2013 11:30:41 PM, ZakYoungTheLibertarian wrote:
The price of money is expressed in an amount of a good or service.

No that is it's utility, i.e. what makes it valuable. The price of money is the interest rate.

Price = (Quantity Demanded - Quantity Supplied) / (Price Supplied + Price Demanded)

The interest rare = (Money Demanded - Money Supplied) / (Interest supplied + Interest demanded)

Interest is the cost of borrowing money, not the price of money itself.

It is the cost of borrowing money because it is the price of money.

On the market interest rates reflect the degree to which consumers are choosing to save rather than consume.

And a 0% interest rate will maximize consumption.

I am able to do that webcam debate now.
Do you have a facebook? I would like to send you a PDF or word file.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
ZakYoungTheLibertarian
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7/20/2013 1:15:19 AM
Posted: 3 years ago
utility is not price (which is the cost of purchasing something, how else can you purchase money but with a good or service?) it is the subjective value attached to an object by an individual. utility is ordinal. we cannot know how much a person values something, just whether or not they value it more than something else.
ZakYoungTheLibertarian
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7/20/2013 1:17:23 AM
Posted: 3 years ago
https://www.facebook.com...

dont' any of u internet weirdos get any crazy ideas and add me, this is for DanT only. all other applicants for facebook friendship will be rejected and probably sent a mocking message laced with profanities and threats of severe bodily harm
ZakYoungTheLibertarian
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7/20/2013 1:19:27 AM
Posted: 3 years ago
Consumption is not a source of economic growth. It is the byproduct of production. The state should not be attempting to force people to consume less or save more. It is not our role to instruct other people how to carry about their affairs. You and I are in absolutely no position to tell someone who we have never met that they should consume more or save more. That's their decision to make.

This notion that consumption drives economic growth is entirely backwards.
DanT
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7/20/2013 2:07:52 AM
Posted: 3 years ago
At 7/20/2013 1:15:19 AM, ZakYoungTheLibertarian wrote:
utility is not price (which is the cost of purchasing something, how else can you purchase money but with a good or service?)

You purchase goods and services with money, not the other way around.

Money is a form of credit, which represents a good or service owed.

Money x Velocity = Price x Output

Price is tied to money, and velocity is tied to output.

it is the subjective value attached to an object by an individual. utility is ordinal. we cannot know how much a person values something, just whether or not they value it more than something else.

Utility can be quantified, which is why the utility of one thing can be greater than an alternative. Simply because utility varies does not mean it cannot be measured.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
DanT
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7/20/2013 2:10:08 AM
Posted: 3 years ago
At 7/20/2013 1:19:27 AM, ZakYoungTheLibertarian wrote:
Consumption is not a source of economic growth. It is the byproduct of production.
The state should not be attempting to force people to consume less or save more. It is not our role to instruct other people how to carry about their affairs. You and I are in absolutely no position to tell someone who we have never met that they should consume more or save more. That's their decision to make.

This notion that consumption drives economic growth is entirely backwards.
I never said consumption drives economic growth.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
ZakYoungTheLibertarian
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7/20/2013 2:55:36 AM
Posted: 3 years ago
It's both ways around. You buy a good and service with money, or you buy money with a good and service (i.e. selling).

Utility cannot be measured because it is subjective. All that can be said is that a given individual values a quantity of good a more than a quantity of good b. How much he values a quantity of good a over a quantity of good b will forever be a mystery. There is no such thing as a util.

Clearly, the implicit argument behind advocating a 0% interest rate in order to maximize consumption is more consumption is a good thing. Whatever your views on this matter mine are simply that individuals should be free to decide how much of their income they wish to consume now and how much they wish to save and invest for future consumption. Only the individual is in a place to determine what will benefit him most. This is tangentially related to why, especially in developing countries, regulations to mandate better working conditions are a bad idea. Better working conditions come at the cost of higher wages, and only the individual in question is in a position to determine if they would rather be safer or wealthier. Why would someone choose money over safety? Well, that money might be used to feed their children, or pay for medical treatment, or to escape to a better country, etc. etc. Or it might even just be used for their ends and they value being able to spend that extra money over the security of a safer work place. That's their decision to make, it's their life, not yours.
DanT
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7/20/2013 3:54:33 AM
Posted: 3 years ago
At 7/20/2013 2:55:36 AM, ZakYoungTheLibertarian wrote:
It's both ways around. You buy a good and service with money, or you buy money with a good and service (i.e. selling).

That is not the price of money, that is the exchange rate.

Money is a medium of trade, and thus serves a form of trade credit, substituting one of the commodities during barter.

Utility cannot be measured because it is subjective. All that can be said is that a given individual values a quantity of good a more than a quantity of good b. How much he values a quantity of good a over a quantity of good b will forever be a mystery. There is no such thing as a util.

Utility is measured by one's willingness to pay for something, i.e. the demand. That is assuming that price is reflective of utility.

Clearly, the implicit argument behind advocating a 0% interest rate in order to maximize consumption is more consumption is a good thing.

Assuming the ratio between money and transactions remain constant at all times, an increase in consumption is a good thing.

Whatever your views on this matter mine are simply that individuals should be free to decide how much of their income they wish to consume now and how much they wish to save and invest for future consumption. Only the individual is in a place to determine what will benefit him most. This is tangentially related to why, especially in developing countries, regulations to mandate better working conditions are a bad idea. Better working conditions come at the cost of higher wages, and only the individual in question is in a position to determine if they would rather be safer or wealthier. Why would someone choose money over safety? Well, that money might be used to feed their children, or pay for medical treatment, or to escape to a better country, etc. etc. Or it might even just be used for their ends and they value being able to spend that extra money over the security of a safer work place. That's their decision to make, it's their life, not yours.

They are still free to do so. Low interest rates don't discourage savings, they encourage consumption and investments. Low interest rates also discourages lending.

High interest rates encourages savings, and lending, while discouraging consumption and investments.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
ZakYoungTheLibertarian
Posts: 253
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7/20/2013 4:54:36 AM
Posted: 3 years ago
The exchange rate is the price of money in other monies. When commodities served the function as money it was not during barter, as the commodity was in fact money, and if you are using money you are not bartering.

Utility cannot be measured. The price of a homogenous good is determined through supply and demand.

I assume you're talking in the aggregate here. Economics cannot properly be understood in the aggregate but even here you are mistaken. On the individual scale it's quite obvious you are mistaken. How can you possibly say an individual should consume more, without knowing that person, their finances etc? But even on the broader macro economic scale, who are you to say society should consume more? There are costs to consumption - specifically resources which are consumed cannot be saved and channeled into capital. Consumption today forgoes consumption tomorrow.

You cannot simultaneously both consume more and invest more. This is trying to have your cake and eat it to. The more consumption, the less investment, and vice versa.

Where do investments come from, if not initially from savings?
DanT
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7/20/2013 2:14:31 PM
Posted: 3 years ago
At 7/20/2013 4:54:36 AM, ZakYoungTheLibertarian wrote:
The exchange rate is the price of money in other monies. When commodities served the function as money it was not during barter, as the commodity was in fact money, and if you are using money you are not bartering.


The currency exchange rate is the price of foreign currency, whereby the demand for imports is the demand for foreign currency and the demand for exports is the supply of foreign currency.

The barter system works in a similar manner, whereby imports is the goods you want, and exports is the goods you are trading. The exchange the rate between the goods you are trading and the goods you want is the price for the goods you want.

Money is a medium of exchange, which replaces the goods you are trading, thereby serving as a form of trade credit. This replaces the demand for the goods you are trading with the supply of the goods you want. where there would be 4,950 different exchanges under the barter system, there would only be 100 exchanges if a medium of exchange was used.

The exchange rate between money and a good or service, serves as the price for that good or service. Likewise, the exchange rate between goods and services could be seen as the price of money; whereby a higher price for goods and services would result in a lower price of money.

The interest rate is the price of obtaining money. If the price of obtaining money is 0, than prices would be maximized (assuming the interest rate could not be reduced to a negative).

Utility cannot be measured. The price of a homogenous good is determined through supply and demand.


If simplified;

The Demand for a Quantity depends on the Utility of the Quantity.
The Supply of a Quantity depends on the Utility of the Price.

The Demand for Output depends on the Utility of the Output.
The Supply of Output depends on the Utility of Money.

The Demand for Money depends on the Utility of Money.
The Supply of Money depends on the Utility of Output.

I assume you're talking in the aggregate here. Economics cannot properly be understood in the aggregate but even here you are mistaken. On the individual scale it's quite obvious you are mistaken. How can you possibly say an individual should consume more, without knowing that person, their finances etc?

If Prices are always at expected levels, than there should not be a problem with the individual's finances. That is to say, assuming money increases as the volume of transactions increase, there should not be a problem with the individual's finances.

I am not saying that all individuals should senselessly consume. Aggregates are made up of individuals. It is not aggregates vs individuals, as individuals determine aggregates. If a model holds true, than the individual data should confirm the aggregates.

But even on the broader macro economic scale, who are you to say society should consume more? There are costs to consumption - specifically resources which are consumed cannot be saved and channeled into capital. Consumption today forgoes consumption tomorrow.

You misunderstand. Assuming the supply of money remains constant, an increase of consumption today forgoes consumption tomorrow.
If changes in the supply of money = changes in the volume of transactions, than the price remains constant, and output will always remain at its potential.
Assuming prices remain constant, than an increase in consumption will indicate growth, as both the short run and the long run aggregate supply will increase.

You cannot simultaneously both consume more and invest more. This is trying to have your cake and eat it to. The more consumption, the less investment, and vice versa.

Low interest rates encourages investments in stock and consumption, while discouraging investments in bonds.
High interest rates encourages investments in bonds and savings, while discouraging investments in stock.

If the interest rate is at 0, than there would be no bond market, but stocks would flourish.

Where do investments come from, if not initially from savings?

Private Savings = Income i.e. Output - Taxes - Consumption.

A Low interest rate increases the volume of transactions i.e. Output. The increase in output means an increase in Consumption + Investments. As I mentioned before, I am not promoting blind consumption.

A 0% interest rate would indicate either an increase in consumption, an increase in investments, or both.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
twocupcakes
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7/20/2013 2:49:43 PM
Posted: 3 years ago
At 7/18/2013 12:20:47 PM, DanT wrote:
Utility is maximized when Marginal Utility = 0.
The nominal price of money is the nominal interest rate.
According to the quantity theory of money transactions are the utility of money.
According to the optimal purchase rule, transactions are maximized when the marginal utility of money = the nominal interest rate.
0 = change in transactions / change in money = the nominal interest rate.

Huh?
DanT
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7/20/2013 4:30:13 PM
Posted: 3 years ago
At 7/20/2013 2:49:43 PM, twocupcakes wrote:
At 7/18/2013 12:20:47 PM, DanT wrote:
Utility is maximized when Marginal Utility = 0.

Marginal Utility of Money is the Utility gained from each additional unit of currency.

Marginal Utility of Money = Change in Utility / Change in Money.

According to Gossen"s first law of utility, the marginal utility of money decreases with each additional unit of currency.

When Marginal Utility = 0, Marginal Utility is Maximized. i.e Marginal Utility is maximized when there is no longer a change in utility when you create more money.

The nominal price of money is the nominal interest rate.

The interest rate is the price of money, i.e. the cost of obtaining money.

Price = (Quantity Demanded - Quantity Supplied)/ (Price Supplied + Price Demanded)

Interest = (Money Demanded - Money Supplied)/ (Interest Supplied + Interest Demanded)

According to the quantity theory of money transactions are the utility of money.

The Quantity theory of money states that Money x Velocity = Price x Transactions.
Therefore the Utility of Money = (1/Velocity) x Price x Transactions

Assuming the Price and Velocity are constant, the Utility of Money = the Volume of Transactions

According to the optimal purchase rule, transactions are maximized when the marginal utility of money = the nominal interest rate.

The optimal purchase rule states that the demand for or the utility of a quantity is maximized when the marginal utility = the price.

In other words, (Money Demanded - Money Supplied)/ (Interest Supplied + Interest Demanded) = Change in Utility / Change in Money

0 = change in transactions / change in money = the nominal interest rate.


Huh?
The maximum demand or the maximum utility of money is met when the nominal interest rate = 0. Transactions (or output) being the utility of money.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
Caninope
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7/24/2013 5:48:43 PM
Posted: 3 years ago
At 7/18/2013 12:20:47 PM, DanT wrote:
According to the quantity theory of money transactions are the utility of money.
Although that is the commonly accepted consensus, there's actually a group of economists (calling themselves market monetarists, and led by Scott Sumner) who reject that notion, arguing that the interest rate is the price or utility of credit and not money. They argue that interest rate is, in the short term, reflective of previous tightness of money (not of current tightness of money) and, in the long term, inflationary expectations. The price or utility of money is thus independent of the interest rate. Starting from this fundamental assumption, rather than the traditional one, market monetarists have made the argument that monetary policy at the zero bound has far more effect than Keynesians would argue. It's an interesting idea, I think, if nothing else.
DanT
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7/24/2013 11:26:46 PM
Posted: 3 years ago
At 7/24/2013 5:48:43 PM, Caninope wrote:
At 7/18/2013 12:20:47 PM, DanT wrote:
According to the quantity theory of money transactions are the utility of money.
Although that is the commonly accepted consensus, there's actually a group of economists (calling themselves market monetarists, and led by Scott Sumner) who reject that notion, arguing that the interest rate is the price or utility of credit and not money.

Credit is the borrowing capacity of an individual, and money is a form of trade credit, representing an owed share of the economy's goods and services.

The bond supply, comprised of the borrowers, depends on the monetary demand or the volume of transactions. The bond demand, comprised of the lenders, depends on the monetary supply (Cash + Deposits) or loanable funds (Aggregate Income - Consumption - Government spending).

The loanable funds market determines the real interest rate, and the money market determines the nominal interest rate. The real interest rate = the nominal interest rate - expected inflation.

They argue that interest rate is, in the short term, reflective of previous tightness of money (not of current tightness of money) and, in the long term, inflationary expectations. The price or utility of money is thus independent of the interest rate. Starting from this fundamental assumption, rather than the traditional one, market monetarists have made the argument that monetary policy at the zero bound has far more effect than Keynesians would argue. It's an interesting idea, I think, if nothing else.

My ideal monetary system would be a global monetary system that automatically adjusts the monetary supply according to changes in the volume of transactions, thereby stabilizing prices and promoting trade. I believe this can be done with a digital currency, and the sole use of electronic transactions. While aggregate prices would be generally stabilized, differences in price may still arise due to transportation costs and brand variations in the product.
"Chemical weapons are no different than any other types of weapons."~Lordknukle