Natural or Neutral: Real Interest Rates are Positive

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If we start from this simple, human premise and if we

concentrate on how the real-world individual is likely to

act rather than rushing to lose him in a faceless mass of

abstract mathematical symbolism, one very important

corollary soon follows; viz., that the widely perceived and

highly persistent requirement for a measure of compensa-

tion to be given for undergoing the psychic discomfort of

deferring the satisfaction of our wants and desires is the

fundamental source - the ontological root, we might say-

of the phenomenon of interest.

In that last paragraph, an Austrian would easily recog-

nise that we are arguing for what he would call

'methodological individualism' and that such a focus on

how we individuals actually conduct ourselves in every-

day life is entailed in the study of that purposeful Acting-

with-a-capital-A that Mises called 'praxeology'. He would

also readily identify with the concept that interest is a

matter of subjective, individual time preference - one

which would be expressed even in the absence of a medi-

um of exchange or a market for loans thereof.

As financial market participants, it is a hard fact that we

would nevertheless do well to acknowledge that the in-

terest rates we spend so much time analysing, predicting,

and comparing are not in any way primary. Even when

not being reduced to absurdity by the unrestrained mone-

tary quacks who people our latter-day central banks, we

should hold onto the idea that they are just the shadows

of a deeper truth being cast on that electronic wall of Pla-

to's cave which is our Bloomberg screen.

Rather, market interest rates are a close reflection of the

marginal degree of time preference being expressed in

their dealings by the relevant population of Acting Men.

Or at least that is what they best approximate when the

market is being left to function as it should.

That such a degree of happy concordance is in practice

more of a rare occurrence than we could wish is thanks

both to the rickety stage construction of our flawed insti-

tutions and to the uncomprehending folly of the political

actors who strut and fret upon it.

hindesightletters.com

THE CASE FOR POSITIVE INTEREST

An Austrian rebuttal to Summers, et al

THE TIME IS OUT OF JOINT

Over the years, any number of psychological experiments

have been conducted in order to validate - or at least to

give a veneer of academic corroboration to - a truth al-

ready well established by practical experience; namely,

that we humans must continually struggle to overcome

our basic animal instinct to seek instant gratification of

our wants.

Seen from a different perspective, it is just this capacity for

forward thinking that underpins, even defines, our very

humanity. As such, the idea that the phenomenon repre-

sents a major facet of our behaviour much should not be

in any way controversial.

In order for us to deny ourselves the pleasure of the mo-

ment, we generally need some form of reward - or at least

the prospect of one - in return for our abstinence. The re-

ward can, of course, be the negative one of not being pun-

ished and it can clearly also take spiritual rather than

purely material form.

It hardly needs to be said that that last motivation – essen-

tially the promise that we shall have cake for tea if we are

good little boys and girls in the meanwhile - is by far the

most prevalent one in everyday operation.

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This recurring disparity between the ideal and the ob-

served is the primum mobile in our long, sorry history of

booms and busts, for such cycles of mass delusion and dis-

abusement are principally brought about when falsified

market rates of interest lead successively more people to

act as if the world were a richer, less time-constrained place

than it really is. Only later, in the ensuing crash, is the true

horror revealed that those under the spell of the delusion

have all the while been making it poorer and more urgent

than it ever need have been.

Ironically, it is the case that the now poorer folk, with

fewer spare resources available to be devoted to schemes

for improving their future lot, must be closer to a bare

subsistence than they were before. Hence their time pref-

erence must have RISEN along with their degree of pre-

carity. Underlying, natural interest rates, then, must have

gone UP, not down, much as it does for those poor souls

who deliver themselves, in their hour of desperation, to

the pitiless clutches of the loan shark.

This inference tells us that knee-jerk policy moves to sup-

press firstly short-term, official and then, by contagion, all

other market rates of interest can only work to maintain the

debilitating incoherence between past and future which the

boom introduced, if with a different range of outcomes to

those observed when it was at its height.

And to be clear here, to say this is not unfailingly to en-

dorse a stony-faced, Old Testament rejection of all aid for

the 'sinners' amid the crisis, nor does it lead us to propose

that emergency interventions aimed solely - in the classic,

costly, tough love, Bagehotian style - at preventing the tug

and swirl of the fast-receding monetary floodwaters from

undermining the foundations of even the most sound of

our buildings should always be foregone.

What it does do, however, is insist both that any such

emergency aid is restricted solely to preventing the spread

of the blaze and that those saved from the flames should

entertain no doubts as to whether they will then be pre-

sented with a substantial firemen's bill. It should be made

categorically plain that it is no part of the duties of the res-

cue team to help those who have been playing with match-

es to keep themselves warm amid the embers of their delin-

quency, much less to aid them in rekindling a new confla-

gration on the site of the old.

In direct contravention of the guiding tenets of dear old

Walter's much cited (if, in fact, reluctantly adopted) ap-

proach, current practice is to lend cheaply, for lengthy peri-

ods of time, most especially to those possessing NO sem-

blance of sound collateral whatsoever. Thus it is the case

that many firms which are realistically in need of a merci-

fully swift liquidation are instead 'evergreened' and placed

in that 'twixt Heaven and Hell, run-them-for-cash category

populated by what we now refer to as ‘Zombies’.

Once that happens, the latest manifestation of an incompat-

ible market rate of interest is not now to be found in an

insupportable 'lengthening' of the productive architecture -

i.e., in entrepreneurs engaging in long-amortization, often

highly speculative, activities which presuppose an exces-

sive flow of capital, not just directed to such activities

themselves, but also into all manner of other, hazily-

conceived, but nevertheless essential, complementary un-

dertakings. Rather, too low rates now result in the inhibi-

tion of that over-extended structure's contraction back to a

healthier, more sustainable span, as well as in the retarda-

tion of its rearrangement into a more coherent, mutually

supportive set of interlinkages.

Similarly, in a world where credit is easily accessible not

just by producers but by all manner of exhaustive end-

users - whether private or, most egregiously of all, public

sector ones - the artificially lowered rates have as their mis-

guided purpose a stoking of the fires of Keynesian con-

sumption. In so doing, they only serve to militate against

the swift replenishment of the capital which has been lost

in the Boom by being locked into so many, now unprofita-

ble forms, both physical and organizational.

There may be many specific features at work both in pro-

moting any given Boom and in precipitating its ensuing

Bust - on top of which lies an entire bestiary of subsequent

responses and tail-chasing interventions - but it should not

be hard to recognise here the outlines of an explanation for

why this past eight years' unprecedented efforts to pre-

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serve the status quo ante and to frustrate the re-shaping

and re-allocation of both human and physical capital have

been accompanied by so meagre a recovery, or why debt

levels have continued to rise so alarmingly even as capital

investment has languished and official measures of

productivity have only flattered to deceive.

THE TRADE AND PROFIT OF THE CITY CON-

SISTETH IN ALL NATIONS

But, we digress. The issue at hand is for us is firstly to

achieve a better understanding of the phenomenon of inter-

est and then to examine the frankly illogical nature of

much current thinking on the issue. In order to do this, let

us step right back to the beginning as a way of providing a

solid underpinning for some of the concepts developed

above.

In even the simplest of barter economies it is the case that

the real price of anything we wish to acquire is the value of

whatever it is we next most urgently desire among the

things which, having only finite resources and limited time

allotted to us, we must give up in order to have it. In other

words, at bottom, price equals opportunity cost.

Stepping up to the next level of complexity, we now enter a

world where most of our transactions are indirect and

largely anonymous, rather than direct and face-to-face.

Here we have hit upon the felicitous idea of employing

mutually acceptable media of exchange in order to carry

out our traffic. (We shall here avoid all discussion of

whether this was a largely spontaneous, emergent happen-

ing or the fortuitous offshoot of certain proto-states'

attempts to gather revenue from and exercise control over

their subjects).

Once liberated from the narrow trust networks which must

have prevailed in pre-pecuniary times, the adoption of me-

dia of exchange allowed for a great flourishing of com-

merce and industry. Now, in this new world of multiple

potential counterparties, the market process could better

grade and sort the competing uses to which scarce re-

sources could be put according to the highest valuation

placed upon them by those with the means and the will to

make their assessment effective, even if these were people

of whom one knew nothing more than that they were in-

deed so furnished.

In such a system, in order to achieve his own aims, the

buyer must offer up something to the seller which this

latter prizes more than the good he has put up for sale. Ig-

noring for now the rare cases of physical good-for-good

swaps, this offer takes the form either of a final settlement

good (viz., money) or a deferred settlement one (credit)

which is essentially a pledge to provide a quantity of that

same money in the future.

Since, as we have just argued, future goods are generally

worth less to us (furnish us with less satisfaction) than pre-

sent goods, that deferred claim must include some incre-

ment to today’s settlement – an addition to which we refer

as ‘interest’ and which we should thus regard as being the

price of time or as an express delivery surcharge in reverse.

In the interests of avoiding confusion, here we should note

that that this contractually agreed increment typically in-

cludes a premium by which to account for additional risks

we run in postponing the final reckoning, whether these

are perceived to be due to the deferrer’s own particular

circumstances, to the general tide of affairs, or to the wider

hazards pertaining to a possible variation in the standard

of value in terms of which the bargain is being concluded.

Note that, if such risk premia are small enough and if we

were ever to suppose that the two apples which we de-

mand next month as payment for the enjoyment of one

apple on the spot are then expected to be had for a lower

overall monetary outlay then their sale might fetch today, it

might just be the case – rare to the point of non-existence

though such instances have been in practice on the unham-

pered market – that the arithmetical, pecuniary amount of

interest would be a negative numerical quantity.

Even this rare case, however, would still not alter the

deeper truth that the underlying real, natural rate of in-

terest - i.e., the one which remains after excluding such

expectations of change in money’s worth and so the one

which emanates solely from the workings of societal time

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Original Thinking.



preference - would remain incontrovertibly positive. The

compelling, Aristotelian logic to the proposition is that

our forthcoming two apples has been, is now, and ever

shall be a greater quantum of appleness than our contem-

porary one apple, however distributed in time is their

delivery.

Though this may seem trivial enough, there is one further,

deep implication of what we might call the Law of Jam To-

day, one which can be drawn as follows.

As we have seen, the market tends to allocate our limited

goods to those willing to pay the most for them and in the

promptest manner, too . Out of the near infinitude of possi-

ble uses to which it could be put by the teeming crowd of

would-be buyers, such a price can only be paid by those

whose past efforts to produce valued goods have met with

sufficient success as to now afford them the greatest means

to devote to such a purchase, or else by those whose cred i-

ble plans to acquire such means in the future will do enable them

to issue some kind of acceptable IOU (and membership of

the first class is, naturally, the attribute most likely to as-

sure membership to the second).

Given that the production of future saleable goods in-

volves, by definition, the passage of time, for the process to

be worthy of the singular expenditure of effort, much less

for it to be repeatable, the maximum price which the entre-

preneur can rationally pay for the inputs which his produc-

tion requires (land and labour, process and capital goods)

is one which must not exceed today’s equivalent of the de-

ferred proceeds of their eventual sale.

At worst then (and, strictly, after assuming that the entre-

preneur's own subsistence is counted among the overall

cost of labour), the outlay must be equal to the sum of

those expected future receipts discounted back to today at

the prevailing rate of interest. This simple truth should be

enough to dispel the annoyingly persistent theory that in-

terest rates are determined by productivity alone, a shallow

half-argument which neglects the plain fact that the would-

be users of means will naturally pay more for those which

they feel will lead to more lucrative ends, an upward as-

sessment of value which leaves us with nothing else by

which to explain the ratio which comes to prevail between

these two prices, i.e., the interest rate.

This means that producer goods are effectively priced with

close regard to (in an ideal setting, exact correspondence

with) the net present value of the future net cash flows to

which it is assumed they will give rise.

Great Scott, Marty, they are, in effect, today’s material em-

bodiment of tomorrow’s as-yet unformed consumables!

THE NET THAT SHALL ENMESH THEM ALL

Now, the foregoing may be all well and good, but it is also

the case that any such consignment of goods is open to a

multitude of what economists call 'rivalrous' uses. If this is

not true for that rare, individual batch of highly purpose-

specific goods which we may have under consideration in

some particular instance it will nonetheless still hold for

the earlier, typically less use-constrained goods of which

that batch is partially comprised, as well as for the later,

more shop-ready goods to which it will in turn give rise

and whose own market valuation, as we have seen, will

help determine the price of their antecedents

Thus, it is the case that today’s producer good, needing to

be bid away from an alternative use, must be deemed to be

able to give rise to either a slug or a stream of future con-

sumables just greater in cumulative, time-weighted value

than it would in alternative hands, whether the last, most

eager man whom we outbid in order to secure them in-

tended them for a different productive end or for one in-

volving immediate, exhaustive consumption.

Stated like this, it may all sound all very abstract, so let us

try to illustrate it in more readily comprehensible terms.

Imagine that I come across a full-grown chicken, priced at

$10 today and I estimate that it will lay one batch of eggs

which I can sell one period later for at least $1.10. In such a

circumstance, I will not baulk at paying up to a 10% inter-

est rate for the loan of the money with which to buy the

chuck and thus to tide me over the egg production cycle.

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Original Thinking.



However, in order for me to do so, it also has to be the case

that the second most insistent bidder, the man whom I just

beat out at my bird’s auction, must not think he can make

chicken sandwiches which sell for more than that same

$1.10 or which he reckons can be made ready and deliv-

ered to his customer in a shorter time than it takes for the

hen to lay my own saleable eggs. If he does, he will outbid

me for the hen (or, indeed, outbid me for—pay more inter-

est for— the loan).

Nor can he be someone fancying the fowl for tonight’s din-

ner who values it more highly than the specimen weighing

10% more (or my eggs or my other rival’s sandwiches)

which might otherwise land on his table after an equivalent

period of delay. If he turned out to have such an ordering

of his appetites, he would at once cancel the new savings

he was previously intending to make, or liquidate the ones

he had made in time gone by, in order to make his pur-

chase of poultry immediate.

In fact, such a man might even be inclined to take the other

side of the trade from some fourth party—a person who

does still wish to defer consumption—and thus borrow,

against a specific promise of a future act of redemption, the

consideration he requires to see me off.

In each of these cases, my competitor – whether would-be

producer or aspiring end-consumer – would pay up and

exclude me from the market if he thought he could be more

productive of value within the same time-frame (or pro-

ductive of the same value over a shorter one), or if he were

more dismissive of future consumption opportunities in

comparison to current ones (i.e., if his subjective, individu-

al time preference were higher than mine).

Whether you look at it from the side of the finance being

taken up or from that of the bird for which I, too, have

sought to marshal the requisite monies, I may be driven

out of the market by those with differing intentions, leav-

ing all my budding entrepreneurial ambitions regrettably

unfulfilled. Were I not to face such constraints – because

the extension of credit was unchecked and its price was

thus unresponsive to demand – it is easy both to see that

the auction could get out of hand and that the linkage be-

tween present and future values would be sundered, with

potentially disastrous consequences for all.

Even absent that distortion, it is important to note that an

excess of consumptive zeal on the part of one of my rivals

has the potential to put paid not only to my endeavours,

but to those of other, would-be value creators, too. While it

is false to say this is inherently a bad thing - since end con-

sumption is, after all, both a child of necessity and a well-

spring of motivation to action - it nevertheless gives the lie

to the idea that the deliberate promotion of mass avidity

somehow 'calls forth' investment when the truth is that

such a 'stimulus' can all too easily co-opt the men and ma-

tériel needed to create value into activities which will extinguish

it utterly instead.

By pre-empting any move to develop bigger and better

means of production, it is therefore entirely possible that a

blind focus on end consumption can keep us both poorer in

substance and less prolific in our works than we need oth-

erwise be: an unlooked-for penury which will perhaps lead

our bewildered opinion-formers and policy-makers to des-

pair at the onset of what they will term 'hysteresis losses',

to fret about whether there are indeed any ‘gains to trade’

which remain to be had, and then to bewail our apparently

ongoing 'productivity paradox'.

Be that as it may - and moving beyond this narrow trade

in gallinaceous bipeds - it is important to recognise that

the continuing overlap between our activities as buyers,

sellers, spenders, savers, producers, and consumers is so

pervasive that we all incessantly interact on what is effec-

tively a single market; one on which we are constantly - if

often unconsciously - discounting back from (and con-

versely compounding up to) the anticipated price of fu-

ture goods.

This implies that the web of transactional possibilities, both

actual and potential (or, if you prefer, both realised and

counterfactual) which comes into being under the opera-

tion of the price mechanism is as intricately intertwined

and intertemporally connected - and almost as well-

explored - as the smeared-out pathway of possibilities ex-

perienced by an electron in a quantum experiment.

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Original Thinking.



I say 'almost' for it is the honourable role of the entrepre-

neur to discover and then gainfully to exploit the remain-

ing gaps in this web of implicit knowledge; to arbitrage

away any informational deficiencies; and to reallocate

scarce resources from lesser to more urgent wants. It is pre-

cisely for this service that he earns his profit - when that

vexatious line item is properly understood in an economic,

rather than in an accounting, sense - and it is precisely for

this reason that profit should not be seen as some kind of

zero-sum symptom of pervasive social evil.

Here we should also be aware that, as Hayek was at pains

to make clear, the economy, in all its complexity, is no uni-

directional assembly line. As a result, at any given instant

we might easily be contending with the 'rivalrous' elements

of that web which involve earlier, 'higher' stages of produc-

tion or later, 'lower' ones or with those occupying the same

cross-section as do we, ourselves.

Even this does not fully do the case justice, for the topology

of such exchanges is in no way fixed - especially in a dy-

namic, growing economy. Instead it is one which is con-

stantly evolving under the pressure of our own actions, an

unavoidable malleability which means that even as we

move to carry out our plans, we conspire to change the

very landscape in which we must try to realize their full,

remunerative intent. This long understood truth (see the

great Cantillon, writing all of two hundred years ago) has

its parallels in the elder von Moltke’s observation that ‘no

plan of operations extends with any certainty beyond the first

contact with the main hostile force’. It is also the phenomenon

which, craftily rebranded as the new concept of

‘reflexivity’, gave that faux philosopher, George Soros, an

off-the-shelf reputation as a deep thinker

All of these factors mean that, if that market is deep

enough to ensure the Law of One Price is observed hori-

zontally between substitutable present goods, it also im-

poses the Law of One Price Ratio vertically between pre-

sent and future ones, i.e., it gives rise to a single, natural

rate of interest which, let us re-emphasize, our core human

instincts will ensure is always positive.

NO REMEDY IN THIS CONSUMPTION OF THE

PURSE

But this sort of reasoning is alien to much of today’s main-

stream, many of whose members succumb to the long-

dispelled, circular fallacies of the productivity argument.

Yet more of them adhere to what Dennis Robertson wick-

edly derided as Keynes’ Cheshire Cat theory of ‘liquidity

preference’ under whose rubric ‘...the rate o f interest is

what it is because it is expected to be other than it is. But if it is

not expected to be other than it is, there is nothing to tell us why

it is what it is… [it is] a grin without a cat’.

Otherwise, espousing no theory at all, but instead mum-

bling a few half-digested phrases of Wicksell by way of an

incantation, they resort to the blunt force trauma of macro-

econometrics to ‘prove’ that this, that, or the other interest

rate—now grandly entitled ‘r-star’—must be ‘natural’ (or

sometimes merely ‘neutral’) if their particular choice of

statistical architecture happens to suggest that its imposi-

tion is all that is needed to ensure that that bastardized

modern form of ‘price stability’ (which is actually a low-

level, chronic inflationary creep) will once again prevail or

alternatively that that other nebulous concept of ‘full em-

ployment’ will ensue.

In practice (and for all the droning to that end of speechify-

ing central bankers), it has not been so much an abstruse,

cabbalistic calculus as an impatient, heuristic groping

which has determined the market rates – as implausibly

low as they have turned out be – which have been imposed

upon us as these theories have taken root. There may have

been widespread disappointment that these nostrums have

failed to elicit the predicted response, but none of those

administering the snake oil have been in the least willing to

admit their fundamental error – much less to seek out and

eradicate all other impediments to sound finance, individu-

al enterprise, and healthy market clearing as a more likely

path to a cure.

Rather than subjecting themselves to the anguish of the

soul-searching that would entail – and readily afflicted by

the latest mutation of that gloomy millennialism to which

large numbers of the frustrated intelligentsia have habitu-

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Original Thinking.



ally fallen prey - they have instead sought their excuses in

the mischief being wrought by that figment of their imagi-

nation – that diabo lus ex machina - which is nothing but a

rehashed version of the first-generation Keynesians’ re-

soundingly disproven theory of ‘secular stagnation’.

From a vantage point on the more respectable wing of this

particular sect of pessimism, the belief has brought the

likes of Larry Summers belief to muse upon the existence

of a ‘negative, real rate of interest’ as the corollary to our

current economic sluggishness – a proposal which all of

our forgoing examination should strongly suggest to the

reader is a logical impossibility.

Meanwhile, at the more irresponsible, if not to say extrem-

ist, end of the cult, the Krugmans, the Haldanes and the

Buiters have been busy cooking up much more Swiftian

scenarios - ones filled with helicopter drops, cash bans, se-

rial bubbles, and even wars on Mars (sic) as a means to

jump-start economic vitality.

If there is one field in which the world we truly does face

an ineradicable over-capacity, it is surely in the produc-

tion of dangerous enthusiasms by those who hold ten-

ured chairs in the Faculty of Fatal Conceit.

It is an irony that such men who, when holding forth in

matters of which they have no especial expertise, tend to

subscribe to the stultifying ecological fearfulness of the

‘precautionary principle’, are the same monetary Doctor

Frankensteins for whom no new assault upon economic

reason or institutional tradition is too wild-eyed or too un-

predictable to essay.

Similarly, though among them are men who gravely try to

assure us that no amount of government debt is too great -

since we only ‘owe it to ourselves’ – these are also those

most given to loud, public lamentation over what the build

-up of that mountain of illusory self-obligation will entail

for a State which will soon only be able to levy the sums

demanded for the service of this Everest from a demo-

graphically less numerous posterity.

The only consolation the promoters of indebtedness can

take from their self-contradictory fears is that it furnishes

them with the perfect excuse for yet further indulgence in

half-crazed experimentation of the type exemplified by the

rapidly unravelling farce of ‘Abenomics’ or by the yet to be

unleashed scourge of ‘helicopter money’ and the orgy of

public sector ‘infrastructure’ mega-projects this will finance

now that the ‘social dividend’ of these gleaming White Ele-

phants has supposedly fallen below the artificially sup-

pressed interest rate.

If even that fails to usher in a new commercial and indus-

trial Renaissance, perhaps they will consider staging the

meretricious jonglerie of the Olympics every four months,

instead of every four years, or running the printing presses

simply in order to build factories in which to make yet

more printing presses. Expenditure – even of the circenses

et panem kind - is, after all, the watchword of the disciples of

a man who thought he was helping alleviate the woes of

the Great Depression by soiling extra table linen in his high

-end hotel rooms.

These savants, having evidently crossed beyond the nar-

row threshold separating them from genius, we shall leave

to the metaphorical padded cells with which their ivory

towers appear to come equipped. But we would seek to

dispute matters with former-Secretary Summers – a man

whose heavyweight reputation should not blind us to the

fact that he has contributed in one capacity or another to

several of the more debilitating financial upsets – as well as

to one or two of the outright economic debacles - which

have plagued us these past twenty years. Does the reader

still fondly recall our Seer’s eve-of-crash hyperbole about

the prodigies being delivered by ‘tieless’ Tech executives,

back in early 2000, we wonder?

Regardless of his record in office, we would firstly remind

Summers the Thinker that the default position of that in-

sistent little devil on our shoulder is that we should yield to

each passing temptation without qualm and treat the to-

morrow when we must pay the price of our surrender as a

day that never dawns. On that account, we must always be

offered some little sweetener to go against his urgings. That

‘something’ is interest and given that the concept of a nega-

tive sweetener is somewhat nonsensical, in real terms,

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therefore, such interest is always positive.

The man who most often offers to pay us that interest (and

certainly the one who most fruitfully does so) is the pro-

ducer-entrepreneur who has a plan to carry out but who

lacks enough savings of his own to be able secure the in-

puts and to feed and clothe himself and his workers while

he does so.

Moreover, unless our man works in some idealized prima-

ry industry and uses nothing whatsoever previously pro-

duced by any other human agency, he must, by extension,

also make a proportionate contribution to the workers at all

those other firms which sequentially combine to provide

him with his stock of components and raw materials and

who therefore do not themselves add to the immediate en-

dowment of end-consumables of which we and they alike

have need.

Naturally, our entrepreneur acts in the expectation that his

use of present goods will give rise to an even more valua-

ble future supply of goods; i.e., that his project’s own con-

sumption will be productive of value, not exhaustive of it.

Individually, he may turn out to be mistaken in that lauda-

ble estimation, of course, but when we consider his motiva-

tion and the reason he therefore contracts to pay interest, it

is the intent and not the outcome which matters.

In reality, of course, the path of human material progress

shows that the successes tend to outnumber (or at least to

outweigh) the failures, if by a narrower margin and in greater

concentration than one might be led to suppose. Those re-

grettable occasions when this is NOT the case have their

roots in some form of social calamity, whether that entails a

natural disaster - such as fire, flood or famine - or a

manmade one such as bad government, or war, or that all-

too frequent, systemic scrambling of price signals which

arises from the generation of too much 'fictitious capital'

under conditions of artificially low market interest rates

and the overly elastic provision of credit.

When he first sets about his venture, our entrepreneur has

no wish to emulate the weary patience of a Robinson Cru-

soe while he painstakingly marshals the necessary re-

sources for it. It may also be the case that the scale of his

vision puts it beyond the capabilities of any one man to lay

in a sufficient stockpile, whether of goods or money.

If, therefore, he can persuade some thrifty group of Men

Fridays to provide him, on demand, with the necessary

means instead, he knows what he is really acquiring from

these, his lenders, is TIME. We have alluded to this above,

but it is important enough to re-iterate: interest is NOT the

price of 'money' - much less is it that of those cash hoards

whose existence Keynes conflates with ‘liquidity’. It is the

price of time; the time saved in acquiring a magazine of

employable (or enjoyable) present goods beyond the capac-

ity of one’s present income or past accumulated savings.

With that in mind, if we now imagine that we live amid the

distortions of Summer’s House of Mirrors, the negative real

natural rate which he imagines to prevail there can only

mean that we have come to prefer future consumption to

consumption today and that therefore we must now pay a

man not to postpone his breakfast, as in the everyday

world, but rather to call off the hunger strike upon which

he bizarrely is thought to be only too willing to embark

each morning.

That is convoluted enough in itself, but what Mr. Summers

does not explain is what happens when tomorrow becomes

today and the day after becomes the next tomorrow. Surely

our abstemious one will be minded to repeat his act of ab-

stention and then, as the heavens turn relentlessly in their

circle about him, to do so again, and again, and again, un-

less he is continually prodded and paid to act against these

most perverse of inclinations and actually USE something

up?

But here we run into a paradox, for what will our dedicat-

ed ascetic do with the reward we have given him? Being

intrinsically a current good (for that is what money is), he

will again wish to defer its use and so he will presumably

set it, too, aside, building up a sterile hoard until he and his

whole race die of inanition and inaction like the fictional

inhabitants of Joss Whedon’s Planet Miranda in the film,

'Serenity'.

And while this folly of self-denial is unfolding, what of the

hero of the Modern Age, the enterpriser, the man who lives

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at hazard, enriching himself by giving us whatever it is we

wish to have and on better terms than those extended to us

by his competitors?

Well, it only takes a moment’s thought to see that the ex-

consumer, now wishing only to be rid of the embarrass-

ment of his present goods, will pay our man to take them

away. But since future goods trade at a premium to current

ones in this topsy-turvy world, this latter no longer has the

duty to husband them and nurture them in order to bring

about the increase from which he hopes both to discharge

his contractual obligations and make his living.

To the contrary, he can idly or deliberately waste some por-

tion of these goods and still be ahead in the game. We will

thus be paying him not to fructify his capital but to despoil

it. To complete the ‘Serenity’ metaphor, the entrepreneur

will become a Reaver - a destroyer, not a creator.

TOMORROW, AND TOMORROW, AND TOMORROW

So, one last time and in the hope of eliminating all remain-

ing obscurity, let us reprise the argument developed above

for it is a pivotal one and therefore one which must be well

understood if we are to challenge the very substance of the

perilous theorizing of our Lords and Masters.

With positive real rates – which, we must again emphasize,

simply imply that the instantaneous price ratio between

goods today and goods tomorrow is greater than unity –

the primal temptation is for the consumer to eat as much as

he can, even including his seed corn, and so to yield to the

pleasures of the moment in disregard of the needs of the

morrow.

Too much of this and the inveterate consumer - whether a

willing spendthrift or some unfortunate piece of human

flotsam washed away by an inflationary tide severe enough

to shut off all access to the future (as well as to dissolve

many of the mutually-enriching interconnections of the

present) - can only end up bereft of all capital, deprived of

everything which leverages up his puny human strength in

the face of a pitiless Nature, and so be reduced to foraging

for his existence in what is likely to be more of a Bolivarian

purgatory than a blissful, Rousseauan paradise.

Faced with this underlying proclivity, the producer must

tempt his neighbour temporarily to spare some part of his

right to consumables by giving a credible promise of re-

turning a greater, a better, or a more highly-prized alterna-

tive quantity after enough time has elapsed for the former’s

entrepreneurial transformation to be completed. Here we

must hope that there exist sound enough institutions with-

in which do so – the rule of law, certainly among them, but

also that fundamental respect for property rights which

utterly precludes a deliberate adulteration of the monetary

standard in whose terms the contracts which buttress them

are written.

If such an offer fails to be sufficiently persuasive, the pro-

ject will be much-delayed, if not actually stillborn. The pro-

ducer is thus paying to save himself the time he would oth-

erwise require to set aside the resources necessary to his

undertaking out of the fruits of his own, ongoing efforts - a

task which may of course be utterly beyond his solitary

capacities to discharge.

Conversely, where he does secure to himself the requisite

means, he must then strive to generate enough surplus val-

ue from his efforts in as short a time as possible, not only to

meet his obligations to his creditor, but also to earn his own

reward on top - which residual sum is the profit which

marks out his success as a creator of value. Had he no ade-

quate expectation of future profit as the due reward for his

present toil, he would of course not stir himself to act in the

first place. Here, then, is a further manifestation of a posi-

tive real rate of time discount at work.

With Summers’ imagined negative rates, however, this all

goes into reverse as the ratio between present and future

goods ratio falls crazily below parity.

Now the common urge will be to starve to death, obses-

sively squirrelling away the forest acorns or planting only

the slowest growing among them; prizing the glacial pace

at which the mighty oak will one day emerge to spread a

fluttering shadow over the early grave of its soon to be

famished planter.

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The producer will be paid (in goods or coin which he, too,

will try to lock away in some needlessly long-lived format)

to overcome his own distaste and take the acorns away. Far

from being commissioned to fructify or multiply them as

much and as rapidly as possible, he will be asked to give

only some fraction of them back as long afterwards as pos-

sible.

He will thus be enjoined to waste time, not to economize

on it. He will have his reward regardless of any poor stew-

ardship of the goods in his charge – not that he will want

that bounty, of course, since he, too, will wish to defer in-

definitely his enjoyment of the goods over which its receipt

will give him command. In fact, in contrast to the business-

man in our Non-Summers world, he would be more than

happy to have his reluctantly-tendered invoices languish

long unpaid, his payment terms arbitrarily extended, and -

at the extreme - would even heartily welcome the disem-

barrassment of gain which ensued from an outright de-

fault.

Faced with such a blizzard of paradox and acutely wary of

the impenetrable tangle of malign consequences which it

conceals from our gaze, all we can say is: No, Larry! Real

natural interest rates cannot ever be negative!

Sean Corrigan

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Economy & Finance

Natural or Neutral: Real Interest Rates are Positive