NetNews Usenet Archive 1993 #3/NN_1993_3.iso/spool/sci/econ/9830

Internet Message Format | 1993-01-25 | 2.7 KB

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From: [e-mail] (Charles M Kozierok)
Newsgroups: sci.econ
Subject: Re: Inflation
Message-ID: <[e-mail]>
Date: 24 Jan 93 16:38:21 GMT
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In article <[e-mail]> [e-mail] (Christopher Browne) writes:
>In article <[e-mail]> [e-mail] (Charles M Kozierok) writes:
>>interest is simply rent for the use of a dollar. if that dollar
>>will be worth 4 cents less a year from now, then i will include that
>>amount in the rent i charge. you'll have to explain how it works the
>>other way around. i don't see it.
>
>Supposing the basic interest rate is 4%, and there is no other source
>of inflation, then it would be rather difficult to have an inflation
>rate of below 4%, expressed as follows:
>
>If I have $100, and keep it in the form of currency for 1 year, then
>at the end of that period I still have $100.
>
>Unfortunately, that won't buy me as much as I'd have if I had lent out
>the money at the interest rate of 4%.
>
>Holding money costs 4%, and this will encourage the inflation rate to
>grow toward 4%.
>
>The presence of interest WILL result in some inflation.
>
>Interest is a "monetary" influence in the economy, and there is no
>contradiction in having it cause some inflation.

i disagree with this analysis, though i openly claim not to be
an expert on the matter.

first, based on this analysis interest rates and inflation would
chase each other's tails to infinity at no time at all.

second, history shows that inflation and interest rates *do* usually
maintain a gap. your claim that inflation below interest rates
would be hard to happen is not empirically indicated.

third, some explanation. if you hold on to your $100 instead of
investing it, you are doing so because you feel that you will get
some benefit from doing so. *that* is compensation for the 4% you
don't earn by investing. simple opportunity cost trade-off, as i see
it. holding money does not cost 4%.

now you could argue that the 4% that somone has to pay to get
capital to build something to sell will impact the price; and that
if it went up to 15% then prices would increase. i agree. but that
effect is only one of rental cost, and is no more important than the
cost of renting equipment or buildings.

so, i agree that there is *some* causality, but nowhere near the
amount you previously claimed.
--
charles