Time Preference Derivation
There is an idea and economics that involves thinking about money in two different ways. If you thought about having $1 million now versus having $1 million plus a little bit more in the future, there’s a point where the money that you imagine now versus that same amount of money plus a little bit more in the future would be equivalent in your mind.
For example, if you thought about getting $1 million today versus getting $1.1 million in the year from now and if you thought about both of those amounts they seemed equivalent in your mind and the difference would represent something called your personal time preference or 10% in this example.
The idea of the law of supply and demand is relatively simple. If something is in very very high supply and in very very low demand that thing will be very very cheap, very inexpensive. If something is in very very high demand but in very very low supply then that thing whatever it is will be very very expensive.
Supply and Demand
The law of supply and demand covers everything. Financial, non-financial, labor, goods, services, even the cost of money. There’s a lot of ways that the government likes to intervene in the economy and there’s this law of economics called the law of unintended consequences.
This law says whenever you try to do something, whenever you try to alter some complex system, there are always going to be outcomes that you cannot anticipate. You have such a complex system and you try to change one thing on one level that’s always going to change other things and those other things will change other things and you’ll get an ultimate outcome that is usually different from what you first anticipated.
The question is do governments know this and they do it anyway or are they just very very unintelligent? Every time it seems the government tries to intervene in the economy somehow the result is always the opposite of what they want.
Great Depression Boondoggle
There is never ever been a more clear example of this of how they tried to intervene in the grain market back during the Great Depression. One of the biggest problems that all societies have had since the dawn of time is the battle between those with political power and those with money power.
Those with political power ostensibly want to rule society and keep society functioning smoothly. Those with money power tend to get so powerful they end up controlling the political power.
There have been a lot of ways that those with political power have tried to keep this from happening. One of the most common ones that popped up in many many different societies is laws prohibiting usury, or charging large amounts of interest.
Money To Make Money
If you happen to have a lot of money, a great way to gain more wealth for yourself is to loan people money with large interest rates knowing full well they won’t be able to pay you back. Once they default on their loans then you have legal claim on all of their property.
Having a lot of money, having a lot of strong money power allows you to gain more property without ever having to do any kind of violence. This is one way that money power gets more and more powerful.
One of the laws that attempts to keep this from happening are laws against usury. Laws against charging interest. But these money power people are very very clever. One of the many ways they use to get around these laws against usury was charging what they call the currency exchange fee.
Tricky Money People
Normally they would loan money and they would collect that same amount of money back in a year plus interest. Because this was illegal they had to figure out a loophole. They would loan money in one currency and then they would demand payment back in a different currency. They would charge a currency transaction or a currency exchange fee that would reflect the interest that they would have gained had they been able to loan and collect in the same currency.
These ancient moneylenders started to call themselves money changers. That’s exactly what Jesus got pissed at when he went into the temple and he chased out the money changers. He chased the money changers out of his father’s house.
The deeper question though is what were these money changers, who were really moneylenders, what ere they doing in a holy temple?
Meanwhile, Back On The Farm…
What happened during the Great Depression was you had a lot of these farms and these farms had borrowed a lot of money to keep their farms operational. They would borrow money from the bank, use the borrowed money to keep their farms producing. They would produce stuff. They would sell stuff and based on the profits they got from their sales they would then pay off their loans to the bank.
The problem is the price of grain started to fall considerably during the depression. Which meant the farmers couldn’t make their payments which meant the farmer started to go bankrupt and because so many farmers started to go bankrupt a lot of these banks started to go bankrupt.
This led to a huge banking crisis. One of the super genius plans the government thought of was to make some kind of law to keep grain from falling. Their idea was that they could support the price of grains and these farmers wouldn’t go out of business and they will be able to pay off their loans and the banking crisis wouldn’t get worse.
The Original Corn Holers
In order for the government to keep the price of grain from falling the government had to actually buy the grain from the farmers because they had to operate within the natural laws of supply and demand. Their idea was if the grain, if the price of grain falls the government would buy the grain from the farmers.
This would boost the price back up and this would keep everything working smoothly. What they didn’t anticipate was the law of unintended consequences because once the government started buying grain from farmers at a certain price this sent a very clear signal to all the other farmers.
The government only bought certain grains. For example let’s say they only bought corn. This sent a clear signal to every other farmer and the signal was this: You can grow whatever you’re growing now. Maybe sell it, maybe not. Or you can grow corn and the government will guarantee a purchase price.
Risk Or Free Money?
Any farmer with half a brain started growing corn knowing they had a guaranteed sale to the government. But because the government needed to keep this corn off the market, because otherwise it would make the price drop, the government was buying all of his grain from farmers and they were destroying it.
This law of unintended consequences created a situation where people were starving and the government was buying corn from farmers and destroying it. This led to the agricultural industrial complex becoming one of the biggest power brokers in the country today.
Big agriculture is such a powerful lobbying group today mainly because of those decisions that the government made back during the Great Depression. These decisions that the government made during the Great Depression impact everybody today. Those decisions are directly responsible for why we have high fructose corn syrup in all of our food and are directly responsible for why the ethanol corn alcohol industry is such a boondoggle.
Long Lasting Consequences
Because the modern equivalent of that is what they’re doing with all these interest rates. If you think of somebody’s personal time preference, say your time purposes 10%, there’s a law of economics that says the average time preference will be the free market interest rate.
You have this peculiar set of circumstances today were the interest rates of the world are artificially suppressed, which kind of indicates, if you look only at the law of supply and demand, this means there’s a lot of money to be loaned out and not a huge demand for money. That would create a natural system of low interest rates.
But the opposite is what’s happening. Everyone is broke. Everyone has maxed out their credit cards. Everybody has zero dollars saved in the bank. It’s very similar to the depression where the government was buying corn and destroying it while people were starving.
Interest Rate Suppression
Today you have the situation where the reality is nobody has any money. Everybody needs money but the economic indicators indicate the opposite. The artificial support of grain prices back during the Great Depression are still with us today.
Who knows what the secondary, tertiary and other unintended consequences of the artificial suppression of interest rates will be.
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