Re: Why is a dollar today worth more than a dollar tomorrow?

2003-12-06 Thread Fred Foldvary
--- Marko Paunovic [EMAIL PROTECTED] wrote:
 OK. Then, as long as the expected profit from building a factory is
 higher than zero, I would not lend the money at zero interest rate.

If at a zero rate of interest, the quantity of savings exceeds the quantity
of borrowings, savers would earn zero interest.  Borrowers would just pay
the overhead costs and a risk premium and an inflation premium.  You as
lender would earn a wage for engaging in the lending business, but the pure
interest rate would be zero.  The reason the interest rate is positive is
that at a zero rate, the quantity of funds demanded for loans exceeds the
quantity of loanable funds from savings, so this scarcity drives up the
rate just as with other prices.

Fred Foldvary

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Re: Real wages constant since 1964?!

2003-12-06 Thread Fred Foldvary
 If you measure wages in desk calculators instead of dollars, I'm sure
 they've gone up substantially!  ;-)
 --Robert

And if you measure wages in units of a real-estate price index, they have
gone down substantially!
Fred Foldvary

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Re: Real wages constant since 1964?!

2003-12-06 Thread Fred Foldvary
--- john hull [EMAIL PROTECTED] wrote:
 Why are we better off today?
 (Better products  two wage households would be a
 start, I guess.)

Better products, yes, but not necessarily two-wage households.

If the price of housing goes up substantially, a spouse may be induced to
work for wages, but after paying for the increased cost of real estate,
extra taxes, and child care, the family may not be better off.

When the wife goes to work for money wages, it looks like the GDP has gone
up, but she is substituting commercial child care for her home child care
that does not show up in GDP, so the per-capita increase in GDP is
exagerated.

Fred Foldvary

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Re: Why is a dollar today worth more than a dollar tomorrow?

2003-12-06 Thread John Morrow
I recall a Japanese econ grad student telling me that in fact real interest
rates were negative for some span and people were STILL saving in the late
nineties in Japan.  He also blamed several bubbles at the time (notably,
real estate in Japan) on this.  Interesting if true...  (Anyone know the
details and can they justify the connection without resorting to framing
biases of investors?)
Following:

Fred, I think you answered your own question -- even if many people
would save some of their money even if the risk-free interest rate
were zero, the quantity of funds demanded by borrowers at this rate
would exceed the amount saved.  So, a positive interest rate induces
some people to defer consumption (save) and others to borrow less,
until the market clears.
And this would be the case even if there were no risk of nonpayment,
and no inflation/deflation.
By the way, there have been times and places where the measured real
interest rate was essentially zero; I think this happened in Japan in
the 1990s.
--Robert