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Thursday, October 9, 2008

The Time Preference Problem

When you save money, you're saying "I value consumption in the future more than consumption now." If your investment yields a positive rate of return, you're saying "I'm willing to forego consumption now in exchange for the ability to consume more later."

The Federal Reserve distorts the interest rate market. By tampering with interest rates, the Federal Reserve prevents people from making the valid choice to save for the future. Negative real interest rates encourage overspending in the present. Saving for the future is foolish when there are no safe investments.

In the present, anybody who saves money in a State-sanctioned investment is letting themselves be ripped off by inflation.

*NO INVESTMENTS YIELD A POSITIVE RATE OF RETURN*, from the point of view of the average person. If you save your money in a checking account, you earn a negative inflation-adjusted return. Stocks return a negative inflation-adjusted return, compared to a gold investment. If you invest in real estate, you don't get full allodial title. Property taxes are a drag on your earnings. With real estate, you may use leverage to boost your returns, but then you risk bankruptcy during the next economic bust. If you have an unleveraged investment in real estate, then your returns will be less than inflation, due to the drag of property taxes.

You may choose to invest in your own business. However, with an on-the-books business, you are subject to taxes and regulations. At any time, the State may impose new regulations that make your business unprofitable.

If you invest in gold, you earn an inflation-adjusted return of 0%. This may be the best investment out there.

Of course, politically connected insiders may lobby the State for favors. CEOs may grant themselves excessive option and stock grants, even though they own a minority stake in the corporation. These investments yield a positive rate of return, but they aren't accessible to the average person.

If you invest in gold, your long-term inflation-adjusted return will be 0% minus transaction costs and storage costs. An agorist off-the-books business should be profitable. However, you won't be able to rely on the State to shield you from competition. You probably won't be able to sell your business to someone else. Anybody who understood your business well enough to consider buying it could start their own competing business.

When the State distorts the interest rate market, it prevents people from making rational decisions to save for the future. When the State distorts the interest rate market, it prevents people from making rational decisions for where to invest their savings and capital. When insiders and capital holders may lobby the State for favors, why bother making rational investment decisions?

1 comment:

barry b said...

Hey FSK,

could you create some categories for your blog? That would help I think and keep folks on your site longer...

This Blog Has Moved!

My blog has moved. Check out my new blog at realfreemarket.org.