Individual Time Preferences and Interest Rates
According to thinkers such as Carl Menger and Ludwig von Mises, interest is the outcome of the fact that individuals assign a greater importance to present goods versus identical goods in the future. The higher valuation is not the result of capricious behavior, but because life in the future is not possible without sustaining it first in the present. According to Carl Menger:
To the extent that the maintenance of our lives depends on the satisfaction of our needs, guaranteeing the satisfaction of earlier needs must necessarily precede attention to later ones. And even where not our lives but merely our continuing well-being (above all our health) is dependent on command of a quantity of goods, the attainment of well-being in a nearer period is, as a rule, a prerequisite of wellbeing in a later period.
Also, according to Mises,
He who wants to live to see the later day, must first of all care for the preservation of his life in the intermediate period. Survival and appeasement of vital needs are thus requirements for the satisfaction of any wants in the remoter future.
Hence, present goods are assigned higher importance than identical future goods. This is manifested by a premium on present goods over the same future goods. The premium is what interest is all about. Since individuals assign a higher preference to present goods versus future goods this means that interest must be positive.
Interest and the interest rate are just an indicator that mirrors individual time preferences. A lowering of the interest rates—absent intervention—signals to businesses that individuals have increased savings. Increased saving enables greater capital investment. An increase in capital goods enables the increase in the production of future goods and services, more efficiently and usually at lower prices. In a way, individuals have instructed businesses to increase the production of consumer goods in the future in relation to the current production of these goods.
On the other hand, the central bank’s lowering of interest rates through an artificial expansion of money and credit—in the absence of an increase in savings—diverts savings from other productive activities. It will result in the misallocation of savings and discoordination of the price and production structure. In this case, savings are diverted towards activities that have emerged on top of the central bank’s low interest rate policy. What we have here is the diversion of investment from wealth-generating activities to non-wealth-generating activities.
Changes in the interest rates should reflect the wishes of individuals and their social time preference, not the wishes of central bank bureaucrats. The artificial lowering of the interest rates generates the misallocation of savings and discoordination in the price and production structure. Ultimately, this weakens economic growth.
This is what the FED does to us when they are fiddling with the interest rates. Interest rates actually have a meaning and present as a signal to consumers and investors on what to be doing with their resources, so when the FED f_cks with the interest rate they are setting us up for the boom-and-bust economy that hurts everybody because of miscalculations and misallocations. Next time you suffer due to the boom-and-bust that will inevitably come, you know who to blame.
Just as an addendum, why do you think they are controlling interest rates? Could it be because we have politicians that spend like drunken sailors and adhere to the Modern Monetary Theory? Or is there some less obvious alternative to why they are doing this?