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Suggestion: A reform option to peg the interest rate with the inflation rate

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Pasha99
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Post: #1
Suggestion: A reform option to peg the interest rate with the inflation rate

Pretty self-explaining. Create a reform option that allows you to peg the interest rate of your country with your country's inflation rate.

This post was last modified: 24.08.2015 09:47 by Pasha99.

24.08.2015 08:42
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Helsworth
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Post: #2
RE: Suggestion: Peg the interest rate with the inflation rate

Pasha99 Wrote:
Pretty self-explaining. Peg the interest rate of your country with your country's inflation rate.

The devs have other matters on their hands. It's very unlikely that economic-matrix-wise, the game will suffer changes.
Also, your suggestion is pretty unapplicable in real life. Inflation is a mercurial thing. Central banks allow the quantity of money to fluctuate (according to demand) in order to control the price of money (that's why you don't have spikes in the interest rate) - that's how they obtain price stability.
The natural interest rate of fiat money is zero. Anything above zero is a subsidy, anything below zero is a tax. The government can levy positive rates, negative rates (like the ECB foolishly does), or maintain ZIRP policy. If it chooses positive rates, the CB speculates on where short term & long term inflation will be & then sells short term & long term gov interest bearing securities with a yield higher than that speculated figure of inflation. What you're arguing for really is for government interest bearing securities to have neutral yields.
In this case, a ZIRP policy would be best. This minimizes cost pressures on output, including investment, and thereby helps to stabilize prices. It also minimizes rentier incomes, thereby encouraging higher labor force participation and increased real output. Additionally, because the nongovernment sectors are net savers of financial assets, this policy hurts savers more than it aids borrowers, so a fiscal adjustment such as a tax cut or spending increase would be appropriate to sustain output and employment.


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This post was last modified: 24.08.2015 09:52 by Helsworth.

24.08.2015 09:48
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Pasha99
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Post: #3
RE: Suggestion: Peg the interest rate with the inflation rate

Helsworth Wrote:

Pasha99 Wrote:
Pretty self-explaining. Peg the interest rate of your country with your country's inflation rate.

The devs have other matters on their hands. It's very unlikely that economic-matrix-wise, the game will suffer changes.

Please forgive my vague sentence, what I propose is a reform option that will allow you to launch a reform that will peg the interest rate with the inflation rate, not changing all nation's economies. Fixed that.

Helsworth Wrote:
Also, your suggestion is pretty unapplicable in real life. Inflation is a mercurial thing. Central banks allow the quantity of money to fluctuate (according to demand) in order to control the price of money (that's why you don't have spikes in the interest rate) - that's how they obtain price stability.
The natural interest rate of fiat money is zero. Anything above zero is a subsidy, anything below zero is a tax. The government can levy positive rates, negative rates (like the ECB foolishly does), or maintain ZIRP policy. If it chooses positive rates, the CB speculates on where short term & long term inflation will be & then sells short term & long term gov interest bearing securities with a yield higher than that speculated figure of inflation. What you're arguing for really is for government interest bearing securities to have neutral yields.
In this case, a ZIRP policy would be best. This minimizes cost pressures on output, including investment, and thereby helps to stabilize prices. It also minimizes rentier incomes, thereby encouraging higher labor force participation and increased real output. Additionally, because the nongovernment sectors are net savers of financial assets, this policy hurts savers more than it aids borrowers, so a fiscal adjustment such as a tax cut or spending increase would be appropriate to sustain output and employment.

First of all, I'm not an economist, so if my following comment did not makes any sense to you, please forgive me. My argument for this reform is this:

If you pegged the interest rate with the inflation rate you eliminated interest from being artificially manipulated by the central bank. This, in my opinion, actually allows for more wealth creation. To understand the reasoning behind my thinking, we need to understand the role played by interest in investment decisions. This is because the challenge all people face is one of investment. Simply put, people will only invest their money if the rate of return of a business venture measured against the risk of the venture is offset by the interest that can be gained from leaving the money in a bank account to accrue interest.

Thus, if the risk of the rate of return on an investment is less than the rate of interest, then one would leave their wealth in a bank account rather than actually invest it. Hence the incentive would be to save the money rather than to use (invest) it.

Therefore in my opinion, pegging interest with inflation will incentivizes wealth circulation in the economy through investing in real goods and business ventures while taking the real economy into consideration, vastly reducing the risks of bubbles or overheating from happening. This brings added stability as all participants participate in the same sphere – the real economy.

Again, this is only my opinion and might very well be proven wrong, and I will appreciate any critiques of this idea.

This post was last modified: 24.08.2015 10:37 by Pasha99.

24.08.2015 10:08
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Helsworth
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Post: #4
RE: Suggestion: A reform option to peg the interest rate with the inflation rate

Yes, all of your points are erroneous. Investment is a function of sales, not of rates. Sales is a function of spending (both private and public).
The interest rate is a cost on all portfolios.
Someone's saving is another's debt. Banks don't loan out deposits. Loans create deposits - operation in endogenous money which doesn't lead to the creation of net financial assets. All horizontal transactions (transactions within the nongovernment sector) net to zero. The money supply grows when bank debt is contracted (but not in net terms), and it shrinks (but not in net terms) when those bank debts are paid off or defaulted on.
Banks create money by leveraging off of HPM (high powered money, which only the Gov & the CB (consolidated government sector) can issue). The source of net profits or net income or net financial savings for the nongovernment sector is the fiscal deficit.

See these images & these links:


(S-I)+(G-T)+(X-M)=0
(G-T)= -(S-I) -(X-M)
G-T=gov spending - gov taxation (gov sector)
S-I= spending - investment (domestic private sector)
X-M= exports - imports (foreign sector)




How a sovereign currency works:


Governments are not households:


Endogenous money creation:
http://www.bankofengland.co.uk/publicati...eation.pdf

Debunking neoclassical/neoliberal/monetarist theory & models:


Debunking Austrian economics 101 (with all the relevant footnotes)
http://socialdemocracy21stcentury.blogsp...-page.html


https://www.patreon.com/SerbanVCEnache

This post was last modified: 24.08.2015 13:01 by Helsworth.

24.08.2015 12:56
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dragonflare88
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Post: #5
RE: Suggestion: A reform option to peg the interest rate with the inflation rate

Helsworth Wrote:
Yes, all of your points are erroneous. Investment is a function of sales, not of rates. Sales is a function of spending (both private and public).
The interest rate is a cost on all portfolios.
Someone's saving is another's debt. Banks don't loan out deposits. Loans create deposits - operation in endogenous money which doesn't lead to the creation of net financial assets. All horizontal transactions (transactions within the nongovernment sector) net to zero. The money supply grows when bank debt is contracted (but not in net terms), and it shrinks (but not in net terms) when those bank debts are paid off or defaulted on.
Banks create money by leveraging off of HPM (high powered money, which only the Gov & the CB (consolidated government sector) can issue). The source of net profits or net income or net financial savings for the nongovernment sector is the fiscal deficit.

See these images & these links:


(S-I)+(G-T)+(X-M)=0
(G-T)= -(S-I) -(X-M)
G-T=gov spending - gov taxation (gov sector)
S-I= spending - investment (domestic private sector)
X-M= exports - imports (foreign sector)




How a sovereign currency works:


Governments are not households:


Endogenous money creation:
http://www.bankofengland.co.uk/publicati...eation.pdf

Debunking neoclassical/neoliberal/monetarist theory & models:


Debunking Austrian economics 101 (with all the relevant footnotes)
http://socialdemocracy21stcentury.blogsp...-page.html


Debt is money so I really don't see the 'problem' of the private sector having debt in a capitalist economy.

24.08.2015 13:56
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Helsworth
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Post: #6
RE: Suggestion: A reform option to peg the interest rate with the inflation rate

Indeed. Private debt is not the problem. Too much private debt & too much of it going to the (parasitical) FIRE sector, instead of to the productive economy, IS a problem, as it creates inequality and leads to depressed levels of aggregate demand.
The government debt (i.e. nongovernment sector equity) + the gov's net fiscal position + nongovernment sector spending behavior determines the private credit structure. When private debt to GDP ratio reaches 150% of GDP, that's a great signal that a recession is right around the corner.
Look at China for instance. It is experiencing private debt deflation, after it saw fastest rise of private debt in the history of the world.
http://www.forbes.com/sites/stevekeen/20...g-forever/
The nongov sector cannot deleverage without the gov sector growing its debt in consequence. A lot of (bad) private sector debt needs to be allowed to fail & the gamblers need to take the fall on their own.


https://www.patreon.com/SerbanVCEnache

This post was last modified: 24.08.2015 14:20 by Helsworth.

24.08.2015 14:18
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