The Bush administration began the ridiculous economic boom as a way of preventing a recession that was underway already at the time of the 2001 terrorist attacks. Creating funny money via low interest rates was the Bush way of fighting back against the terrorists. Very stupid, because look where it got us. We have experienced the worst financial panic on record, which has devastated us economically far more than the terror attacks. FULL ARTICLE
Source link: http://archive.mises.org/10186/obamas-fix-it-plans/
Obama’s Fix-It Plans
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link doesn’t work
Try http://mises.org/daily/3538
Excellent!
I love the restaurant example… very graphic
Despite not approving of Bush, he didn’t create the asset bubble. Do your research before writing nonsense.
@ Dave:
Agreed. It was Greenspan and the Fed. That’s not to say that Bush’s massive deficits helped matters.
Dave and Matt R.,
The article says:
“In the early 2000s, the Federal Reserve manipulated the interest rate in a downward direction, one which was not justified by market realities.”
Clearly, Rockwell puts the blame on the Fed. Later, he says:
“The Bush administration began the ridiculous economic boom as a way of preventing a recession that was underway already at the time of the 2001 terrorist attacks.”
I guess if you feel that the Fed is truly independent then your quibble is legitimate. However, I think that Rockwell would dispute such a claim (there has been research that shows that central bank policy is heavily influenced by administration policy). To hold such a position is in no way nonsense.
What of the whole “ownership” society garbage? Surely Bush’s administration is partially responsible…
I don’t understand why libertarians blame the fed. A loan represents wealth to be created in the future, savings represents wealth created in the past. Why is trading the latter OK, yet trading the former is not? It seems to me that constant interest rate of 0% makes sense (plus individual risk premium of course). Where am I making a mistake?
Curious,
You make a mistake thinking that there is a fundamental difference between a loan and what is saved. They are, in fact, one and the same. One can only loan what has first been saved. Savings is the source of credit.
Why do Austrians/Libertarians/Classical Liberals blame central banks like the Fed? Because they artifically manipulate the interest rate lower than it would be set by the free market. The only way to have low interest rates is to have very high savings. Conversely, if savings are low (as they are in the US), the interest rate must be set high. If one follows a policy of low interest rates AND low savings rates, it creates a whole host of problems and inevitably leads to a massive correction (like the one we’re experiencing now).
I’m sure someone else will explain it better…
Curious,
Determining that the Fed is the cause of booms and busts is an implication of Austrian economic theory, and not libertarian political theory. However, the implications of Austrian theory often lead people to embrace libertarianism on consequentialist grounds. For others (like myself), Austrian economic theory merely complements other, non-consequentialist, justifications for libertarianism.
You should read up on why Austrian theory faults the Fed for booms and busts. This working paper by Steve Horwitz is a good place to start:
http://www.mercatus.org/PublicationDetails.aspx?id=27494
Curious,
You seem to be confused on what the definition of wealth is. You cannot create wealth simply by printing money. Type “wealth” in the Mises search tool and read some of the articles that it retrieves.
Savings don’t represent wealth created in the past; they represent a person’s willingness to forgo current consumption for future consumption. In this sense savings and a loan are roughly the same. Somebody is giving up current consumption and the money is being given to somebody who is willing to pay a premium for consuming now.
Current consumption is always preferred over future consumption. This is human nature. Would you like a candy bar now, or five years from now? Since current consumption is preferable to future consumption, why do people save at all? Because they can charge a premium for giving up their current consumption. This premium is the interest rate, and it adjusts to reflect people’s time preference (how much people value current consumption over future consumption) and the amount of loanable funds available.
If the interest rate was 0%, like you suggested, nobody would loan any money. Why would a person forgo current consumption and loan out money just to get the same about back (with less purchasing power due to inflation) sometime in the future? This only happen amongst families and friends where benevolence is the motive for forgoing consumption.
The creation of money by the Fed is the greater evil. The Fed can set all the interest rates it wants but they mean little without new money.
With no new money, some corporate bank may get a great deal from the Fed on existing money, but the demand down the line would leverage the rate to its natural level. The bank would make out big[as they do now] but interest rates would soon reach equilibrium.
The Fed must introduce gobs of new money to sustain the artificially low interest rate throughout the economy. There must be enough excess supply of money to keep the rate low.
If money creation was not an option for the Fed, their low interest rates would also soon bury them, if they actually have an accounting department and balance sheet!
Zero interest rates might be a theoretical possibility in a free society whose members “value” only the present. If all wanted it all now, no one would have “interest” in the future!
Nate,
“One can only loan what has first been saved.”
Why? If a baker promises a homebuilder a loaf of bread daily for the next 30 years, in exchange for having a house built, there is no savings. If a bank facilitates the transaction by creating a loan that makes no difference, does it?
Jeremy,
I looked at the paper, it doesn’t explain why loans in excess of savings are bad, which is my question.
Wayne,
“…why do people save at all?”
If there was 0% interest on savings, would you spend all your savings immediately or would you still save for your retirement?
Curious,
Re-read pages 5-8. Horwitz directly answers your question.
Curious, here’s a quote from the Horwitz paper you may have missed:
“According to the Austrian theory, the boom phase of the business cycle is initiated when the central bank attempts to supply more money than the public wishes to hold at the current price level. As these excess supplies of money make their way into the banking system, lenders find themselves able to provide more loans even though they have seen no increase in saving from the public. Central bank open-market operations add to their reserves in a way indistinguishable from private deposits. This increase in the supply of loanable funds (note that “loanable funds†need not equal “private savingâ€) drives down interest rates as banks move to attract new borrowers. These lower market rates of interest appear to signal to firms that the public is now more patient and more willing to wait for consumption goods. Had the expansion of loanable funds been financed by genuine savings, the lower interest rate would be sending an accurate signal about the public’s wishes. However, when the expansion is caused by an excess supply of money rather than a shift in the public’s time preferences, the tight relationship between market rates of interest and underlying time preferences is broken.”
Jeremy, that is a great quote from the Horwitz paper. It is one of the best explanations of the ABCT limited to one paragraph.
Curious, you are most likely correct. I would save for retirement even if the interest rate is 0%. But I would not lend that money out (i.e. put it in a savings account) at that rate of return.
Curious,
“One can only loan what has first been saved” is axiomatic. There is no why to be asked.
Nevertheless, you asked “Why? If a baker promises a homebuilder a loaf of bread daily for the next 30 years, in exchange for having a house built, there is no savings.” so I am compelled to respond.
It is true that in your hypothetical there is no savings…but it is only true INSOFAR AS THE BAKER IS CONCERNED. That is, the baker has not produced and saved any loaves of bread. This is because he is on the RECEIVING end of the loan.
So, there are indeed savings involved in your scenario. They’re just not explicitly stated. The savings is all the capital (drywall, lumber, sinks, bathtubs, lighting fixtures, wiring, plumbing, roofing materials, concrete, tile, etc.) that the homebuilder will use to build the house. All these goods are being loaned to the baker (in the form of a house) and will be paid for in loaves of bread for the next 30 years per the agreement. But they are only able to be loaned because they were first produced and saved.
Curious,
The investment function states that investments are a function of interest rates. Interest rates bring the loanable funds market into equilibrium. Savings are the supply of investment; when people choose to save, the savings supply increases, and the interest rates must be brought down to bring the market into equilibrium, or what Austrians call “the natural rate of interest.”
People decide to save because their time preferences diminish, meaning they don’t value the commodities on the market now as much as they once did. This lowers the demand for lower order goods, ie, consumption goods, and allows firms to engage in more capital intensive, more roundabout methods of investment. Revenues fall, but so do the factor prices(labor and capital). When the FED artificially increases the amount of money in the loanable funds market they suppress the interest rate (market rate of interest) below the natural rate. Hayek calls this forced savings; the banks are lending out more savings then are actually in existence. The banks can only do this as long as the FED continues its inflationary policies, in perpetuity (which would eventually cause hyperinflation), or until the banks become completely illiquid.
The only way that expansionary fiscal/monetary policy does not cause these horrific economic calamities is if the people are forced to save. Remember, money has no intrinsic value; arbitrarily increasing the amount of money held by banks does not increase the actual savings supply. Furthermore, during this inflationary period, firms are wrongly engaging in more roundabout capital intensive investment, and they are bidding away laborers from the lower phases of production (since the demand for current goods has not actually decreased), this bids wages up. Trade unions then set their contracts at these artificially high levels, creating massive wage rigidity. When the correction takes place, the wages cannot come down, and firms must begin cutting their labor force dramatically.
Interest rates serve a very important function, they are a price mechanism. The interest rates tell producers when it’s time to invest (when time preferences decrease), and when it’s time to produce more current goods. Arbitrarily setting this rate below the natural rate creates disproportionalities, inflation, and eventually crises. The same way that setting commodity prices leads to massive deficits, and in the case of agriculture, massive starvation. I missed a lot of things, but I think this is the general break down of Austrian business cycle theory.
Curious,
The investment function states that investments are a function of interest rates. Interest rates bring the loanable funds market into equilibrium. Savings are the supply of investment; when people choose to save, the savings supply increases, and the interest rates must be brought down to bring the market into equilibrium, or what Austrians call “the natural rate of interest.”
People decide to save because their time preferences diminish, meaning they don’t value the commodities on the market now as much as they once did. This lowers the demand for lower order goods, ie, consumption goods, and allows firms to engage in more capital intensive, more roundabout methods of investment. Revenues fall, but so do the factor prices(labor and capital). When the FED artificially increases the amount of money in the loanable funds market they suppress the interest rate (market rate of interest) below the natural rate. Hayek calls this forced savings; the banks are lending out more savings then are actually in existence. The banks can only do this as long as the FED continues its inflationary policies, in perpetuity (which would eventually cause hyperinflation), or until the banks become completely illiquid.
The only way that expansionary fiscal/monetary policy does not cause these horrific economic calamities is if the people are forced to save. Remember, money has no intrinsic value; arbitrarily increasing the amount of money held by banks does not increase the actual savings supply. Furthermore, during this inflationary period, firms are wrongly engaging in more roundabout capital intensive investment, and they are bidding away laborers from the lower phases of production (since the demand for current goods has not actually decreased), this bids wages up. Trade unions then set their contracts at these artificially high levels, creating massive wage rigidity. When the correction takes place, the wages cannot come down, and firms must begin cutting their labor force dramatically.
Interest rates serve a very important function, they are a price mechanism. The interest rates tell producers when it’s time to invest (when time preferences decrease), and when it’s time to produce more current goods. Arbitrarily setting this rate below the natural rate creates disproportionalities, inflation, and eventually crises. The same way that setting commodity prices leads to massive deficits, and in the case of agriculture, massive starvation. I missed a lot of things, but I think this is the general break down of Austrian business cycle theory.
Delete my previous post please.
If I sign a note saying that I will pay $100 1 month from now to the note holder, that note has a value and I can trade it for something I want. If the seller doesn’t want to accept it, I can go to a bank and the bank will assess the value of my note (how likely I am to pay the $100) and give me money in exchange for it. This process is called “getting a loan”. I don’t see how does savings have anything to do with it. What am I missing?
Curious said, “If I sign a note saying that I will pay $100 1 month from now to the note holder, that note has a value and I can trade it for something I want.”
No it doesn’t, and no you can’t. Money does not measure value, since value cannot be measured. Value is purely subjective, it’s never measured, only graded (as Bohm-Bawerk explained, and Mises further elucidated). For example, I may be a baseball card collector, and a new Mickey Mantle rookie card came onto the market. For me, $10,000 is extremely cheap, for you, it may sound absolutely insane. Now take it one step further; suppose I had 2 baseball cards, A=$1000,
B=$900; but B holds some special value to me, maybe my father gave it to me. If given a choice, between A or B, I will choose B. Money only allows for the creation of aggregate price indices, money prices never tell you value. This is why you hear things like “that’s overpriced” or “that’s really cheap.”
Now according to quantity theory (MV=PQ), an increase in the money supply (all other things equal) means an increase in the aggregate price levels. If the government/FED increases the money supply by 100%, that doesn’t mean that everyone is 100% richer, it only means that the prices of goods, on average, are 100% higher. Increasing the money supply does not make anyone richer, ever. Another example, let’s say we’re in a static economy which only creates wheat; meaning that everyone eats only wheat and everything is created solely out of wheat. And let’s assume that this economy is capable of producing 10 bushels of wheat. Now assume that people decided to save 50% of their wages/earnings (which would be paid in wheat); the supply of savings would be 5 bushels of wheat. Now, let’s introduce money into this system. Let’s say that 1 dollar buys 1 bushel of wheat; the banks would then have 5 dollars as their supply of savings. Now, let’s introduce a central bank, and this central bank gives the private bank two more dollars. The supply of savings is still 5 bushels of wheat, but is represented, monetarily, by 7 dollars. This would have a corresponding effect on the average price levels; each bushel of wheat goes from 1 dollar, to 1.2 dollars. But notice, 7 dollars does not mean 2 more bushels of wheat, it only means that the 5 bushels it had are now represented by 7 dollars. If the banks understand this, then there’s no problem; if they don’t, they will lend at an artificially low rate, not justified by savings, until their liabilities far exceed their assets (what just happened).
So when the FED increases the supply of money that the banks have, either through direct injections, or by lowering the reserve rate (lol), it makes it seem like the supply of savings actually increased. And since all prices are determined by supply and demand, the interest rates fall (since interest rates are the price of investment). But the supply has not really increased; only the monetary representation of the supply has increased; as real savings is determined by actual goods, not by the money which can buy those goods at any given time, for any given price, (exchange rate). So the previous interest rate of 10% falls to 5%, and now investments with an expected rate of return at 8% seemingly become profitable, but they aren’t. The people have not actually decided that investments with an 8% return are justified. Investments at this rate are malinvestments, which will become extremely obvious once the banks become illiquid and have to set rates back to their equilibrium level.
This is kind of technical, if you really want to understand you should read Austrian literature. I hope I may have helped you.
Curious:
“If I sign a note saying that I will pay $100 1 month from now to the note holder, that note has a value and I can trade it for something I want. If the seller doesn’t want to accept it, I can go to a bank and the bank will assess the value of my note (how likely I am to pay the $100) and give me money in exchange for it. This process is called “getting a loan”. I don’t see how does savings have anything to do with it. What am I missing?”
I think you’re confusing yourself with your own example. You go to the bank and get a loan for $100, but where does that $100 come from? Someone had to forgo spending that $100 for you to borrow it, and that is why savings is necessary in respect to credit.
When the Fed artificially decreases interest rates they do so by artificially increasing the pool of saved funds by crediting banks with money created out of thin air – the problem is that people have not changed their time preferences in regards to consuming/saving – if anything they save LESS and favor present consumption due to the new low interest rates. With interest rates signaling that consumers are forgoing current consumption for later consumption, businesses begin undertaking projects that will be profitable in the future, so long as consumers have the necessary funds to spend on those projects – unfortunately since time preferences haven’t changed, that future consumption never takes place and those business ventures turn out to be unprofitable.
Curious,
You wrote: “If I sign a note saying that I will pay $100 1 month from now to the note holder, that note has a value and I can trade it for something I want. If the seller doesn’t want to accept it, I can go to a bank and the bank will assess the value of my note (how likely I am to pay the $100) and give me money in exchange for it. This process is called “getting a loan”. I don’t see how does savings have anything to do with it. What am I missing?”
The savings is what is being loaned to you. In this case, $100 for your little note. But more accurately, the savings is whatever you purcase with the $100.
Emil Suric said:
“No it doesn’t, and no you can’t”
Emil, if I offer that note to you for free, will you take it? If so, why?
Dorsia said:
“Someone had to forgo spending that $100 for you to borrow it”
Why? If I can bypass the bank and exchange the note with the seller directly, where does someone’s foregone spending come in the picture then?
Nate said:
“The savings is what is being loaned to you.”
If I can bypass the bank and exchange the note with the seller directly, what savings is being loaned to me?
Curious,
You would be creating your own money, money which no one would ever accept. Unless of course, you were a bank, then everyone would accept it (today you would have to be the central bank); but you would still be creating something out of nothing. And this is the root problem; people don’t understand that paper is not money, and for there to be borrowing, there has to be savings (inflation is nothing more than embezzlement/fraud). You’re right though, today, there doesn’t have to be any saving at all; central banks pump the market with fiduciary media. This is the primary cause of our boom bust cycle. The only way to end it is to go back to sound money, and implement a 100% gold reserve rate.
Curious,
You ask “If I can bypass the bank and exchange the note with the seller directly, what savings is being loaned to me?”
You’ve confused seller with buyer. YOU are the SELLER (of the note) the person on the other end of the exchange (lets say he sells shoes) is the BUYER of your note.
He accepts your $100 IOU and he loans you two pairs of shoes. In this case, the shoes are the savings being lent. Why are the shoes only a loan? Because you haven’t paid anything for them yet. You have merely issued a promise to pay (your $100 IOU/note). If you don’t fulfill your promise to pay, you lose what was loaned to you (the savings/shoes). They go back to the shoe seller and your credit takes a hit.
Wayne said:
“…I would not lend that money out [if interest rate = 0%]…”
Wayne, right now the fed funds rate is about 0%, yet people still invest. Why?
Emil said:
“…you would still be creating something out of nothing.”
Emil, imagine that I have a gold mine and instead of a note promising to pay you $100, I give you a note promising to dig up 1lb of gold and give it to you in a month. Am I still creating something out of nothing?
Nate said:
“…the shoes are the savings being lent.”
Nate, what if I pay the shoemaker for a pair of custom made shoes to be made to my specifications. Where is the savings being lent?
Curious,
You ask “Nate, what if I pay the shoemaker for a pair of custom made shoes to be made to my specifications. Where is the savings being lent?”
Come on dude, you can sort that out for yourself by now can’t you? Especially considering I answered a nearly identical question of yours in this very thread. Remember your scenario about the baker who would promise to provide a loaf of bread everyday for 30 years to a homebuilder in exchange for a house? You promising to pay a shoemaker for a pair of custom made shoes is essentially no different.
All your doing is shifting the same question up and down by stages of production. The savings are always there. It’s just tougher to see them when they are already in the form of shoes (or any product for that matter).
Just as the savings in the baker/homebuilder scenario is all the capital used to make the house, so is the savings in this you/shoemaker scenario all the capital used to make the shoes. That is, the leather, laces, rubber, cotton, other textile materials, etc. Those materials first had to be produced and saved. The shoemaker will now take those savings, apply his skill, turn them into shoes, and loan them to you in exchange for your promise to pay.
Do you understand now? Do you see the savings?
Nate,
In your example, leather + laces + etc. do not equal in value to shoes. Shoes are more valuable because the shoemaker adds value. So the loan is not fully funded by savings (same in your house example).
If it’s easier, instead of a shoemaker, imagine I’m buying services of a maid, to clean my house for a month – no savings involved. See what I mean?
Curious,
First of all, it is not true that raw materials (leather, textiles, etc.) are always more valuable in the form of finished goods (such as shoes). It is quite possible to take capital goods, apply labor to them, and produce something worth less than the sum of its parts. People do it all the time. It is the reason why bankruptcy occurs. I’ve also personally destroyed the value of goods with plenty of foods I’ve made. I knew I should have used sugar instead of salt when I made that cake.
More importantly, you have demonstrated nothing but your confusion. I’ll attempt to help again. You have merely shifted the focus of your misunderstanding from one form of capital (raw materials) to another form of capital (human skills/talents/services). Contrary to what you believe, the loan is still fully funded by savings. The problem is that, for some reason, you just don’t seem to grasp that the labor of the shoemaker (or the homebuilder, or the maid) is indeed a form of capital. It is true that they cannot retrieve their labor from you if you default on the loan. But it is also true that they cannot retrieve the capital goods in their raw form after they have been converted into houses, shoes, or whatever. This is the risk they willingly take. Because of this risk, people tend to demand more money for financed goods/services than they do for goods/services paid for upfront. It is also why interest is woven into loans and penalties are incurred should the debtor default or miss payments.
Keep reading mises.org. You’ll get it soon enough.
Nate,
thanks for being patient with me. You said:
“you just don’t seem to grasp that the labor of the shoemaker (or the homebuilder, or the maid) is indeed a form of capital”
I agree that it is capital, I don’t agree that it is savings.
Meh. Savings is the accumulation of wealth/capital. Skills/labor are indeed a form of wealth.
Best to get on board with functional definitions. Until you do, you’ll likely keep confusing yourself with semantics.
I’ve tried my best but I’m afraid I don’t have the ability to convince you of your error.
My suggestion is for you to attempt to live your life according to your beliefs. Attempt to employ people’s services and buy goods with “curious credits” to be paid at some later date. Also, be sure to never charge interest on any loan you make. See what happens. As they say “experience is the best teacher”
Wait a minute!!! I just re-read your first post and spotted something. You said “It seems to me that constant interest rate of 0% makes sense (plus individual risk premium of course).”
But as economicexpert.com explains…”In finance, the risk premium takes the form of interest rate as interest rate is the compensation for risk.”
http://www.economicexpert.com/a/Risk:premium.htm
Your statement is a contradiction. You just switched the terms.
Cheers
Nate said:
Wait a minute!!! I just re-read your first post and spotted something. You said “It seems to me that constant interest rate of 0% makes sense (plus individual risk premium of course).”
But as economicexpert.com explains…”In finance, the risk premium takes the form of interest rate as interest rate is the compensation for risk.”
http://www.economicexpert.com/a/Risk:premium.htm
Your statement is a contradiction. You just switched the terms.
Cheers
whoah – the risk premium is indeed the compensation for risk. but thats not th eonly component of the interest rate – the core (notionally risk-free) interest rate is th eprice of time – reflecting the preference between present and future.
Perhaps I can explain a perspective on Nate’s point that Curious might grasp.
1. Collectively, across an entire economy, evertybody produces everything and whatever is produced is consumed by everybody. Production and consumption do not necessarily occur simultaneously: At any given period in time, the extent to which production exceeds consumption is the amount of saving in that economy.
2. Money is earned by the producers of goods or services – effectively placing ‘usefulness’ in the hands of those who pay the money for it ( the money they in turn earned from producing something else). the fact that it is useful is self-evident in the fact that the buyer elects to give up money for it.
3. The flow of money is thus the inverse – the reflection – of all the trading of all the results of productive activity.
3. The holder of say $100 in money gained from the activity in 1 above can either spend it on other stuff, or he can elect to retain it. The $100 he has in his hand is a partial claim against the production output of all the other participants in the economy.
4. If he retains it instead of spending it, he is ‘saving’ $100. But that ‘saving’ is not real , its a reflection – by deferring his right to claim $100 worth of stuff from the economy at large, he is electing not to consume $100-worth of stuff, even though he has already injected that $100 worth of production into the system when he first earned it. Absent counterfeiting (people entering the economy with spendable money not earned in the course of production – whether it comes from printed fakes or the central bank money machine makes no difference) , the decision not to spend money earned in the production of goods means that somewhere in that economy there is $100 worth of goods that were produced but are not being consumed. THAT’S what’s being saved.
Multiply this by all the dollar savings everywhere, and you have REFLECTION of the extent of savings in an economy.
When these savings are lent at interest , or used to buy stocks, to fund the construction of further productive capacity, instead of being stuffed into a matteress, you have INVESTMENT. That is, the saved claims against the economy are being ‘spent’ on future production instead of current consumption.
swings in the aggregate propensities for people to save or spend on consumption manifest themselves in price changes. If everybody suddenly saves ( and invests) more and consumes less, we will see the prices of consumption goods come down, and we will see the prices of capital goods go up, and interest ratees will fall because of the abundance of long-term savings available for capital projects.
When longer-term interest rates go down and th eprices of consumption goods fall because of lack of demand, or form more productive capacity coming on stream, or both, people will respond by buying buy more stuff, and saving less, and the prices adjust in the other direction accordingly.
In this way, absent interference from meddling policymakers, the optimal balance between consumption, saving and investment is maintained, which reflects the time-preferences of the population at large. It is impossible to interfere with this process without subverting it and destroying the feedback that balances it. And that’s the bit that’s broken in the current milieu.
Mushindo said:
“At any given period in time, the extent to which production exceeds consumption is the amount of saving in that economy.”
Yes! Even when that period in time is in the future, correct?
If I saved $10, 10 years ago, I can trade it for something today. If I will save $10, 10 years from now, I should be able to trade it today too, no?
curious,
Yes, but if it comes from my savings its gonna cost you.
Curious said
‘Yes! Even when that period in time is in the future, correct?’
response:
yes but so what? – past present or future makes no odds. In any period, if production exceeds consumption, you have net saving, and if consumption exceeds production, you have dis-saving. ( which effectively means that past savings accumulated in prior periods are now being consumed).
and:
‘If I saved $10, 10 years ago, I can trade it for something today. If I will save $10, 10 years from now, I should be able to trade it today too, no?’
Response:
No. or rather not quite. You own the $10 you saved 10 years ago, and you produced stuff while earning it at the time. You are free to trade it for something worth $10 to you right now.
the $10 you intend to save in 10 years time hasnt been earned yet (ie you havent generated that $10 worth of production yet. Neither the money nor the goods you expect to produce in earning it even exist yet). If you want to trade your 10-years-hence intention to save with someone who has something you want right now, , you are first going to have to convince them that you are going to be good for $10 in 10 years’ time. And whoever you do that deal with is going to discount the future to th epresent, so your 10 year forward $10 is not likely to buy much more than a dollar’s worth of stuff in the present, if you’re lucky. And the discount will likely be further widened by the risk premium inherent in your own credit risk profile.
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