The Natural Rate of Interest Is Zero (2004) [pdf]

Takeaways: -the federal government is self funding. (my opinion: we should take advantage of this by lowering taxes or spending more)<p>- taxes create demand for money but don&#x27;t fund government.<p>- &#x27;money&#x27; doesn&#x27;t exist till the federal gov spends it into existence<p>- interest rates are determined exogenously by the fed.<p>- large deficits tend to drive down , not up, interest rates because of the excess reserves created.

(2004) and talking about the risk free overnight rate.<p>&quot;Deficit spending will result in net central bank reserve credits in the aggregate banking system, which will drive the short-term overnight inter-bank lending rate to zero.&quot;<p>Also, we now pay interest on reserve balances which goes against one of the paper&#x27;s assumptions.

It is also the natural amount of profit in perfect competition!

So are the authors lending or just talking?

Being able to use money has value. To get people to forgo the use of their own money, you have to pay them something.<p>If there were risk free investments (I don&#x27;t think there are), wouldn&#x27;t people invest in those directly instead of letting you do it with their money?<p>Of course, there is always arbitrage.

I suspected that low interest rates would be around for a while, if not forever. So when I got my mortgage, I got the 7&#x2F;1 ARM, instead of the standard US 30-year fixed.

Zero interest means zero economic motivation to lend anyone any money. This is only possible in some ideal world in which there is very little demand loaned money, and those few who borrow always give it back in a timely way, so there is zero risk in lending. And lending is just between friends; you know, can you give me a hundred bucks? I will pay you back in a few weeks (exactly a hundred bucks). And they always do.

(2004)

USD is a promise to pay a dollar to the bearer of the receipt. A dollar is an amount of gold, and so is a franc, a pound, a baht, and probably many others. Conversion of a thing into itself is <i>not</i> a conversion. There is no risk free rate, and the behavior of capital constrained by worldwide tax hunt cannot reasonably be called &#x27;natural&#x27;. One more thing: banks can only have reserves <i>after</i> covering the totality of their demand deposits, which means that virtually all public banks are insolvent... You say they can sell some assets to cover? Fine! Let&#x27;s see the selling, and see how many come out alive! I&#x27;m waiting!