Graham and Doddsville -- Value Investing In The New Era Message Board

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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era

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To: Oblomov who wrote (1515)	4/4/1999 9:08:00 PM
From: Freedom Fighter	Read Replies (1) of 1722

Andrew, >>Why would a lender initiate a loan with a negative nominal rate of return? Wouldn't it be a better "investment" to simply place the money under a mattress?<< That's a great question. I would certainly keep as much as possible under the mattress if I were a banker. My prior post was an "intuitive" response to a set of conditions that I'm not sure has ever actually existed. We have had extended periods of price deflation in the past and things fuctioned well. Perhaps the level of deflation was never severe enough to produce nominal wages that were falling enough to trigger that sort of negative nominal rate condition. As I understand it there was always at least some new gold (or money) coming into the system to offset the deflation to some degree. Perhaps that is a requirement but I don't think so. Murray Rothbard has written extensively on the subject of the optimum money supply. I read some of the material (mostly out of curiosity) but it is far outside my expertise. I do remember though that his response was along the lines of "there is none and it need not change". If I can find his thoughts on this I will forward them to the group. You may be able to get a response from the Ludwig von Mises Institute though. www.mises.org Perhaps I can draw on some sketchy understandings of what happened in the past. I believe that there was a cost for the storage of gold (or money) that was not lent out. I am not sure how much it was. Perhaps it would be greater than the cost of lending it out. Keep in mind that under my hypothetical the lender would still be making a real return. It might be a matter of the cost of the safety of the money. I might be willing to lend it out at -2% nominal (+2% real) in a -4% deflation because it costs more to store and keep safe. In any event it's a great question. I am glad that these issues aren't important to my ability to invest successfully. I will get back to you if I can find what Rothbard said on the subject. Wayne

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