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Do negative nominal yields disprove the Austrian “positive time preference” assumption?

Do negative nominal yields disprove the Austrian “positive time preference” assumption?

kuz article

In the aftermath of the financial crisis (2007–2009) the world central banks have launched unconventional monetary measures across the board. Quantitative Easing (QE) has become a norm: central banks engaged in a large scale assets buying in the open market, injecting liquidity into the banking system. These policies tend to affect relative prices and market signals such as interest and currency exchange rates.

The Austrian legacy: What is interest?

We are accustomed to look upon interest as a purely monetary phenomenon. I lend you 100$ at the moment and receive 105$ a year from now. Meanwhile you are charged 5% interest rate. In short: interest is viewed as the “price of money”, as it is often stated.

Nevertheless, Austrian School of Economics holds that interest is neither the “price” of “money”, nor that of “time” strictly speaking. Notice: interest is a category of human action. The example given above serves simply as illustration of a simple fact regarding human nature: humans have positive time preference, meaning they a priory prefer the present over the future.

Or differently put: the present has a positive premium against the future. It’s true for money, as well as for apples, clothes and foodstuff. Like Mises states:

“He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple” Human Action, p. 529; p. 532

Let us exemplify a little more. How much money will you lend me in this very moment, if I promise to pay you back 1000$ a year from now? Normally, less than 1000$, right?

The anomaly

European Central Bank (ECB) engaged in QE in March this year. As a result of this unconventional assets buying frenzy and of the zero-interest-rate policy (ZIRP) a striking economic phenomenon took place.

In the case of some short-term government bonds (like German ones, for instance, as well as these of Switzerland, Denmark, Finland, the Netherlands and Austria) nominal yield stepped in a negative territory, disproving any relevant financial textbook.

What makes this investment situation highly bizarre is the simple fact that we would be better of to just sit on our cash without losing a dime than to invest it in negative yield securities. Why paying a certain amount of money to buy an asset just to receive less the paid amount in return? And why in the world borrowers being paid by creditors for accepting the loan granted?

What lies behind this apparently illogical investor’s behavior?

A) Humans act according to their expectations and what matters is the “real”, not the nominal purchasing power and return. The existent formal deflation at that time in the Eurozone gave impetus to investors to invest in nominal negative yield securities, but with positive “real” return. The expectation is that the rise of the purchasing power of money (deflation) would outstrip the nominal yield “negativity”, leading to positive real return.

B) Nowadays investment environment is heavily shaped by Central Banks maneuvers. By introducing QE, the ECB virtually installed a secure and omnipotent buyer in the market. No price is too high, financial asset prices will continue to rise with capital gains for those taking part in the party. The negative nominal yield is born only if the asset in question is held to maturity. But if you can find another buyer (i.e another sucker) meanwhile, there are only capital gains. The ECB is that… buyer.

C) Another pertinent explanation might relate to the systemic lack of confidence in the global banking system. Fractional reserve banks are vulnerable if not inherently insolvent as Rothbard has eloquently explained in a great number of books. Commercial banks’ balance sheets are stuck with shaky assets: bonds of fiscally irresponsible governments as well as poorly performing mortgages, inherited by the previous stunning pre-great-recession-crisis credit expansion.

It is not surprising that institutional investors think at least twice before putting their eggs into this lousy basket — the fractionally reserved banking system.

In stark contrast, if you buy German government debt you might feel yourself safer. The German government cant only tax people to pay its debts, but there is real wealth produced to tax in the first place. Preserving the main capital — although losing tiny part of it in the face of daunting uncertainty and high risk — apparently is a price worth paying at present.

D) Some contemporary analysts believe that buying German government debt is a de-facto bet against the survival of the Eurozone. If the currency union should fail and member states return to their national currencies, would you rather be paid back in French francs or in German Deutsche marks?

Were Austrian economists disproved empirically in their positive time preference assumption in the light of negative nominal yields?

Mises stated that people act in order to improve their own lot. Others among Austrian economic scholars argue that man can be driven in his action by pure desire to protect what he already had acquired. Rothbard, for instance, states that man is a man in action and fulfills his nature and happiness in acting.

In fact, the three assertions are perfectly compatible with one another. The Mises’s claim obviously holds true most of the time. The same goes for the second one: by struggling to protect what they already have, people obviously expect that their state of affairs might deteriorate in the future, so they try to prevent this from happening. In their mind not allowing the worse future situation to occur is definitely an improvement, viewed from the present moment. Finally, man is a man in action and the fact that man acts proves he assigns (ex ante) a higher value to the expected result, otherwise he wouldn’t act at all.

To put this remarks in a context: the fact that some investors prefer negative nominal yield by choosing a particular investment could simply mean that the loss of some money is less important for them (subjectively) than what they will receive in exchange.

And they receive a subjectively perceived security and “main capital” protection. In their mind the future might be so uncertain and full of undesired events that by acting this way they are better off.

Their time preference remains positive in a sense, that from their current point of view, an investment in a German Treasury bills, for example, even in negative yield territory, makes perfect sense form the actor’s own standpoint.


In conclusion, we could say that Austrian theory of pure time preference — the interest — is one of the most neglected economic achievements with great impact over people’s live, financial markets, asset prices and resource allocation.

Interest rate is not a monetary phenomenon. It is a category of human action. Mainstream economics who rules the modern political decision-making process doesn’t take this contribution into account. Interest — this crucially important market signal – is constantly being distorted by central bank interventions which leads to financial chaos and economic crisis. Negative nominal yields are mere effects of these dangerous monetary policies.

However, negative nominal yields fit perfectly into what Austrians have to say about human action and validate their basic theoretical assumption — that man has always a positive time preference.

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