I can't speak to everything you're saying here, but I do have a few comments.
1. The unit of account need not be "regulatory." It just has to be the standard that people have adopted.
2. One way of thinking about nominal money-market rates is that they represent a spread over cash. Cash always yields zero (nominally). If you subtract the "…
I can't speak to everything you're saying here, but I do have a few comments.
1. The unit of account need not be "regulatory." It just has to be the standard that people have adopted.
2. One way of thinking about nominal money-market rates is that they represent a spread over cash. Cash always yields zero (nominally). If you subtract the "real" cash rate from the "real" money-market rate, you'll get the same spread as if you subtract the nominal cash rate from the nominal money-market rate.
Another way to put it is that the nominal yield on cash is rigid (stuck at zero).
3. I'm not convinced that credit restrictiveness is primarily determined by collateral appraisal. There are cases where collateral appraisal matters. But the actual funding rate also matters. Anyway, the two are related because higher interest rates generally correspond to lower asset prices.
4. I'm also not convinced that collateral appraisal is equivalent to the price level. What do you mean by that?
5. You say that I must be able to distinguish between a neutral interest-rate level and an equilibrium interest-rate level. What do you mean by that? And why must I? For what purpose? Can you define what you mean by a "neutral interest rate" and an "equilibrium interest rate"?
6. What do you mean when you say that agents tend to think in "dimensionally neutral terms"?
7. I'm not sold on the idea that IOR is a stock split. The money view emphasizes the effects of the *price*—that is, the interest rate itself—over the effects of the interest payments. It's hard to see how the interest payments matter if everybody outside the banks' balance sheets is only affected by the prices. If you're setting a floor on interest rates, money being pumped into the banks is not the same thing as money being pumped into the economy as a whole.
Let's start with the last part and work backwards. The initial claim is not that IOR is a stock split, it is that if you wanted to do a continuous stock split, at a given rate, then it would look like ior.
Account balances would be increased by some proportion continuously, devaluing the unit of account. So then we must ask what differentiates IOR from a continuous stock split.
It may be a valid answer to say "because we don't claim it as such" but certainly that is not a satisfactory answer. But at the least a stock split is different because all contractual terms are adjusted in a stock split.
The basic mechanism of charging a rate on credit lines, is to incentivize to keep balances at zero. Note that there must be some other enforcement mechanism, otherwise if credit repayment is never enforced, then people won't mind their outstanding balances exploding exponentially.
The first thing that I will point out, is that a credit balance can go positive or negative. I can owe you $1000, or you can owe me $1000. If you owe me 1k, then I am in essence paying you a negative interest rate.
So because interest payments can go in either direction, if we took a true average rate, for some segment of the market, the rate would be much closer to zero, as some people will pay interest and others will get interest.
Instead we take absolute values, and by taking an absolute value we lose important information. This is the reason why trying to compute an equilibrium rate is problematic, because all interest is transfer payments, and by tossing out the directional information we lose important information about the transaction. This is especially important when one segment of the economy is passively extracting income from another segment, because then the equilibrium point is dictated by the attractiveness of the bankruptcy option, in other words, the amount of extraction which can be tolerated.
But it gets worse, we can actually adjust the point of a "zero rate" to be different from a "zero credit balance". Banks could, for example, charge depositors a service fee above a certain amount of deposits. Or alternatively depositors might only earn interest on deposits above a minimum amount. So representing the average marginal rate on credit, as a market equilibrium, I would say is wholly inaccurate. It's an average measure of stress on the limits of credit lines, not a market wide determined price for money.
Again, if you want to dig all the way down to the bottom of the issue, this goes back to when people claim that banks create money. It's a pedantic debate that I simply prefer to avoid, and instead I describe it thus: banks upgrade credit instruments.
A bank upgrades your signed loan contract to a deposit in their institution. Then central banks can upgrade a portion of balance sheet assets into central bank reserves.
The principle point is that credit is inherently non-fungible, and the upgrading is not just a matter of risk adjustment. It also includes service costs, but also, it's a fee they charge just because they can. Because your credit is not widely accepted, but your local bank's credit is more widely accepted. But even your local bank needs to upgrade its credit to something more widely accepted.
Describing this credit process, involving hierarchical upgrades, as a money market, ignores this hierarchical aspect to it, which is the most important part of all.
There's so much more to discuss, but that's what I have time to explain today.
I can't speak to everything you're saying here, but I do have a few comments.
1. The unit of account need not be "regulatory." It just has to be the standard that people have adopted.
2. One way of thinking about nominal money-market rates is that they represent a spread over cash. Cash always yields zero (nominally). If you subtract the "real" cash rate from the "real" money-market rate, you'll get the same spread as if you subtract the nominal cash rate from the nominal money-market rate.
Another way to put it is that the nominal yield on cash is rigid (stuck at zero).
3. I'm not convinced that credit restrictiveness is primarily determined by collateral appraisal. There are cases where collateral appraisal matters. But the actual funding rate also matters. Anyway, the two are related because higher interest rates generally correspond to lower asset prices.
4. I'm also not convinced that collateral appraisal is equivalent to the price level. What do you mean by that?
5. You say that I must be able to distinguish between a neutral interest-rate level and an equilibrium interest-rate level. What do you mean by that? And why must I? For what purpose? Can you define what you mean by a "neutral interest rate" and an "equilibrium interest rate"?
6. What do you mean when you say that agents tend to think in "dimensionally neutral terms"?
7. I'm not sold on the idea that IOR is a stock split. The money view emphasizes the effects of the *price*—that is, the interest rate itself—over the effects of the interest payments. It's hard to see how the interest payments matter if everybody outside the banks' balance sheets is only affected by the prices. If you're setting a floor on interest rates, money being pumped into the banks is not the same thing as money being pumped into the economy as a whole.
Let's start with the last part and work backwards. The initial claim is not that IOR is a stock split, it is that if you wanted to do a continuous stock split, at a given rate, then it would look like ior.
Account balances would be increased by some proportion continuously, devaluing the unit of account. So then we must ask what differentiates IOR from a continuous stock split.
It may be a valid answer to say "because we don't claim it as such" but certainly that is not a satisfactory answer. But at the least a stock split is different because all contractual terms are adjusted in a stock split.
The basic mechanism of charging a rate on credit lines, is to incentivize to keep balances at zero. Note that there must be some other enforcement mechanism, otherwise if credit repayment is never enforced, then people won't mind their outstanding balances exploding exponentially.
The first thing that I will point out, is that a credit balance can go positive or negative. I can owe you $1000, or you can owe me $1000. If you owe me 1k, then I am in essence paying you a negative interest rate.
So because interest payments can go in either direction, if we took a true average rate, for some segment of the market, the rate would be much closer to zero, as some people will pay interest and others will get interest.
Instead we take absolute values, and by taking an absolute value we lose important information. This is the reason why trying to compute an equilibrium rate is problematic, because all interest is transfer payments, and by tossing out the directional information we lose important information about the transaction. This is especially important when one segment of the economy is passively extracting income from another segment, because then the equilibrium point is dictated by the attractiveness of the bankruptcy option, in other words, the amount of extraction which can be tolerated.
But it gets worse, we can actually adjust the point of a "zero rate" to be different from a "zero credit balance". Banks could, for example, charge depositors a service fee above a certain amount of deposits. Or alternatively depositors might only earn interest on deposits above a minimum amount. So representing the average marginal rate on credit, as a market equilibrium, I would say is wholly inaccurate. It's an average measure of stress on the limits of credit lines, not a market wide determined price for money.
Again, if you want to dig all the way down to the bottom of the issue, this goes back to when people claim that banks create money. It's a pedantic debate that I simply prefer to avoid, and instead I describe it thus: banks upgrade credit instruments.
A bank upgrades your signed loan contract to a deposit in their institution. Then central banks can upgrade a portion of balance sheet assets into central bank reserves.
The principle point is that credit is inherently non-fungible, and the upgrading is not just a matter of risk adjustment. It also includes service costs, but also, it's a fee they charge just because they can. Because your credit is not widely accepted, but your local bank's credit is more widely accepted. But even your local bank needs to upgrade its credit to something more widely accepted.
Describing this credit process, involving hierarchical upgrades, as a money market, ignores this hierarchical aspect to it, which is the most important part of all.
There's so much more to discuss, but that's what I have time to explain today.