|Decision method of interest rate
Interest rate is defined as [Change ratio of value of currency]. Then, what should the change ratio be decided by? Interest rate is limited to plus in traditional financial / economic theory. (In this book, plus interest rate includes 0%.) Plus interest rate means that value of currency increases constantly. [Currency has store function of value.] [We should repay full amount of money we borrowed. We should also pay interest.] These common sense ways of thinking might be reasons for interest rate to be limited to plus. But, are these ways of thinking really true? Let’s look into how to determine interest rate by explaining simple sample of economic transaction. Currency doesn’t exist before economic transaction. Currency occurs with economic transaction. Currency is credits. It is right to buy something. Debts and credits always occur equivalently at the same time. Rights (credits) and obligations (debts) always occur in pairs. Suppose there are three people who make deals. These three people are named A, B, C.. A makes a deal with B, and C plays a role of bank. A produces commodity and sells it to B. Price of it is ¥100. C occurs ¥100 and lends it to B. B buys the commodity from A with the money. A gets ¥100 and deposits it to bank C. B is in debt to the amount of ¥100. Suppose these flows of currency arise at the same time, because value of money occurs at the moment of economic transaction.
| In these two transactions, values of economic transactions are increased
from ¥100 to ¥110. This means expansion of scale of economic transaction.
Change ratio of values produced in economic transactions is called economic
growth rate. Suppose period of two transactions is one year, economic growth
rate is (110-100) / 100=0.1 (10% per year).
Interest on a loan of the same period is ¥10, so it can be converted to
10% in interest rate.
As described above, if interest rate corresponds to economic growth completely, debts and repayments are compatible completely. Therefore
[Interest rate must correspond to economic growth rate completely.]
Otherwise, economic transactions can’t be realized.
Interest rate of deposit is usually different from that of loan in banks. Banks get profit for interest rate of loan to be higher than that of deposit.
Suppose previous transaction of ¥110 is changed to transaction of ¥120. Suppose interest of deposit is ¥10 and interest of loan is ¥20. Then, the transaction can’t be realized because of lack of funds of A. A has only ¥110.
Suppose A buys commodities of ¥110 and C buys commodities of ¥10. Then
transactions can be realized completely.
| In this case, economic growth rate is 20%. Because interest rate on loan is also 20%, interest rate on loan corresponds to economic growth rate perfectly. On the other hand, because interest rate of deposit is 10%, it is different from economic growth rate. As described above, the conclusion is
[Interest rate on loans must correspond to economic growth rate completely.]
This is very simple example of transaction, but it is necessary to eliminate money out of relation to the transaction in order to understand essence of economy. Then it becomes very easy to understand essence of economy.
As many economic entities transact in real economic activities, it is difficult to grasp whole image of transactions. As there are two kinds of products, [Intermediate product] [Final product], it is complicate to understand the whole image.
[Intermediate product] is a part of car and [Final product] is car in
car productivity. As parts are intermediate products to product car, it
is called as [Intermediate product].
As price of [Final product] includes price of [Intermediate product],
whole amount of transactions can be summed up to sum up whole amount of
transactions of only [Final product]. Therefore, only [Final product] is
target to sum up in order to simple the whole image. (If [Intermediate
product] is summed up, amount of additional value is summed up excessively.).
To grasp amount of daily transactions means amount of currency occurred daily. As it is amount of daily transactions, it escalates naturally. Then, change ratio of amount of transactions is daily interest rate. Thinking in the same way, change ratio of transactions for a year can almost substitute for average interest rate for a year. (Error is observed by when and how much deals are made.).
Amount of value of final product that is produced within the specific
period is called gross domestic product (GDP). GDP is released periodically
as economic index. Change ratio of GDP is called economic growth rate.
(The word “economic growth rate” is used in example of transaction, but
general meaning is change ratio of GDP.).
As discussed above,
[Economic growth rate as economic index should correspond to interest
rate on loans naturally.]
is easily understood.
There are two kinds of economic growth rate, nominal economic growth rate that means amount itself and real economic growth rate that takes change ratio of price into consideration. Economic growth in this book is nominal economic growth rate that doesn’t take price fluctuation into consideration.
(Because GDP doesn’t include all economic transactions, it doesn’t correspond
to economic growth rate in this book perfectly. Economic index that resembles
economic growth rate in this book in meaning is nominal economic growth
The reason why essence of interest rate can’t be defined in classical
economic theory is that money without economic transaction has economic
value in classical economic theory. Too much money is distributed in present
economic system in that cash is used mainly. Economic value is given to
all the money and interest rate is applied to the money, the essence of
interest rate can’t be understood easily. Value of currency is occurred
at the moment of economic transaction, and another money is not needed
essentially. If cash basis is abolished and IT technology is used in currency,
as currency without transaction is not needed, economic transaction may
be able to be operated theoretically compatibly. As a result, management
of the economy can be done without extreme difficulty of today.
That interest rate corresponds to economic growth rate means if economic scale is changed in a curved line described on the figure, interest rate is changed in a curved line described below.
If economic growth is plus, interest rate is plus. But if economic growth
is minus, interest rate is minus naturally.
It is defined that scale of economy at time of t is X(t), interest rate is r(t).
| As discussed above, it is understood there is fatal default in classical economic / financial theory. The condition of plus interest rate has no theoretical root. Minus interest rate exists naturally. Reduction of scale of economy means the decrease of amount of money. The decrease can be realized by applying minus interest rate.
It is concluded in classical economic theory that interest rate should be raised in booming economy and interest rate should be lowered in depression.
The conclusion is derived from discussion other than explanation of this
book, but the way of thinking in this book may be simpler and easier to
understand. In short, basis interest rate is economic growth rate itself.
If interest rate is higher than it, debtors are burdened excessively. In
reverse case, debtees (depositors) are burdened excessively. Do you understand?
It may be easily understandable to regard introduction of minus interest
rate as introduction of market principle. Assessed value of equity is evaluated
by market value, not by purchase price. If market price rises, equity increases.
If market price lowers, equity decreases. Purchase price has no relation.
Amount of currency is decided by scale of market economy itself. Currency
occurs with economic transaction. If scale expands, currency increases.
If scale diminishes, currency decreases. Without economic transaction,
there is no value of currency.
As discussed above, amount of currency should be decreased when scale
of economy diminishes. It is interest rate that changes the amount of currency.
Therefore, amount of currency should be decreased by applying minus interest
rate, when scale of economy diminishes.