Interest Relativity: The Foundations of the Forward Prices Argument

Relativity applied to financial reasoning.

As far as I am aware, Warren Mosler was the first one to propose a “forward prices” argument, to support the idea that interest is a rate of relative inflation.

Mosler described the interest rate as creating an upward price path based on the costs of provisioning a futures contract for a durable good. To provide this layaway, you must purchase the good today, warehouse it, forego the interest on the spent amount over the storage period, and then finally exchange the good for the agreed upon price at the redemption date.

The important part here is that by buying and storing the durable good today, you forego the interest income, and so you must charge for that opportunity cost. The futures price for the durable good is thus increased over the “spot price” or price today, by exactly the rate of interest. If the interest rate is 5%, then a layaway futures contract needs to charge 5% for each year in the future. Mosler named this rate of continuous price increases as the “academic definition of inflation”.

As a futures contract reflects a relative exchange rate across time, this implies that the price of the durable good in the future will be exactly increased by the interest rate, or equivalently, the purchasing power of a unit of currency will be decreased by exactly the rate of interest, in terms of that durable commodity.

Implicitly, Mosler’s argument assumes a zero marginal time value of money, as you are warehousing a good over the lifetime of the contract, instead of investing the money in a productive endeavor and then fulfilling the contract using the yields of your productive endeavor. This assumption means that some good at a given time will be provisioned based on its purchase price today and the storage costs(which can include interest opportunity cost), not that all capital equivalently has a zero rate of return. For such goods, you are implicitly stating that you are willing to pay a higher price, to guarantee their future availability.

This leads us to the question of to what extent we really can discount future cash flows. Because for some resources, we may be willing to pay a premium to guarantee their future availability.

And if you see money itself as something that is not inherently scarce, but rather as a tax credit account for deferring the public’s authority to reclaim your reserved property rights, then it does not make sense to consider unemployed money a problem. Money itself is just an accounting record, of an earned right to pay taxes. Just like our hypothetical futures contract, some people will be willing to pay a premium to make sure they can continue to reserve their owned property into the future.

Unlike an actually scarce resource, it does not matter if numbers in an account sit idle, and there is no real world opportunity cost for “idle money” on the aggregate level, only the individual level. In fact, in the aggregate, the entire money stock is always going to be idle in someone’s account somewhere.

Because Mosler’s forward prices argument assumes a zero marginal time value for money, we can understand why mainstream conventional thinkers will not find it compelling, as the power of compounding interest rates and the time value of money, is an essential maxim of modern financial thinking. And especially, they are committed to the idea of interest equilibrium, that any

Mosler’s example of purchasing durable goods at a premium in the form of a futures contract should make us question the assumptions of uniform returns. The act of storage reflects that you think your current rate of productive output is at a relatively high level, and so you “lay away” some of that output for your future consumption, rather than continue to develop more labor enhancing capital.

This brings us to the labor theory of capital, which is the definition of capital as an asset with a given price that increases the productivity labor.

The Labor Theory of Capital: Capitalists Do Work Too!

I have described previously why I think the “Labor Theory of Value” is an example of a poorly constructed ideologically motivated economic idea. The second worst offender comes from the completely opposite end of the political spectrum on property rights, and that is the idea of the “calculation problem”.

Both these ideas have a sliver of truth to them, and proponents likely have a very specific version of these ideas in their head, but the purpose of each of these arguments is to deny or hide a specific principle to promote a specific ideology.

In other words, neither of these ideas are wrong when described correctly. In fact, they are both very useful and essential principles, however the way the are described is intentionally obfuscating.

The labor theory of value is designed to cement the nature of property along strict class boundaries with a false dichotomy between “capital” and “labor”.

Yes, class is real, but there are many “intersectional”, or rather overlapping distinctions, which makes class just one issue among many issues. Especially in America, we like to enjoy the benefits of our accomplishments, but not identify with them as who we are. It is a huge part of American culture to emphasize your loyalty to your roots, and not your current station. This is a prevailing theme across film, television, and even music. Whether it is Country music or Hip Hop, Americans love to talk about their continued loyalty to their roots even while enjoying the benefits of success. Consider Not Like Us, by Kendric Lamar, or virtually any country music song.

On the other hand, the calculation problem describes the difficulty of command structures, in a way that presents any central command as impossibly dysfunctional.

Again, there is a really important insight here. A common collective effort that requires us to forfeit our personal identity, rather than simply sacrifice our personal needs, will always be self defeating and socially destructive. Personal sacrifice, again, is an expression of our loyalties, it is not about denying the individual self, but rather embracing your true self, by identifying with a higher purpose. I think that no one does quite a good job of this as Brett Scott talking about declarations of dependence.

Libertarians Seek Out Admirable Personal Qualities But Embrace Misguided Politics

Libertarians are often high agency, personally motivated, and individualistic people, who find themselves in a constant frustrating struggle against the status quo and inefficiencies of modern life. Trust me, I have been there. In many cases, they never seem to quite get on top of this struggle to overcome the limitations and constraints of the “system”. What these people could use, is a little bit of perspective. Their high motivation and desire to chart their own destiny, is really a unique and admirable quality.

However, it is unrealistic to project this individualism onto everyone else. We can greatly admire a skilled rock climber, who can “free solo” treacherous mountain climbs, and yet still recognize that approach is not well suited for most people.

The average person will always prefer some degree of comfort and security, over complete autonomy and self determination. If your mindset is different and you prefer to chart your own path, I can appreciate why it is so frustrating to deal with guardrails and regulations, with censure and building things for the least common denominator.

But my argument would be, there is a way to pursue this individuality in your own life, without making that your political template for how everyone should live. Rules are comforting for people, even if they are arbitrary or senseless. Being a follower is always easier and less risky than being a leader.

Aside from that, I find arguments like “socialism always fails” or the non-aggression principle, to be frankly insulting and self defeating. If we value liberty and individual freedom, which I do to a very high degree, we should promote these idea(l)s on their merits, not brandish the fatalist view that anything else is guaranteed to fail. This fatalist view is just “Reverse Marxism”, a form of historical determinism, where “the end of history”, then gets reversed to “socialism always fails”, it suffers from the same ideological dogma as Marxism, just in the opposite directions.

This arguments that would be for promoting individual freedom, come across as the misguided authority figure scaring people into conformity and falling in line: if you try socialism once you will grow warts on your face and turn into a toad instantly. We can see from history that many large and long lived regimes do all sorts of authoritarian and damaging practices, and that even so, these regimes present a real threat, they are not automatically self defeated by not adopting the ideals of capitalist individualism. Thus we should oppose authoritarianism based on our values, not a false misguided historical determinism.

All of this is to get to the point, where in contrast to what a strict class division would suggest, capitalists, especially the brand new up and coming capitalists in America, do a lot of really, really hard work, without receiving any direct wage compensation for their time.

The labor theory of capital is just the idea that most, if not all of the “time value of money”, is actually a synthesis of the capitalist’s own creative efforts and labor when combined with their privileges and opportunity to serve which is granted through property rights. The capitalist may own their own time, so they don’t need to track a wage rate, but they still have to work consistently and competitively to succeed in a fair market system.

In contrast, completely passive capital gains, that are little more than your money going to a job instead of you yourself, in my opinion are counter to the ideals of capitalism where hard work, creativity, and personal responsibility lead to success.

If capital gains a passive and automatic, then they are just a tribute or negative tax to property owners. This is why in the margin, the time value of money is zero. Because someone will always have spare time and opportunity to save a little extra, and then just to let that money be happy on vacation unemployed not earning interest.

Monetary Scarcity Promotes Human Unemployment To Maintain Full Employment for Your Dollar Bills

And this is the most nefarious part of it all. Beginning with Milton Friedman, we see a huge surge in the idea that there is a tradeoff in the monetary system, that some people must suffer through unemployment, so that every dollar bill can have a job and earn interest. If we don’t do this, we are told, we will get inflation. If we do not have a job guarantee for every dollar bill that is created, in the form of treasury bonds, then the bond vigilantes will go on strike.

Remember what Margaret Thatcher said:

Let us never forget this fundamental truth: the State has no source of money other than money which people earn themselves. If the State wishes to spend more it can do so only by borrowing your savings or by taxing you more. It is no good thinking that someone else will pay - that 'someone else' is you. There is no such thing as public money; there is only taxpayers' money.

This is the doctrine of a full employment job guarantee for every dollar bill. Every dollar you hold is your natural right and your privilege. The dollar bill itself is entitled to a job. To employ your dollar bill, you can put it into treasury bonds or the stock market.

This is what people don’t realize, we have been promoting a Job Guarantee all along, only it is a job guarantee for the paper in your wallet, not the muscles on your arm. That your dollar is entitled to interest even if 5% or more of the economy needs to be laid off to get there. That you can

Back To Interest Relativity

So now I have described how and why the marginal time value of money is zero. If we let people have jobs and save for a rainy day, then that extra money itself does not need to be guaranteed a job earning interest.

The goal of describing interest relativity is to not shove these conclusions in peoples faces, but rather give the mathematical tools to reach those conclusions. “If you give a man a fish”, kind of deal.

Interest relativity doesn’t require you to understand MMT, it even can be used in a context of a commodity currency. When you have commodity currency with debt based interest, the debt security is the store of value, but the commodity is just the unit of account. So the interest rate still devalues the unit of account, even with a gold standard or commodity currency. The standard store of value is then commodity debt, not the debt itself.

This leads us to the following alternative and correct statements for describing interest relativity. Most are approximately equivalent, but not all perfectly so:

• With a zero marginal time value of money, durable futures contracts dictate the nominal interest rate is a rate of continuous inflation.

• The nominal interest rate is the devaluation of the unit of account against the store of value, realized as increasing nominal account balances through interest payments.

• The yield on bonds is the relative devaluation of cash.

• The nominal rate sets a benchmark for the real rate, in order to have less than your target maximum inflation.

• If two countries debt securities offer the same real yield, the country with a higher nominal interest rate will have greater inflation.

• The fisher equation, as the definition of the real rate, can be rewritten isolating inflation as the nominal rate minus the real rate, the real rate must exceed the nominal rate to achieve deflation.

• Raising the “price of borrowing” money today, lowers the price to buy money tomorrow.

• The interest rate is an intertemporal exchange rate where the real rate is an instance of purchasing power parity: the time value of money expresses greater future purchasing power parity.

• A uniform nominal interest rate without CPI guidance, collateral appraisal, or automatic stabilizers, is a continuous stock split. If everyone earns interest, then no one does, when you consider account balances as shares of an aggregate asset whole.

While some may not understand why human unemployment is a bigger deal than monetary unemployment, at least they can learn the principles of basic interest relativity. That is the bare mathematical minimum to be able to discuss interest in our modern monetary system.