“Time preference is why tomorrow matters today. The value we put on something in the present is different from what we put on it in the future.
If you were to give me $100 now versus $100 in a year, I value those two things differently.
A low time-preference person is patiently saving — building capital and wealth.
A high time-preference person wants to spend now and consume in the moment, and that long-term leads to poverty.
Why does this matter? It explains where an interest rate comes from — it’s essentially the compensation for waiting.
If you were to get $100 today or $100 in the future, what’s the differential in price between those two moments you receive the capital? That differential is an interest rate.
When you doctor or manipulate interest rates via central banking, there’s a handful of men who sit down and go, ‘Do you know what? I think the economy is a bit overcooked at the moment — we’re going to take off the interest rate by 0.25%. Oh no, we’ll take it off by half a percent, or we’ll put it up.’
They’re manually changing the cost of capital. And when you massage the interest rate to become too cheap, it increases malinvestment and, through the Austrian lens, causes the boom-bust recessionary process we go through...
Governments distort the price signal with easy credit — and it creates bubbles.”
Jake Woodhouse / Ep.99 / 15:49
