Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

776 Money, Bank Credit, and Economic Cyclesmarket rate of interest tend to drive up the present value ofcapital goods and investment projects: a decrease from 1 to 0.5percent will double the present value of durable capital goods,and this value will double again if rates fall from 0.5 to 0.25percent. Therefore it is inconceivable that nominal interestrates should reach zero: as they approach that limit, growth inthe present value of capital goods will give rise to fantasticopportunities to earn considerable entrepreneurial profits,which will always guarantee an inexhaustible flow of entrepreneurialprofits and investment opportunities.Consequently one aspect we can foresee is that in the proposedmodel, nominal interest rates would reach historicallylow levels. Indeed, if on average we can predict an increase inproductivity of around 3 percent and growth in the world’sgold reserves of 1 percent each year, there would be slightannual “deflation” of approximately 2 percent. If we considera reasonable real interest rate, including the risk component,to be between 3 and 4 percent, then we could expect the marketrate of interest to be between 1 and 2 percent per year andto oscillate within a very narrow margin of around one-eighthof a point. Economic agents who have only lived in environmentsof inflation based on monetary and credit expansion mayfeel we have just described a panorama from outer space, but itwould be a highly favorable situation, and economic agentswould become accustomed to it with no major problem. 7979 In a world of a rising purchasing power of the monetary uniteverybody’s mode of thinking would have adjusted itself tothis state of affairs, just as in our actual world it has adjusteditself to a falling purchasing power of the monetary unit.Today everybody is prepared to consider a rise in his nominalor monetary income as an improvement to his material wellbeing.People’s attention is directed more toward the rise innominal wage rates and the money equivalent of wealth thanto the increase in the supply of commodities. In a world of risingpurchasing power for the monetary unit they would concernthemselves more with the fall in living costs. This wouldbring into clearer relief the fact that economic progress consistsprimarily in making the amenities of life more easily accessible.(Mises, Human Action, p. 469)