Mises comments gave me pause also. I would not bet that my explanation is correct. It is just my way of trying to reduce things to the least common denominator. But here goes my attempt at explanation. We will go back to a simpler time. Say a hundred years ago before all the financial engineering and exotic investments. People either had surplus money or they did not. Let's take an example of a wealthy person. The person has a million dollars. He finds he can loan it out to someone who wants to start a business but lacks the money to do it. The person is willing to pay 5% interest. So the millionaire has $50,000 income to live on, without needing to consume capital. He takes risk of not getting paid back the principal but at least he is getting paid to take the risk. Now lets say the potential borrower/businessman doesn't want to pay 5%. He is only willing to pay 0%. Maybe a goofy banker or crazy aunt has offered to loan at 0% so the market rate is now 0%. Now the millionaire has a choice. He can go ahead and loan out the money, get nothing to live on, and take the risk of not getting paid back the principal. Or he can just consume 5% of his capital for the next 20 years or until interest conditions improve and have no risk of loosing everything. Easy choice. Consume capital. That is obviously an extreme oversimplification of the problem, but that is about the only way my simple mind can contemplate a lot of this stuff. I could be wrong. John
Edited by John Burns 11/24/2014 19:23
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