Can someone explain this quote to me?

Can someone explain to me this Murray Rothbard quote (related to time preference and liquidity traps)?

• I understand that a liquidity trap is essentially caused by the hoarding of money because people expect something to go wrong with the economy, and that it leads to very low interest rates. But I was reading Murray Rothbard, who rejected the notion of liquidity traps,and said "Increased hoarding can either come from funds formerly consumed, from funds formerly invested, or from a mixture of both that leaves the old consumption-investment proportion unchanged. Unless time preferences change, the last alternative will be the one adopted. Thus, the rate of interest depends solely on time preference, and not at all on "liquidity preference." In fact, if the increased hoards come mainly out of consumption, an increased demand for money will cause interest rates to fall—because time preferences have fallen." As I understand it, time preference is how soon someone is interested in making money. Someone with a high time preference usually seeks to make a lot of money very quickly, while someone with a low time preference seeks to make a long term investment, providing a steady flow of money over time. However, I fail to see how the two concepts are related. This could be because of my caveman understanding of economics, or maybe I'm just dense. But could someone explain to me what he's arguing in layman's terms?

• Answer:

  First off, Austrian economists are mostly gadflys who just don't have it quite right. The notion that increased demand for money means that interest rates will fall is pretty much ludicrous. I always think of economics notions like this as if I was in my kayak going down some raging river and some Austrian economist is sitting in an eddy saying "See?! The water flows uphill". The fact is there are eddies and there are currents and some people aren't good at deciding which is which. Anyway your understanding of time preference is messed. Time preference has to do with the premium people put on immediate consumption (not "making money"). A high time preference means that people put a high premium on consuming now at the expense of consuming later. The higher people's time preference, the higher the interest rates ought to be. The easiest way to see that is to think of interest rates as discount rates and if someone has high time preference then he will discount future dollars at a high rate. Thus, if time preferences fall, interest rates should fall. Rothbard states that the rate of interest depends on time preference (premium on consumption) rather than liquidity preference (fear about the future). That's just not an accepted fact nor is it justified by the one sentence preceding it. Reasonable people can disagree but only Austrian economists can jump up and down on a desk and claim that interest rates are completely dependent on the former not the latter. Being an Austrian economist is a little like religion. The he says that if there is increased demand for money it might be that increased demand is because people are foregoing consumption (their time preferences have changed) and thus the increased demand for money represents a change in the discount function for money. Thus increased demand for money "will" (not even "may") cause interest rates to fall. I personally completely believe that money can be thought of as an asset and that increased demand for an asset should cause its price to go up. The price of money is the interest rate. Thus increased demand for money causes interest rates to go up. I, uh, wasn;t the first person to think of that and historically it seems to be the current and Rothbard's effect is the eddy. I would love to take Rothbard kayaking and yell "Look the water flows upstream" just to see what happens. Alas, he died 10 years ago or so.