The mismatch between interest rates and time preferences is well known during times of central bank interest rate manipulation like we have today.  But less understood is the mismatch between time preferences among developed and developing countries.

As societies become wealthier, they begin to have higher savings rates.  The higher savings rates imply a lower time preference, meaning that they are willing to forgo consumption today for greater consumption later.  Time preference is the basis of interest rates.  Lower time preference for consumption leads to greater savings, which leads to more capital available to be lent and lower interest rates.

This all works out because a sufficient amount of capital available for, say, two year loans implies that in two years, when the project for which money is borrowed is completed and its products are being offered for sale, the buying power will be there to purchase the products.  The only question is whether or not the entrepreneur calculated consumer tastes correctly.

But does this work in the world of international capital flows?  Money saved in a wealthy, low time preference country that is invested in a poor, high time preference country could be at risk of a mismatch between the investment and its future products and the ability of the local citizens to purchase those products.  Especially in times like these, when central banks have pushed interest rates to very low levels, and investors are searching for creative ways to earn returns, the danger of mistaking rising foreign asset prices for good investment opportunities due to time preference mismatching seems great.