Shocked, shocked, do you hear me!
Not to snark at this poster, but in general,
if we learn anything from experience in markets, we learn:
People want higher returns without higher risks, and
other people can profit from convincing buyers that the returns are higher, or the risks are lower.
Also, money is more nimble than legislation. While
Congress is trying to outlaw the most recently
exposed scam or malfeasance, people are inventing the
next several workarounds to existing or upcoming law.
That does happen, but what may be even more common (and more important is a slightly different form:
People want high returns, and are willing to accept risks, but are required by law to invest in safe securities, and are happy to pay high fees for people who can find a way around this.
A huge driver of this isn't scams or outright fraud, but "regulatory arbitrage". Not saying it's fine, but if your mental model is "how can we protect unsophisticated mom and pop investors from these predators selling exotic asset backed securities", well, they're not the ones buying them. The bigger question is, how can we (or should we?) stop pension funds from knowingly seeking higher risk/higher return investments as part of their ongoing effort to try and reduce their massive unfunded liabilities.
Not only this, but Better, Cheaper, Faster.
I'm in Healthcare and it doesn't work like this.
My gut response is that, yes, if you’re buying risk-free treasuries, why should you get a return above inflation at all? Rewards and risks should be commensurate.
Adam Davidson: All right. Here's one of his speeches that really drove that army of investment managers crazy.
Alan Greenspan: The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance.
Adam Davidson: You might not believe me, but that little statement, that is central banker's speak for, hey, global pool of money, screw you.
Alex Blumberg: Come on, that's not what he said.
Adam Davidson: It is. I speak central banker. Believe me, that's what he said. What he is technically saying is he's going to keep the fed funds rate-- that's when you hear, the fed interest rate-- at the absurdly low level of 1%.
And that sends a message to every investor in the world, you are not going to make any money at all on US Treasury bonds for a very long time. Go somewhere else. We can't help you.
To the question: why should you get a return above inflation at all?
I guess one way of looking at it is: do you want to treat low-risk returns for conservative investors as a sort of public utility guaranteed by the government? Or do you want to put it in the hands of private industry?
If for whatever reason (and having a moderately stable currency is the answer there) there is more demand for bonds than supply, then the price will fall. This has nothing to do with economic reality and everything to do with market pricing mechanisms. Whether it´s good in the long term for the government to increase its lending this way, is a completely separate question.
Secondarily, many prospective borrowers of these projects are already in debt, and have cash flows which are not growing fast enough to borrow more.
why should a gov't project need to have any real returns? Social returns is enough. If the city is nicer to live in, if the businesses thrive because of increaed foot traffic, lower car accident rates, cleaner air etc.
We're running our governments like businesses and you're not going to find any nimble or disruptive startups in the mix.
Which isn't to say that I think the government should do what it do out of spite. Is there any chance of... I dunno, cutting off the public handout and then regulating the private vacuum-fillers sufficiently? Or does the implied drug analogy here reach its logical conclusion (on the black market)?
... is the system working as intended, because the policy rationale behind issuing lots of government bonds is precisely to make investors seek higher risks.
When downturns (like 2008) happen, this is investors fleeing to safe, money-like assets and and so wonks recommend that governments flood the markets with bonds, printed money, whatever to make that unprofitable.
The problem is with trying to fix the economy with policy levers. You can force people towards riskier investments (especially if they can be disguised as safe ones). But investment that is actually productive on average requires conditions where people on the ground can actually build useful stuff at a profit.
But that's an anathema to macro-economists (who want to advise on how use those levers) and also to politicians (who want to be seen to be "doing something").
Every state, city, country has a lot of favored sectors and grant opportunities, it's then up to investors to come up with projects that actually turn a profit.
VC/startup investors do this by simply doing a semi-blind search, funding everything they think is at least minimally sound.
If investors are still unable to turn a profit they are not taking on enough risk. (They are not thinking big enough.) And that might be okay. There's no moral imperative to keep every investment fund alive, every investor happy. And the only difference between business as usual periods and now is that the numbers are now scary (negative yields!).
But the fundamentals haven't changed.
Negative yields just mean that too many investors are risk averse, too many people (pension funds, passive funds, low-risk funds, inflation tracking funds, basic savings accounts) just want to park money. And that's okay. Eventually one of the following will happen: the fund managers will take on more risk, the people behind the funds will use the money for something else (eg spend it), or the people behind the funds will pester Congress to spend more and finance it all from debt.
Even if the investor plans to hold the bond to maturity, then the investor is agreeing to lock up that money until maturity. This carries the risk that the investor won't be able to take advantage of an investment opportunity before then. Or, if he decides to sell at that moment, he must accept interest rate risk.
The investor should be compensated for these risks, however small they might be, and that - in my opinion - is why treasuries should yield more than inflation.
Pensions were funded (or not) based on assumptions about yields. If actual yields are not hitting those assumptions (and they're not), it's not the rich that'll be eating cat food in their retirement.
(Of course, fixing the funding shortfall by making risky bets on exotic high-yield investments is uh...what's the word? Oh yeah, terrible! But let's not pretend this is strictly a problem for the 1%.)
I don't think that's the only source of time value of money.
For example, I'm fairly certain I can buy a car for the same price a year from now, but I am willing to pay a huge premium to have the car now so I don't have to ride the bus for two hours a day while I save up the cash to pay for it.
That is a preference for present consumption over future consumption that has nothing to do with inflation.
The whole thing seems to me like central bankers confusing cause and effect and trying to squeeze a complex system in to linear regressions. Lots and lots of unpredicted consequences to artificially low interest rates, including effects that do the precise opposite of what was predicted.
So it is very possible that the central bank is not doing enough.
My completely unsecured credit card only charges 10%, and that’s before inflation.
Eg a pension fund has to put money somewhere, but it has to be low-risk. Hence the seemingly absurd demand for negative yields.
Obviously no one is buying negative yielding bonds for the yields except pension funds, etc who are required to by law or not paying attention.
> My gut response is that, yes, if you’re buying risk-free treasuries, why should you get a return above inflation at all? Rewards and risks should be commensurate.
The parent has some sort of ad hoc economic theory ("gut response"), and I am asking them to expand on what the theory entails. "Supposed to happen" means it would be predicted by this theory of theirs.
We have a couple of levers to increase the interest rate. We could reduce inequality to reduce the supply of loan-able funds, we could allow large amounts of immigration to drive up the demand for loan-able funds, or we could keep interest rates high enough that we have a permanently high unemployment.
However I do have a strong worry that natural interest rates are too low for our current inflation. This gives the fed very little room to deal with the next crises. They should probably be targeting an inflation rate closer to 3-4% so we don't run into zero lower bound problems.
The government could spend the money. Or it could give the money to the people (universal basic income) and they could spend it.
This also fixes the inflation problem. Just don't overshoot.
Confiscate $3 trillion from the "rich", and give everyone in the US $10k dollars. What percent would end up back in the banking system after 1 year?
With online banking, etc perhaps once a day.
Actually, if the funds are transferred electronically it would take as long as an ACH transfer takes to get to the new account. The funds are tied up during that but then immediately available to the banking system again.
Banking system is where money lives.
Value lives outside, but the money represented by the value lives on accounts, in databases.
Even cash is just something tracked by central banks as liability (negative account value - because when someone deposits cash they increase one account, and if the bank then deposits that electronic money at the central bank the total money supply must not change, hence cash is tracked separately).
And if you want to take out a loan, it'll still be a risk, since you'll need to make the principle payments, but you'd get a tailwind on the interest paid to you.
I'd be happy to learn where I'm wrong if you have any insight.
Btw the definition of the natural interest rate is "The natural rate of interest, sometimes called the neutral rate of interest, is the interest rate that supports the economy at full employment/maximum output while keeping inflation constant"
There Is No Alternative!
Negative rates don’t force junky investment decisions. Inflation does.
Inflation is low. Investors choosing junk yielding 4% are not being forced to do so by negative yields (or, in America, low yields). They’re choosing to reach for yield.
Yeah but Central Banks that set the interest rates say that too, so this is the worst kept secret known to man
All the comments here and your observation should just be “hey its working”
Also, the ratio of theoretical to empirical content on that page is ridiculous given the topic is supposedly an empirical phenomenon requiring explanation. What is there is extremely weak as well. Is there better evidence this phenomenon exists?
Say what you will but I think that's really significant.
There is no way for the government to push rates, especially on exotic collateralized products like you describe. The Fed can play around at the low end and set an overnight rate, but not much else. Historically, the Fed has tried and failed over and over to affect the long end. And it certainly doesn't have the stock to dump long bonds to drive yields up.
Right now, the yield curve is inverted showing how little they actually effect rates. Long run rates are set in the global market.
It doesn't mean that it's a good thing to do as it has all kinds of other effects, but in general the governments have the ability to do this should they choose to, it's just that they keep pinky-swearing that they won't do it, making legislation that makes it tricky to do without consensus (but they can repeal that if both parties agree that it's the way to go) etc.
They can target the overnight rate and buy and sell short term funds because they are the majority player there, but even then the actual Fed Funds rate doesn't always equal the target they are trying to set (and not by a few points either).
On the long end they are more constrained. They can print a ton of money to cause inflation, but going the other way just isn't as easy. They aren't the major player there either. Long term treasuries compete with every other debt instrument out there government and private. Those rates are global for the most part
Just look at the late 90s when the Fed tried to push long term rates up and failed horribly. All they did is invert the curve. It is a repeating scenario.
This same conversation comes up about once a decade it seems.
There is a ton of interesting monetary theory about how the Fed can do this and issues they run into.
In a real dollar sense, the fed has zero ways to affect long term rates.
And there is no way they would be to keep that rate. They can say whatever they want, but that doesn't mean the overnight rate has to oblige them either. They only set a target, the actual rate is still determined in the bank to bank market and historically it does diverge, sometimes strongly.
No, to drive up rates would mean to restrict the buyers from buying (either via restricting the money supply - that means a combination of raising the overnight repo rate [FFR - Federal Funds Rate], raising reserve requirements, decreasing interest payment on reserves).
But such a move means slowing down regular lending, VISA/MasterCard and the banks would have to increase consumer facing prices of credit, etc. It would slow down wage growth.
And we are not seeing wage growth, we're not seeing inflation.
To stimulate spending/consumption all the Fed can do is absorb more and more risk (buy bonds/assets - quantitative easing, keepr rates low, encourage lending, encourage the starting of new projects).
Why people are not starting new projects?
Well, for example look at NIMBYs, look at how Congress doesn't want to force mandate better EPA regulations, look at how municipal fiber plans were stopped thanks to Comcast lobbying, etc.
Basically a lot of money goes into "rent" instead of innovation. (Asset bubbles.)
In other words, the Treasury dept is the one that has more power here.
The fed causes the inversions every time by pushing up the short term rates until they are near or above long term... It is ridiculously obvious if you just look at a plot of this.
Paul Mason, from 2013.
Whenever I hear successful entrepreneurs bash cryptocurrencies, I wonder how they can simultaneously hold the following 3 thoughts inside their heads:
- My company became successful in the last 10 years because it added value to the economy.
- Cryptocurrencies became successful in the last 10 years in spite of subtracting value from the economy; they are the exception to an otherwise efficient market.
- Capitalism works.
If cryptocurrencies were an exception to an otherwise highly efficient and meritocratic economy, could we say the same about bonds which have negative yields?
Maybe the following thoughts are more logically consistent:
- My company became successful in the last 10 years because I exploited a vulnerability in the economy.
- Cryptocurrencies became successful in the last 10 years because they exploited a vulnerability in the economy.
- Capitalism doesn't work because it's vulnerable to hacks.
Also, to explain the current bonds situation:
- Bonds can have positive value in spite of negative yields because some investors believe that the vulnerabilities in the economy can be patched (e.g. it's possible to increase interest rates) and that bonds will eventually return to positive yields.
That pool of money hasn't gone away and the lesson investors seem to have learned from the financial crisis is that the only truly safe investments are government bonds issued by major governments. The demand that drove mortgage lenders to make (in hindsight) irrational decisions to increase supply seems to have shifted over to those government bonds. Because the supply of bonds is fixed by politicians the market is responding as it needs to match demand with supply: lowering rates (effectively increasing the "price" of the bond), even below 0, to lower demand to meet the available supply.
In the US, the Federal Reserve sets the Federal Funds rate, which is (supposed to be) determined independent of the federal government.
The reason rates are low is because there is a lot of demand, and participants are bidding down the price as they compete to acquire the bonds.
It seems relatively obvious in hindsight, but I was still having a little trouble getting my head around it until I read this.
I find it baffling how everyone talks as if inflation is some incomprehensible force of nature out of anyone's control, even though it's actually trivial to cause inflation by printing money and buying assets.
Then the article links to https://www.bloomberg.com/news/articles/2019-07-05/germany-s... which states that Germany is being paid to borrow money but refuses (against the advice of economists) to actually do this and invest in anything? What?
Why does it seem like nobody (with the relevant authority) is willing to do anything but stand around in paralysis worrying?
But that is literally the mystery about the contemporary economy. The Fed has been printing money like mad with "quantitative easing", with extremely low interest rates, and Congress helping them along with massive tax cuts, but this is having basically 0 impact on inflation rates. We're printing money like mad and it's seemingly having no effect on prices.
eg, my anecdotal view is that:
1. the rich just put extra money into investment
2. the upper middle-class are just putting any extra money into paying down their debts: housing and student loans.
3. the lower-middle and lower classes are increasingly precarious; and they're not actually seeing any extra money.
4. big business are just doing stock-buybacks, and any profits are just going back into 1
5. small business are struggling because of 2 and 3
What is there in all that to drive inflation?
(edit to fix list)
One conclusion that you might draw is that we are in a massively deflationary environment. So much so that all of the inflation tools running at full-tilt only keep us in place.
Among other things, birth rates in rich, developed countries have been dropping for decades and are below replacement rate in many of them. Does that sound inflationary to you ?
In this article he gives some examples of forms of MP3 in the past:
Maybe because those relevant authorities are more and more not very good at their jobs. It happened a bunch under Bush and his happening way more under our current POTUS. Unqualified people are being put in charge of large portions of our government, and there has to be some consequence. This might just be it.
That’s more than double the long term stock market return, and it’s (basically) risk free.
Dad was getting phone calls just begging him to refinance his 3.5% mortgage to current rates. "We have a low-low 18.5%!" Nope.
I had a mortgage originated in 2009, and then rate adjusted down several times to something in the 3.x range -- and would get calls and mailers promising "historically low" rates of 4.x; which I always found very amusing.
Sure, the mortgage that would be paid off in 5 years now has another 20 years of payments left, but hey lower monthly payments!
Dad was very financially literate and would hang up on them after a short "no thank you". If for no other reason than they interrupted the family dinner.
That is, second attempt -- his first attempt, when oil prices were still high, didn't work.
The establishment have not made the same mistake again. When you have people in perpetual debt you have them under perpetual control.
Credit can be created at will, but if you accidentally let financial independence break out, it's not easy to put back in the bottle. You have to wait for the next generation.
When prices looked like they were going to drop, the government stepped in with "help to buy".
The free market rhetoric is just that. It's a complete and utter lie.
He would record every payment on the booklet you got with the mortgage that had the amortization schedule printed in it.
If anything, it's a huge anomaly that this facility isn't routinely available to retail customers, and an indication of lack of competition within the banking sector in many countries.
On a per consumer level a variable rate is much higher risk, even in countries with highly variable inflation rates some fixed form of incomes will not inflate uniformly with the economy and a variable rate would increase the rate of defaults. On the other hand the loan terms and risks are determined once at loan origination where it's quite feasible for a financial institution to hedge out any long term inflationary risk.
You can go longer but the bank will factor that with a higher fixed rate to offset variation.
I'm honestly surprised that became the standard, it seems like a lot of risks for the banks for what they're getting. I think it has something to do with Fannie Mae and Freddie Mac preferring to buy some mortgages and absorb the risk?
And of course the 2008 'financial crisis' didn't really result in 'stable inflation' in the US within the last 40 years.
You still pay something as the loan has a management fee on top of the interest, so you can end up paying approx 0.6% in interest in the variable loan that can change every 5 years. The mortage loan can only cover up to 80% of the value of the house, with rest being 5% cash and 15% a more normal, higher-interest bank loan.
How much you can loan is based on a multiplier of your household income typically.
The 30-year fixed loan is 2% effective interest. And you can also not pay any interest for up to 10 years.
The problem is that most people don't understand these things and are stupid, and decide to buy a house and sign all the paperwork without reading it.
The problem is the amount it can help you and the amount it can hurt you are disproportionate; if the rates fall enough to significantly help you, you could likely have a similar reduction by refinancing a fixed rate mortgage. But, if rates go up, you can't refinance to get a better rate, and you may have trouble selling as you may have planned, because higher interest rates put downward pressure on prices.
For me, it seemed like the risk was not worth the reward; especially given I was borrowing in 2009, and rates had significantly more room to go up than to go down. In the 1980s 20+% interest rate climate, I may have chosen differently.
See, this is what banks are explicitly NOT in the business of doing. They are in the business of borrowing short and lending long, with a rate spread to make money in the process.
I have had a number of mortgages in the last 10 years in the US (refinanced multiple times), and none of them had any prepayment penalties. I suspect if I looked for one that does I might find it and it might have a slightly lower rate. Maybe. That depends on whether the bank planned to keep it on the books or sell it on; it's easier to sell on standardized mortgages into an MBS than weird ones with bespoke terms.
See that makes sense with variable rates. However if you offer a 30-year fixed rate at 4% because you know that you can currently borrow short at 2.5%, what happens in 20 years time when no-one is willing to lend short to you for less than 6%?
1) The loan is still on your books. In that case, you are in the same situation as an individual who has invested money in a 4% bond and can't withdraw it from there while at the same time paying 6% on a car (or house, or whatever) loan. It's annoying, for sure, but whether it's a serious problem depends on your net assets (which you might draw down to make up the difference) and your net income at that point (which will depend on whether you are still managing to make loans at higher than 6%). Also, 20 * 1.5 - 10 * 2 = 10, so I think you you still come out positive in this scenario, subject to some _really_ simplifying assumptions like the rates being 2.5 and 4 for 2 years and then jumping to 6 and 4, and ignoring the fact that money now is more valuable than money later, etc. But yes, if you keep the loan on your books you do run the risk that rates will go up and the money will not be optimally invested; you presumably try to model that risk and price it into your rates.
2) You sold the loan on to investors in the form of bonds. In that case you really don't care that much, as the loan originator. The investors who bought a 3.25% (or whatever; some loan management fees come off the top) bond now have the problem of having a bond that is paying likely below-inflation rates, and can't be sold, except at a loss, because of that. If the question is why investors would buy such a bond now, it's because they need something to invest in and pickings are pretty slim if they want a risk profile better than stocks (and we can argue whether morgage-backed securities give you that) and they are betting rates won't go up that much.
Now you could ask why people generally buy fixed-yield bonds at all, which is really the same question. My guess would be that partly this is a bet that rates won't rise (partly driven by central banks' commitment to macro stability and therefore not having too-large changes in interest rates). And maybe partly an issue of what time horizon the bond purchasers are operating on...
2) Negative interest rates.
in theory one could make a bet that a recession will occur in X months forcing a rate cut/stock decline and use leverage on fixed rate investments to make an above average return.
My lender had a program where you paid a nominal amount (originally $500, but later $1000) and they'll adjust your rate to their then current rate. If you do a full refi, my understanding is that's going to cost in the neighborhood of $3000, although many lenders will roll that into the loan, or otherwise hide it.
Reminds me of the time I bought a package at a pawn shop, but didn't want one of the items in it. They said that to get a discount, I'd have to buy the whole thing as is then pawn back the unwanted item. So far, so good, but then I had to give my ID and attest that I didn't steal that one item ... even though they knew it never came from me to begin with!
 The way you said it, thousands sound like the typical case and $500 is a special deal.
Just adjusting the rate in their systems certainly doesn't cost the lender nearly $500 or $1000, but it was still a win-win. They got some money to offset the lower rate, and got to keep servicing the loan, and I got to pay less interest, it's been a while, but I seem to recall my break even was about 3 years each time. I would certainly consider the availability and price of rate modification when considering lenders in the future.
You do have to pay loan original fees again though which can be 1-2% of the balance of the loan so you have to compute when it actually pays off for you and whether it's worth it.
You could buy a 10-year bond paying 8% in 1970. That's a high yield by 21st-century standards but it performed quite poorly : when you got your principal back ten years later it was worth less than half as much due to inflation (and not even by reinvesting the interests received would you break even).
 not worse than stocks, though
You're comparing nominal and real numbers here. The nominal rate was more than double the long term _real_ stock market return, but the corresponding real rate was 4.5%, as the inflation rate was 13.5% in 1980. That's a more accurate and much less eye-popping number.
You also risk that the bond is not honoured - that's a really low risk for the US Government, but it's also not 'risk free.'
Reasoning: When a bank lets you transform production today into future consumption, it's performing a valuable service for you. Storing your value takes work and the bank deserves to be paid for that service. However, historically, they charged a negative price for this service (positive interest rates), because this service allowed them to make even more money letting other people transform their future production into present consumption. But as fewer people need to borrow and as more people want to save, the market clearing price of savings is approaching and in and cases overshooting 0%.
Extrapolation: There's a fair chance this will be a big deal in the history books we write a century from now. Today's bond prices are telling us that the world is changing. We are going from a world of relative growth, where we needed to delay consumption to juice investment, to a world of a relative stasis, where consumption and investment are in equilibrium. Everyone who said interest rates would bounce back to "normal" after the Great Recession has been wrong. This may be the new normal.
Suppose you are planning your future, and you think there's a small but real (1-5%) chance that sometime over the next decade your local currency will become devalued to zero. Suppose also that you're expecting significant future costs: elder care for your parents, rising costs of living, etc. In those situations, you're likely to have a very high savings rate, and will tolerate guaranteed returns that are near zero (because factoring in the risk of local returns might make them closer to negative double digits).
I'm not a global economist, so I don't know how much this is driving things. But China as a 45% personal savings rate, India is in the 30s, compared to the 6-7% of the US, and anecdotally people have noted significant amounts of foreign investment in "safe" assets. Some of these areas have banks that offer double digit returns for investments, but only on paper - people were talking up the returns from Mongolian savings accounts a few years ago, but then the currency has eroded so quickly that 15-20% returns are actually negative.
The problem with this theory is that debt is quite high globally and in all sectors (households, corporate, government).
If there's cheap government money on the table, everyone would be crazy not to avail themselves, as long as the potential use expands one's business.
Edit: they had started to reduce the size of the balance sheet , but who knows how long will it take .
To use a car analogy I'm arguing the gas pedal doesn't work as well so the Fed is having to keep their foot to the gas to maintain it's historical speed. Others argue the Fed is has been trying to go faster and that's why their foot is on the gas pedal. The graph seems to support that indeed their foot is on the gas.
This is an odd contention that I don't agree with entirely based on the usage of "rewarded." Interest isn't a reward, it's simply the price of money, and depending on your personal current values/needs/wants (spend now or save now), it can look either like a reward or a punishment.
So this ends up reading only as a topsy-turvy ex-post-facto justification for central bank policy that favors / provides cover for governments that spend more than they earn, which they all do afaik.
I do agree with some elements of your extrapolation though. It is possible that we are going from a world of relative growth to one of stasis. Or, at least, I don't think it's necessarily a bad thing if economies do not "grow", especially not in cases where population growth is slowing or even reversing.
If we didn't treat things like wellfare as disdainful and something you could actually rely on, we wouldn't need to worry about personal savings as much.
For example people in their late 50s and early 60s might have been making let's say $30,000 back in the 1980s and 1990s and now today the same exact type of job pays the same 30k salary except the cost of living is crazy high now compared to back then.
Back then they had money to spare for investments but that same salary today means you're probably in debt.
But really, it's not about consumers, but about banks not making as many loans as governments want them to. That suggests a lack of safe investment opportunities.
Maybe, instead of pressuring banks to make investments that they don't want to make, governments could stimulate demand in some other way? There are certainly people who, if you give them money, they will spend it.
Personally I think what's missing is a way to holistically track real world resources and consumption and tie them to digital money that can then be regulated in a fine grained way.
I think that is what is needed to change economics from a society of witch doctors into a technical and practical profession.
Helicopter money which deletes loans (meaning it would not punish people who did not borrow) would be a far better strategy in this case, and lead to both inflation and deleveraging at the same time, something which is impossible with other methods.
Also the whole tax reduction statement is mostly an opinion. From what I've seen, most companies are almost purely motivated by the risk-adjusted post-tax profit that can be obtained from the investment. Every idea on the drawing board is effectively evaluated meticulously on this basis. If that number isn't to their liking then the research/project simply never gets funded. The company might opt to simply do share buybacks or pay a higher than normal dividend. Plus the overall argument is mostly junk because the United States heavily reduces taxes for companies that perform R&D through the R&D tax credit.
So one of two things will likely happen:
1. Economy will go into recession, feds can’t drop interest rates much more (they are already low), so recession hits hard.
2. Inflation skyrockets and the fed starts cranking up interest rates in an effort to control it. Economy stops growing but inflation continues (hi 1970’s!). People bitch because their paycheck stays the same but he price of milk doubles.
Land prices are not included in inflation stats. The cost of carry is, as mortgage payments, however that is simply the cost of money. And rates are at all time lows.
The difference between 7% rates where your mortgage takes up most 50% of your wages and 2% rates where your mortgage takes up 50% of your wages is that it's far harder to pay off your mortgage in the latter case.
You cannot attain financial freedom. This means ultimately you cannot refuse to work, even if compensation is poor (low wages, stuck low).
There is inflation. It's being used to force us to work, and the precariat cannot bargain for more of their surplus value.
Or in other words, many people aren't paying market rate and it brings the average down. This isn't what you experience if you need a place now, or bought recently. Inflation is an average and most people aren't average. (Just like nobody has 2.2 kids or whatever.)
The only people who seem to be enjoying it are exploiting the bubble with high wages and investing companies.
And if you didn't take the investment, your competitors destroyed you.
Fiat currency is a weird thing.
One possible arbitrage here might be for the governments themselves to issue more debt and invest it? (Essentially, this is a government bank.)
But, the market seems to be saying that there are too few good investment opportunities. Maybe consumption should be higher? A UBI scheme might do it.
I'm guessing it probably either speculators buying bonds assuming that they can be onsold to a central bank, or people who are forced to buy for whatever reason (eg, maybe some savings schemes are forced to put x% into government bonds). I've bought bonds exactly once on the assumption that I could on-sell them for a profit when government lowered interest rates. People like me don't have any impact on the market, but if the incentives make sense at the small level maybe it works out the same on the large.
They could hardly be any more different. If one person beyond yourself knows about it, then you're in trouble. One fire or disaster and it's all gone. If it's a smaller sum, you're FDIC insured against loss in a bank account, which again makes the point about just how different the scenarios are. If I feel like it I can safely protect $1 million via four distinct accounts under the FDIC at no cost. The Fed will go back to zero rates at some point to stimulate the US economy. Even when that happens, I'm essentially paying a small insurance fee (inflation vs zero rates) per year to guarantee the safety of the $1 million. That is ultimately far safer than managing it under my mattress. And cheaper, if I need any guaranteed security for the mattress. It's also easier to move at low concern (whether that's to shift it into an investment account or move it to another bank). If it's under your mattress, every move is a high risk for exposure; every person you let deep into your life creates some risk of theft (eg non-malicious gossip).
Burglary isn't the only danger. Paper money can be eaten by moths, so you probably want to vacuum seal it. That still won't keep out rats. You could lose it all in a flood, landslide, tornado, fire, or earthquake.
The individual probabilities of all these events are quite low but multiplied with your all your liquid cash, the cost is unacceptably high for most people.
> Tests by the Serious Organised Crime Agency found it was possible to carry €25,000 in €500 notes in a cigarette packet, €300,000 in a cereal box – £1 million in banknotes weighed 50kg while its equivalent in €500 notes only 2kg.
Note that having that much in €500s may raise some questions.
Someone once proved in court you could fit 7,400 bills into a normal shoe box. Filled with $100 bills that's $740,000.
1 million $1 bills is really large. The $20 bills would fit in a suitcase. The $100 bills fit into a briefcase, which will have a clear plastic cover over it so you can take pictures of yourself holding a million dollars in a briefcase.
FYI: They also give away bags of shredded cash, which you can then use as baller confetti at your kids' birthday parties.
Investors are saying they’ll pay for the privilege not to, and some also started buying tiny amounts of bitcoin.
Economics consistently fails to predict actual human behavior.
The market has very little say in the matter when the central banks force interest rates to near (or equal to) zero -- somewhat ironically to increase consumption by de-incentivising saving.
There are plenty of other choices for investors, like the stock market or real estate. So, you could either spend the money or choose a riskier investment.
Imagine if you're managing people's retirement money. How would you invest it? People's nest eggs.
To put it into computer-nerd context; remember the saying, "nobody ever got fired for buying IBM".
Isn't this the same kind of thinking?
By the way, what do you think about the idea some are proposing that crypto-currencies are more solid than a gold standard?
Instead of transitioning from this central bank backed fiat currency malarkey (which in theory ought to work just fine but doesn't because of greed, collusion, corruption, hubris – i.e., human weakness) back to the gold standard, some say we should move to crypto-currrency standards. I'm not at all versed enough in the tech and theory to know if this is a good idea or not.
Cryptocurrency is high risk, with both dramatic changes in price and insecure exchanges, so I'm not sure why you bring that up in this context?
In reality, keeping liquid cash will no longer make any sense whatsoever, and further push all other assets up in value, property and equities for example.
A huge number of retirement plans and endowments and pension programs will still hold negative yielding bonds, because they need to diversify their assets.
In theory those safe government bonds will shoot up in price just as equities crash. Because these assets aren’t correlated, your long term return will actually be higher. So, yes, that is probably worth paying a bit of money for.
Safe Deposit Boxes Aren't Safe (nytimes.com)
The parent comment was maybe being slightly imprecise, but his core point isn't wrong that positive nominal rates means that your losses are less than inflation (whereas for cash they're equal to inflation).
Also, to the original commenter, I will never put all my cash under the mattress. One break in and it's all gone.
I currently have all my cash parked in a 1% interest checking account with strong protections and fringe perks.
I am content with taking an extremely small loss on inflation while I wait for the market to eventually tank. It's been longer than I expected (2 years already), but I do not ever shed a tear over the what, $16,000 in pretax capital gains I theoretically could have made?
I don’t know what the answers are and no one does. In my opinion there has been a global phenomena of easy money in various ways for a decade, and it has filtered out in all sorts ways, from the premium in equities, the absurd rise in housing prices, the art market, basically anything that can eat excess cash has been eating it. A crash and hangover is coming but it will primarily affect richer people though it will bleed out to the non-monied classes via job losses and retirement accounts falling in value.
But when this will happen? It could be next year or in 50 years! The governments of the world have so many options to keep the party going.
However at least for me, my current earning potential in my job is not that high, and my cost of living therefore has been what I've sought to optimize instead of capital gains.
For people who have lots of taxable income, lots of asset exposure, and a high cost of living, then a mixed bag of investments is definitely crucial to preventing those people from going bankrupt.
But for me, as long as I find ways to continue to live healthy, have a good network of friends, a job, money in my main bank accounts in case I need to put up a security deposit or take an extended vacation, then I am very happy. I therefore would never want to keep $40,000 or something in a market account when I really do need all of that money at any time.
so the safe strategy is to make sure you have an appropriately balanced portfolio (among cashlike securities, equities, bonds, etc.) and to leave your equity investment in place while riding out the downturn.
investors typically get more conservative as they get older, so your advice might be ok for most 25 year olds, but not for most 65 year olds. the conventional wisdom then is to hold increasing proportions of weakly/negatively correlated securities like bonds in your portfolio as you get older, particularly through downturns.
and the s&p500 is a reasonable basket of equities, but it's not perfectly representative of the asset class either, since it's composed of primarily large cap domestic stocks. it doesn't include any startup equities, for instance.
This is how we revert back to a barter economy, or one that uses gold/Bitcoin/etc... Since the Fiat currency is rapidly inflating.
edit: let me add, I mean the consumer space. There can be some oddity in the bank-to-bank market because of various technical reasons, but it is extremely rare.
What comes to interbank markets, it is far from rare and far from only technicalities, it is nowadays pretty normal that the floating leg of the swap pays negative interest rate. (In Euro, that is, USD has higher rates)
And can you show me euribor-based long-term loan where the interest rate is negative? For the most part, banks have no need to loan unless compelled, so maybe where is some policy forcing them to? I would call those extremely strange technical factors.
My old mortgage would have become technically negative a couple of years ago, but I was forced to prepay it due to selling my apartment before the rates went that far down. As I said, my understanding is that my bank would have refused to honor our contract, though, and insist there is a zero floor in my mortgage even if nothing like that was agreed when I took the loan, so in that sense you are right.
Negative coupons would be quite difficult to implement but having a positive coupon doesn't really mean anything: bonds are not necessarily sold at the nominal price even when they are initially issued.
"Henkel and Sanofi sell first negative yielding euro corporate bonds"