6 ms·

Interest rates are nominal; they only matter relative to some equilibrium. The equilibrium interest rate is somewhere close to zero.

rsmckinney 11y ago
On earth, a zero interest rate indicates a sick or at least stalled economy. The rate cannot be held at zero for much longer without risking a deeper debt via evermore unhealthy credit expansion, yet the consequences of raising it, even a little, will likely crush global markets as investors react etc. There is no question this economy is quite sick and has been breathing with aid of the Fed's iron lung so long that it probably can no longer sustain itself without resetting (hard).
- 6stringmerc 11y ago
  Also of note: US worker demographics do not substantiate the narrative that a recovery is going on. Jobs added are typically in the service industry, and a large percentage of those are part-time situations. Also the only age group that has added jobs since 2008 is the 55 and up cohort, which only further punishes the under-employed youth with significant student loan / other debt burdens and stalls the general progression into higher classes. I have my suspicions that the 55 and up group simply can't retire (no savings) or refuses to retire (standard of living). Basically what I see are indicators the collapse will come around by way of massive defaults on student load debt. This will be combined with Federal Government idiocy promising Baby Boomers that the benefits will aways be there for them as a pandering for votes. Everybody knows full well the lower tiers of society and the working population are forced to make do with unapologetically low wages which aren't condusive to a healthy tax system, but there's no end to people voting against self-interest because they're clouded ideologically. I'm not sure a total reset is this time or this year but probably next summer it'll be the focus of all the Presidential candidates.
  - ArkyBeagle 11y ago
    We will retire and the Fed will end up bailing out the IOUs on the SS trust fund. This is not a problem so long as it's done once. All SS money ends up strengthening the metric formerly known as M3, so it'll work out just fine. The problem is the closely-held belief that There Must Be Suffering or we're not being responsible adults. The economy has been liquidity constrained ( outside of bubbles ) since 1980, with the odd 24 or 12 month period off. http://www.interfluidity.com/v2/3212.html http://www.interfluidity.com/v2/3212.html
    - 6stringmerc 11y ago
      Look, even if the Baby Boomer cohort does retire and even if Social Security was funded properly, that leaves the stunning inflation of medical costs and significantly longer-than-forecasted life span of that population as yet one more entitlement economic choke-point that creates problems. There's also the closely held belief that "I paid into this system and I'm going to get everything I deserve!" which doesn't jibe with the decades of voting for people who mis-managed the finances. I don't forsee SS/entitlements "working out fine" barring drastic changes, such as collecting large swaths of destitute and poor Senior Citizens, busing them out to some reservation with centralized health care, and calling it a day.
      - ArkyBeagle 11y ago
        The medical thing will resolve itself. The business model to handle it hasn't emerged yet. No manner of price jiggering is gonna add capacity to the medical system, so alternatives will be found. Medicare will be a second-tier service. That's nearly inevitable. But nobody will do anything about this until they have to. And frankly, longevity of Baby Boomers doesn't seem as likely to work out as it did for the WWII and Silent Generations. I agree wholeheartedly about "mismanaged the finances" but this is the world we live in.
    - eli_gottlieb 11y ago
      >The problem is the closely-held belief that There Must Be Suffering or we're not being responsible adults. While this is quite true, there are underlying demographic factors to take into account. Namely, insofar as voting means anything at all, Generations X and Y together now outnumber the Baby Boomers among voting, working adults. This means that there is now an active, demographically-driven political conflict between the interest of incumbent creditors and the interest of an increasingly large majority of the voting, working adult public.
- tertius 11y ago
  By unhealthy credit expansion you mean unhealthy Fed balance sheet expansion? Very little of the credit created on the balance sheet has actually entered the market.
  - 6stringmerc 11y ago
    Well I think there's some pretty clear correlation that numerous large companies have been using cheap credit in the bond market to buy back shares at a rapid pace (billions) and further inflate the status of the equities market. That's the cheap credit that isn't doing anything other than fleecing the non-investor class. It's simply financial engineering dependent on access to cheap credit, from what I understand.
    - tertius 11y ago
      Yes, buy backs has been a large contributor to indices heading upwards. A lot of these companies issue their own bonds at rates lower than even their dividends. In the public bond market, how is lending fleecing the "non-investor class"?
      - 6stringmerc 11y ago
        How? Because the Federal Reserve enables the cheap credit pegged to a near-zero interest rate to institutions on Wall Street, who turn around and loan to large organizations through channels by which the Wall Street firms will receive compensation by way of financial transactions. If you add up all the pocketing that goes along before a single retail investor has a shot at a position, then you'll understand what I meant by the 'fleecing' comment. Well, that and go back to the first point that the Federal Reserve's ridiculously low interest rate for the past half-dozen years punishes Savers, who are not investors in the market directly (that's why they're called savers), and that's a very large population being taken advantage of by a sophisticated system.
        tertius 11y ago
        No, savers are investors. And I agree that a low to zero interest rate is bad for savers. Again, much of the money printed is just sitting on the balance sheets and haven't made it's way into the market. You're saying that lenders who borrow from the Fed then lend to large organizations who do buybacks. Why does this hurt non-investors?
- cynicalkane 11y ago
  The real-nominal confusion again. Zero interest rates wouldn't indicate a stalled economy if deflation was at 4%. They would be a terrible thing if inflation was high. Neither is true right now, though.
msandford 11y ago
> The equilibrium interest rate is somewhere close to zero Really? Who are all these people who -- with their own money -- are willing to lend $100mm today for $100.05mm in a decade? If there are people willing to lend OTHER PEOPLE's money for near-zero rates, that doesn't count. Because ostensibly all money has to be someone's money. And if it's not -- like say if it's the Fed's money -- then that's clearly some kind of forcing function that can totally disturb the natural equilibrium. The only way that interest rates accurately reflect people's true time preference for money (which is what it's supposed to be, really) is if all money loaned is money owned by a real human being, somehow, somewhere, who has actual influence over what is being done with it. If there's money in the system that doesn't fit that criteria, you're screwing with the interest rate in a non-natural way and suggesting that this artifice is reflective of the aggregate time-preference for money is totally bonkers.
- jbooth 11y ago
  People ARE buying federal bonds at that rate, right? You can find a figure for the sales, look at the yield curve, and quantify exactly how many people are acting that way with their own money (or how much money, at least). Looking at http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield http://www.treasury.gov/resource-center/data-chart-center/in..., the yield for 10 years is actually more like 2%. Less than a year is very close to 0, so there are apparently a ton of people out there who will lend you money for 1 year at 0.33% interest.
  - lmm 11y ago
    There are a ton of people out there who will lend the fed money at that rate. But the fed is in a rather special position.
    - msandford 11y ago
      They're not loaning it to the Fed, they're borrowing it from the Fed and loaning it to the Treasury. By doing it this way everyone gets to pretend that the Fed isn't the entity buying government debt, and so it's not "monetizing the debt" and therefore -- somehow miraculously -- it isn't outright theft. Ultimately though it's not as though banks are making the decision to loan to the Treasury at very low rates all by themselves. It was coordinated how the money flows would happen and it would do two things: allow the banks to repair their balance sheets through "free money" loans and also help the government out of a bind where there was nobody to buy their debt that they desperately needed in order to fund expansions of social services during the downturn. Personally I think that it's pretty immoral to steal from savers to bail out borrowers, but that's because I'm a saver who's been locked out of the housing market by not having gotten in prior to prices going 2x, 3x, 5x or whatever. Ultimately I think the whole thing is going to end very badly, but of course I have no idea how long it'll take. It might take another 2-3 years, it might take another 20-30. No way to know how long the speculative mania will last.

rsmckinney 11y ago

On earth, a zero interest rate indicates a sick or at least stalled economy. The rate cannot be held at zero for much longer without risking a deeper debt via evermore unhealthy credit expansion, yet the consequences of raising it, even a little, will likely crush global markets as investors react etc. There is no question this economy is quite sick and has been breathing with aid of the Fed's iron lung so long that it probably can no longer sustain itself without resetting (hard).

6stringmerc 11y ago
Also of note: US worker demographics do not substantiate the narrative that a recovery is going on. Jobs added are typically in the service industry, and a large percentage of those are part-time situations. Also the only age group that has added jobs since 2008 is the 55 and up cohort, which only further punishes the under-employed youth with significant student loan / other debt burdens and stalls the general progression into higher classes. I have my suspicions that the 55 and up group simply can't retire (no savings) or refuses to retire (standard of living). Basically what I see are indicators the collapse will come around by way of massive defaults on student load debt. This will be combined with Federal Government idiocy promising Baby Boomers that the benefits will aways be there for them as a pandering for votes. Everybody knows full well the lower tiers of society and the working population are forced to make do with unapologetically low wages which aren't condusive to a healthy tax system, but there's no end to people voting against self-interest because they're clouded ideologically. I'm not sure a total reset is this time or this year but probably next summer it'll be the focus of all the Presidential candidates.
- ArkyBeagle 11y ago
  We will retire and the Fed will end up bailing out the IOUs on the SS trust fund. This is not a problem so long as it's done once. All SS money ends up strengthening the metric formerly known as M3, so it'll work out just fine. The problem is the closely-held belief that There Must Be Suffering or we're not being responsible adults. The economy has been liquidity constrained ( outside of bubbles ) since 1980, with the odd 24 or 12 month period off. http://www.interfluidity.com/v2/3212.html http://www.interfluidity.com/v2/3212.html
  - 6stringmerc 11y ago
    Look, even if the Baby Boomer cohort does retire and even if Social Security was funded properly, that leaves the stunning inflation of medical costs and significantly longer-than-forecasted life span of that population as yet one more entitlement economic choke-point that creates problems. There's also the closely held belief that "I paid into this system and I'm going to get everything I deserve!" which doesn't jibe with the decades of voting for people who mis-managed the finances. I don't forsee SS/entitlements "working out fine" barring drastic changes, such as collecting large swaths of destitute and poor Senior Citizens, busing them out to some reservation with centralized health care, and calling it a day.
    - ArkyBeagle 11y ago
      The medical thing will resolve itself. The business model to handle it hasn't emerged yet. No manner of price jiggering is gonna add capacity to the medical system, so alternatives will be found. Medicare will be a second-tier service. That's nearly inevitable. But nobody will do anything about this until they have to. And frankly, longevity of Baby Boomers doesn't seem as likely to work out as it did for the WWII and Silent Generations. I agree wholeheartedly about "mismanaged the finances" but this is the world we live in.
  - eli_gottlieb 11y ago
    >The problem is the closely-held belief that There Must Be Suffering or we're not being responsible adults. While this is quite true, there are underlying demographic factors to take into account. Namely, insofar as voting means anything at all, Generations X and Y together now outnumber the Baby Boomers among voting, working adults. This means that there is now an active, demographically-driven political conflict between the interest of incumbent creditors and the interest of an increasingly large majority of the voting, working adult public.
tertius 11y ago
By unhealthy credit expansion you mean unhealthy Fed balance sheet expansion? Very little of the credit created on the balance sheet has actually entered the market.
- 6stringmerc 11y ago
  Well I think there's some pretty clear correlation that numerous large companies have been using cheap credit in the bond market to buy back shares at a rapid pace (billions) and further inflate the status of the equities market. That's the cheap credit that isn't doing anything other than fleecing the non-investor class. It's simply financial engineering dependent on access to cheap credit, from what I understand.
  - tertius 11y ago
    Yes, buy backs has been a large contributor to indices heading upwards. A lot of these companies issue their own bonds at rates lower than even their dividends. In the public bond market, how is lending fleecing the "non-investor class"?
    - 6stringmerc 11y ago
      How? Because the Federal Reserve enables the cheap credit pegged to a near-zero interest rate to institutions on Wall Street, who turn around and loan to large organizations through channels by which the Wall Street firms will receive compensation by way of financial transactions. If you add up all the pocketing that goes along before a single retail investor has a shot at a position, then you'll understand what I meant by the 'fleecing' comment. Well, that and go back to the first point that the Federal Reserve's ridiculously low interest rate for the past half-dozen years punishes Savers, who are not investors in the market directly (that's why they're called savers), and that's a very large population being taken advantage of by a sophisticated system.
      - tertius 11y ago
        No, savers are investors. And I agree that a low to zero interest rate is bad for savers. Again, much of the money printed is just sitting on the balance sheets and haven't made it's way into the market. You're saying that lenders who borrow from the Fed then lend to large organizations who do buybacks. Why does this hurt non-investors?
cynicalkane 11y ago
The real-nominal confusion again. Zero interest rates wouldn't indicate a stalled economy if deflation was at 4%. They would be a terrible thing if inflation was high. Neither is true right now, though.

msandford 11y ago

> The equilibrium interest rate is somewhere close to zero Really? Who are all these people who -- with their own money -- are willing to lend $100mm today for $100.05mm in a decade? If there are people willing to lend OTHER PEOPLE's money for near-zero rates, that doesn't count. Because ostensibly all money has to be someone's money. And if it's not -- like say if it's the Fed's money -- then that's clearly some kind of forcing function that can totally disturb the natural equilibrium. The only way that interest rates accurately reflect people's true time preference for money (which is what it's supposed to be, really) is if all money loaned is money owned by a real human being, somehow, somewhere, who has actual influence over what is being done with it. If there's money in the system that doesn't fit that criteria, you're screwing with the interest rate in a non-natural way and suggesting that this artifice is reflective of the aggregate time-preference for money is totally bonkers.

jbooth 11y ago
People ARE buying federal bonds at that rate, right? You can find a figure for the sales, look at the yield curve, and quantify exactly how many people are acting that way with their own money (or how much money, at least). Looking at http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield http://www.treasury.gov/resource-center/data-chart-center/in..., the yield for 10 years is actually more like 2%. Less than a year is very close to 0, so there are apparently a ton of people out there who will lend you money for 1 year at 0.33% interest.
- lmm 11y ago
  There are a ton of people out there who will lend the fed money at that rate. But the fed is in a rather special position.
  - msandford 11y ago
    They're not loaning it to the Fed, they're borrowing it from the Fed and loaning it to the Treasury. By doing it this way everyone gets to pretend that the Fed isn't the entity buying government debt, and so it's not "monetizing the debt" and therefore -- somehow miraculously -- it isn't outright theft. Ultimately though it's not as though banks are making the decision to loan to the Treasury at very low rates all by themselves. It was coordinated how the money flows would happen and it would do two things: allow the banks to repair their balance sheets through "free money" loans and also help the government out of a bind where there was nobody to buy their debt that they desperately needed in order to fund expansions of social services during the downturn. Personally I think that it's pretty immoral to steal from savers to bail out borrowers, but that's because I'm a saver who's been locked out of the housing market by not having gotten in prior to prices going 2x, 3x, 5x or whatever. Ultimately I think the whole thing is going to end very badly, but of course I have no idea how long it'll take. It might take another 2-3 years, it might take another 20-30. No way to know how long the speculative mania will last.