4 ms·

In my grandparent's youth, you could invest in "simple things" but nowadays, with the 12mo T-bill yielding 0.42% and an inflation rate of 2.3%, your cash strate

by wtn 17y ago

In my grandparent's youth, you could invest in "simple things" but nowadays, with the 12mo T-bill yielding 0.42% and an inflation rate of 2.3%, your cash strategy won't get you very far.

wisty 17y ago
I'm confounded. How can interest be below inflation? Don't people want money now? I though there was a premium on saving money, because people were short-sighted and greedy. I though that saving your money let it get put to work, creating productive stuff, and you would get rewarded for your short-term austerity. Funny old world.
- hga 17y ago
  It can happen when it's the least worst place to park your money. E.g. what's your interest rate when you put it under your mattress? In a deflation, which we still seem to be in (or so many think), the trick is to find safe places, because the big way to lose is to have the entity you're investing in go under. This is why blue chip bonds were so popular during and for a long time after the Great Depression. AT&T with its government monopoly wasn't going to go under.... One should also note that a T-bill is funding the Federal government's deficit (hardly putting your money in a place where it will "get put to work, creating productive stuff"); you do that for safety and short term liquidity. You can get higher yield instruments ... with a higher risk (almost by definition). Obviously there's a lot of risk aversion nowadays. (In fact, in general but in particular right now the Federal government has a perverse incentive to make their instruments look like the safest in the world....)
  - wisty 17y ago
    If we have deflation, that makes sense. Banks could even charge you to hang onto your money. But if you have any inflation above interest rates, surely you could just take out a loan, buy durable goods (houses, tinned fish, iron ore), hide them under your mattress, and make a killing.
    - hga 17y ago
      Yeah, but you need liquidity for a variety of things. You can't easily turn those durable goods into payment for unexpected medical expenses and other emergencies, college for your children, etc. Gold has been favored for deflations since it's "the only liquidity that doesn't depend on someone else's liquidity", but FDR got Americans out of that game when he confiscated the nation's gold supply. It wasn't legal to own gold until a little while after Nixon closed the gold window, and the wild gyrations after that due to a variety of factors didn't make gold look like a good place to put your money (in general, commodities haven't been a good bet against inflation in the modern era as we get better and better at extracting/growing/whatever them). Hmmm, my father is the sort of person who can play this game, he's at times acquired various sorts of goods and sold them generally at a profit (I can remember one time 1/4 of our garage being filled with cases of suntan lotion), and he never played that game. Probably because if you have the sorts of skills and network my father has, there are much better games to play, in his case N startups, a few of which paid off big. Also real estate, but that's mostly passive in his case.
    - wtn 17y ago
      In your deflationary scenario, you'd be better off holding the cash, because there are costs for storage. Your cash would appreciate as much as the price of the goods.
      - hga 17y ago
        But holding onto physical cash is not without costs, e.g. you have to provide your own security, it's probably not going to be as good as a bank's, etc.
        wtn 17y ago
        In the investment domain, cash is shorthand for T-bills, money markets accounts, insured bank deposits. I wasn't referring to actual banknotes. If the banking system fails entirely, banknotes will be equally worthless as accounts.

by wtn 17y ago

In my grandparent's youth, you could invest in "simple things" but nowadays, with the 12mo T-bill yielding 0.42% and an inflation rate of 2.3%, your cash strategy won't get you very far.

wisty 17y ago

I'm confounded. How can interest be below inflation? Don't people want money now? I though there was a premium on saving money, because people were short-sighted and greedy. I though that saving your money let it get put to work, creating productive stuff, and you would get rewarded for your short-term austerity. Funny old world.

hga 17y ago
It can happen when it's the least worst place to park your money. E.g. what's your interest rate when you put it under your mattress? In a deflation, which we still seem to be in (or so many think), the trick is to find safe places, because the big way to lose is to have the entity you're investing in go under. This is why blue chip bonds were so popular during and for a long time after the Great Depression. AT&T with its government monopoly wasn't going to go under.... One should also note that a T-bill is funding the Federal government's deficit (hardly putting your money in a place where it will "get put to work, creating productive stuff"); you do that for safety and short term liquidity. You can get higher yield instruments ... with a higher risk (almost by definition). Obviously there's a lot of risk aversion nowadays. (In fact, in general but in particular right now the Federal government has a perverse incentive to make their instruments look like the safest in the world....)
- wisty 17y ago
  If we have deflation, that makes sense. Banks could even charge you to hang onto your money. But if you have any inflation above interest rates, surely you could just take out a loan, buy durable goods (houses, tinned fish, iron ore), hide them under your mattress, and make a killing.
  - hga 17y ago
    Yeah, but you need liquidity for a variety of things. You can't easily turn those durable goods into payment for unexpected medical expenses and other emergencies, college for your children, etc. Gold has been favored for deflations since it's "the only liquidity that doesn't depend on someone else's liquidity", but FDR got Americans out of that game when he confiscated the nation's gold supply. It wasn't legal to own gold until a little while after Nixon closed the gold window, and the wild gyrations after that due to a variety of factors didn't make gold look like a good place to put your money (in general, commodities haven't been a good bet against inflation in the modern era as we get better and better at extracting/growing/whatever them). Hmmm, my father is the sort of person who can play this game, he's at times acquired various sorts of goods and sold them generally at a profit (I can remember one time 1/4 of our garage being filled with cases of suntan lotion), and he never played that game. Probably because if you have the sorts of skills and network my father has, there are much better games to play, in his case N startups, a few of which paid off big. Also real estate, but that's mostly passive in his case.
  - wtn 17y ago
    In your deflationary scenario, you'd be better off holding the cash, because there are costs for storage. Your cash would appreciate as much as the price of the goods.
    - hga 17y ago
      But holding onto physical cash is not without costs, e.g. you have to provide your own security, it's probably not going to be as good as a bank's, etc.
      - wtn 17y ago
        In the investment domain, cash is shorthand for T-bills, money markets accounts, insured bank deposits. I wasn't referring to actual banknotes. If the banking system fails entirely, banknotes will be equally worthless as accounts.