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> So literally pay investors so they can get richer without risk? No. it's exactly the opposite. When government steps in and offers 0% interest rates, it's

> So literally pay investors so they can get richer without risk? No. it's exactly the opposite. When government steps in and offers 0% interest rates, it's subsidizing the money lending by handing out cash like it's free candy. It's preventing the natural lending that would have occurred if it didn't step in. Hence offering 0% interest uses the power of government to force people into riskier assets.

deogeo 7y ago
How are 0% interest rates 'handing out cash'? I thought bonds worked in the following way: Buy bond at N% interest. When it matures, government pays you original price + N%. So 0% would be bond buyers handing cash to the government, no?
- whatshisface 7y ago
  Fed interbank interest rates aren't the same thing as treasury bond interest rates. Yes, when money is cheap bonds become almost worthless, that can be seen in the market right now. However the cash party isn't for people buying bonds, it's for people with access to the inside track of low-interest money.
  - deogeo 7y ago
    So when talking about 'fed interest rates', what is meant is https://en.wikipedia.org/wiki/Federal_funds_rate https://en.wikipedia.org/wiki/Federal_funds_rate ?
    - whatshisface 7y ago
      Yes, that's the interest rate that impacts the money supply (along with other factors) by greasing bank's balance sheets. Treasury interest rates are set by the market, they are whatever they have to be to get people to buy government debt.
- nostrademons 7y ago
  The Fed operates on a shorter time scale than T-bond maturities. Basically, every night banks are required to make loans to each other to ensure that they meet the reserve requirements on deposits. If they made more loans than they took in deposits, they must borrow on the open market to settle. If they took in more deposits, they can lend. All of these transactions are for extremely short-duration securities (when people talk about repos and money market accounts, they usually mean this). The security itself is simply an agreement to repay $X + interest in the near future, usually the next day. And just like the stock market, there's a market for these: banks with excess deposits offer repos at a variety of interest rates, and banks with excess loans take the best available interest rate, and eventually the market converges on a particular market-clearing rate (the "Fed Funds Rate"). The Fed is a participant in this market. But unlike a normal bank, they aren't subject to reserve requirements. They have an effectively infinite balance sheet consisting of the T-bills etc. that back all the other repo agreements. So when they say that they're setting a Fed Funds Rate of 2.35%, what they really mean is that if banks are fearful that day and want a market-clearing interest rate of 4%, they will sell enough securities in the overnight market that the interest rate goes down to 2.35%. And if banks are greedy and are willing to sell securities at 0%, the Fed will buy enough of them to push the rate back up to 2.35%. This serves to anchor the rate, because if you know that it's going to be in that vicinity, there's no incentive to try and push it higher and lower. It's very much like a stablecoin in the crypto markets. When Facebook pegs the Libra to a basket of currencies or Bitfinex pegs the Tether to $1, they are effectively trying to become a central bank. Decentralized stablecoins like Dai try to distribute that power among a number of ordinary people: the holders of MKR collectively act as a central bank for Dai, with their collateral being ETH rather than T-bills. When you have 0% interest rates, it basically means that banks can borrow as much as they want for free. So it literally is "handing out cash". The actual bonds backing them are held on the Federal Reserve's balance sheet, which is why you might've heard about the Fed's ballooning balance sheet in the last 10 years. The Fed's under no obligation to pay these back, though: its mandate is to keep employment high and inflation low, and so its job is to release just enough of those securities as to soak up inflation. https://www.stlouisfed.org/in-plain-english/a-closer-look-at-open-market-operations https://www.stlouisfed.org/in-plain-english/a-closer-look-at... https://money.howstuffworks.com/fed10.htm https://money.howstuffworks.com/fed10.htm
BenoitEssiambre 7y ago
deogeo is very right and you are very wrong. If government paper has a return of 0% while private market marginal safe and liquid assets returns are in the negative (which can easily happen) 0% is an above market rate and a subsidy to people holding on to government paper instead of investing in the real economy. If you look at long term history, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth. The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources. While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for humans just out of the 20th century. More here: The World Deserves a Pay Raise (https://medium.com/@b.essiambre/the-world-deserves-a-pay-raise-302f25efd82a https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...)

deogeo 7y ago

How are 0% interest rates 'handing out cash'? I thought bonds worked in the following way: Buy bond at N% interest. When it matures, government pays you original price + N%. So 0% would be bond buyers handing cash to the government, no?

whatshisface 7y ago
Fed interbank interest rates aren't the same thing as treasury bond interest rates. Yes, when money is cheap bonds become almost worthless, that can be seen in the market right now. However the cash party isn't for people buying bonds, it's for people with access to the inside track of low-interest money.
- deogeo 7y ago
  So when talking about 'fed interest rates', what is meant is https://en.wikipedia.org/wiki/Federal_funds_rate https://en.wikipedia.org/wiki/Federal_funds_rate ?
  - whatshisface 7y ago
    Yes, that's the interest rate that impacts the money supply (along with other factors) by greasing bank's balance sheets. Treasury interest rates are set by the market, they are whatever they have to be to get people to buy government debt.
nostrademons 7y ago
The Fed operates on a shorter time scale than T-bond maturities. Basically, every night banks are required to make loans to each other to ensure that they meet the reserve requirements on deposits. If they made more loans than they took in deposits, they must borrow on the open market to settle. If they took in more deposits, they can lend. All of these transactions are for extremely short-duration securities (when people talk about repos and money market accounts, they usually mean this). The security itself is simply an agreement to repay $X + interest in the near future, usually the next day. And just like the stock market, there's a market for these: banks with excess deposits offer repos at a variety of interest rates, and banks with excess loans take the best available interest rate, and eventually the market converges on a particular market-clearing rate (the "Fed Funds Rate"). The Fed is a participant in this market. But unlike a normal bank, they aren't subject to reserve requirements. They have an effectively infinite balance sheet consisting of the T-bills etc. that back all the other repo agreements. So when they say that they're setting a Fed Funds Rate of 2.35%, what they really mean is that if banks are fearful that day and want a market-clearing interest rate of 4%, they will sell enough securities in the overnight market that the interest rate goes down to 2.35%. And if banks are greedy and are willing to sell securities at 0%, the Fed will buy enough of them to push the rate back up to 2.35%. This serves to anchor the rate, because if you know that it's going to be in that vicinity, there's no incentive to try and push it higher and lower. It's very much like a stablecoin in the crypto markets. When Facebook pegs the Libra to a basket of currencies or Bitfinex pegs the Tether to $1, they are effectively trying to become a central bank. Decentralized stablecoins like Dai try to distribute that power among a number of ordinary people: the holders of MKR collectively act as a central bank for Dai, with their collateral being ETH rather than T-bills. When you have 0% interest rates, it basically means that banks can borrow as much as they want for free. So it literally is "handing out cash". The actual bonds backing them are held on the Federal Reserve's balance sheet, which is why you might've heard about the Fed's ballooning balance sheet in the last 10 years. The Fed's under no obligation to pay these back, though: its mandate is to keep employment high and inflation low, and so its job is to release just enough of those securities as to soak up inflation. https://www.stlouisfed.org/in-plain-english/a-closer-look-at-open-market-operations https://www.stlouisfed.org/in-plain-english/a-closer-look-at... https://money.howstuffworks.com/fed10.htm https://money.howstuffworks.com/fed10.htm

BenoitEssiambre 7y ago

deogeo is very right and you are very wrong. If government paper has a return of 0% while private market marginal safe and liquid assets returns are in the negative (which can easily happen) 0% is an above market rate and a subsidy to people holding on to government paper instead of investing in the real economy. If you look at long term history, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth. The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources. While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for humans just out of the 20th century. More here: The World Deserves a Pay Raise (https://medium.com/@b.essiambre/the-world-deserves-a-pay-raise-302f25efd82a https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...)