23 ms·

A Black Hole Engulfing the World's Bond Markets

316 points by igravious 7y ago

raintrees 7y ago
I think they are coming to the wrong conclusions. They lost the plot at 7, so 8 is based on bad data. If the Time Value of Money has disappeared, then I suggest it is the money that is not worth the time. We have many historical case studies that show what happens on a broader time scale when a society's money is debauched. Time is the one true scarcity we all face. I am working at using it wisely... What have I got to lose? :)
- benj111 7y ago
  "We have many historical case studies that show what happens on a broader time scale when a society's money is debauched" All those are examples of high inflation, this isn't what we are seeing, and seemingly not what bond buyers are expecting to see.
  - raintrees 7y ago
    Wouldn't that depend on which part of the cycle we are in? I repeatedly read that prognosticators are expecting both deflation and rapid inflation, but they are arguing over the order. And I am referring to large time cycles, the ones that play out over societal reformation periods, so I would not expect the bond market to reflect that scale of timing.
    - raintrees 7y ago
      In this I would expect it to be similar to the precious metals market - The major moves play out suddenly after years of "relative" quiet.
      - benj111 7y ago
        Who are the prognosticators? I've not read and not sure you accurately can predict medium/long term inflation rates. And what part of what cycle? I assumed when you said debauched, you meant quantitive easing and general money printing. If you, say, double the money supply there isn't going to be double the things to buy, so the cost of what there is will rise to compensate (inflation), or so the theory goes. That seems distinct from any kind of economic cycle, although obviously if you start printing money when theres deflationary pressures then that could act to stabilise the currency, but that doesn't sound like debauching the currency, and doesn't necessarily mean you need to keep printing the money when the inflationary pressure returns.
        raintrees 7y ago
        Sorry, I am multi-tasking, and that poorly. I will look up some of the references, the names that seem to be coming to mind (looking over my RSS feeds) are Kuppy from Adventures in Capitalism, Chris Martensen from Peak Prosperity, Simon Black of Sovereign Man, Charles Hugh Smith of Of Two Minds, I think less-doom-prone authors on fee.org and mises.org. It is highly likely a biased list, I seem to have been gravitating towards the overall message of decay/decline, helped along by the citations of urban areas not doing too well in various places throughout the US. I live very rural along the northern coast of California, so more selection-bias there, as well. Yes on my debauchery reference, QE, TARP, increasing debt (temporary removal of the debt ceiling - oh boy), increasing obligations incurring more debt (social programs, retirements and benefits), the general idea of borrowing from our future to live for today that seems to be the current m.o. And now apparently little in the way of an anchor for US currency (or other central bank nations, for that matter) since removal from the Gold standard, and recently the demise of Bretton Woods as other nations seek ways around being forced to use US currency. This leads me to conclude that we are on the down-slope of Charles Hugh Smith's S curve: https://www.oftwominds.com/blogmar19/empires-collapse3-19.html https://www.oftwominds.com/blogmar19/empires-collapse3-19.ht... Have to run, cooking (experimental tomatillos, tomatoes, and Cilantro sauce) as well as doing some remote tech support.
- Dylan16807 7y ago
  > If the Time Value of Money has disappeared, then I suggest it is the money that is not worth the time. What a baffling statement. "If my money can't spontaneously create new money, then why should I try to earn any?" If anything, lowered time-value increases the importance of trading time for cash. And value being too stable is the opposite of being debauched.
  - raintrees 7y ago
    Money is a tool we use to facilitate trade. Price assignation has been distorted by "corrective action." Traditionally, bonds would be purchased as a hedge/guarantee of future value, and not to be charged a loss of that value instead. Anecdotally, I am slowly raising my service prices as my costs rise. To me, this is evidence that my dollar (I'm in the US) is not going as far as it used to. And yet costs in a healthy financial system should normally be driven down, by typical Austrian Economic thinking. As I posted elsewhere, my observations are for a different time scale than bonds are usually measured against. Sorry for the confusion. :) I have been spending too much time thinking macro...
    - benj111 7y ago
      "Anecdotally, I am slowly raising my service prices as my costs rise. To me, this is evidence that my dollar (I'm in the US) is not going as far as it used to. And yet costs in a healthy financial system should normally be driven down, by typical Austrian Economic thinking" I don't think that's correct. You're referring to competition and efficiencies, not inflation. "The Austrian school believes any increase in the money supply not supported by an increase in the production of goods and services leads to an increase in prices" https://www.investopedia.com/articles/economics/09/austrian-school-of-economics.asp https://www.investopedia.com/articles/economics/09/austrian-...
nostromo 7y ago
It’s insane to me that you could buy a 10 year treasury around 1980 that paid 17%. That’s more than double the long term stock market return, and it’s (basically) risk free.
- bkohlmann 7y ago
  Inflation was nearly that high, so while the nominal rate was high, in real terms it was more in line with historical returns. Mortgage rates were often in double digits too.
- gruez 7y ago
  But during that time inflation was in the double digits, and peaked at 14.8%. There was a real risk that inflation would go to 20%, which would wipe you out.
  - deleted 7y ago
    [deleted]
  - AnimalMuppet 7y ago
    Worse: You got 17%, but inflation was 14%, and you had to pay taxes on the 17%. So even at 17%, you were still losing money.
- chiph 7y ago
  The 1973 oil crisis (and paying for the Vietnam War, etc) had kicked off a cycle of inflation that didn't really end until after the early 1980's when Paul Volcker (Federal Reserve Chairman) shrunk the money supply and raised interest rates. The prime rate hit 21% in 1982. 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.
  - SilasX 7y ago
    Oh, man, he must have been kissing the ground to have locked in that mortgage rate before the inflation and high rates kicked in!
parsimo2010 7y ago
I didn't read the whole article (out of free articles on bloomberg and I'm not going to jump through hoops to get around the paywall), but it seems like the premise of the article doesn't match the title here. It's not that TVM has disappeared, it's that people's evaluation of market risk has changed. It has always been the case that people are willing to accept a lower return for lower risk, and that will always continue to be true for rational people. Government bonds used to be the second lowest risk option- the absolute lowest risk used to be cash in a mattress (or a safe/bank vault), which returned zero percent (or just slightly below zero if you have to pay for storage). If a bond yield is negative it's not that TVM is suddenly wrong, it's that enough people seem to think that bonds are lower risk than holding cash. Another option is that enough people think that the only alternative to stocks is bonds, and they forgot all about cash, causing bond yields to dip below cash yields. I doubt that enough people are dumb enough to forget about the cash option, so I don't really think this is the case. I personally think it's silly to think a government bond would be lower risk than keeping my money in a safe, but think about the market movers (investment funds). You can't keep a billion dollars at your house, so you probably have to keep it at the bank. A negative bond yield indicates that you think the government is less likely to disappear than a bank, which at least makes some sense.
- igravious 7y ago
  A number of points here. Cash in a safe appreciates or depreciates relative to the current deflationary or inflationary environment. Imagine if you had $5,000 right about when Nixon ended convertibility of US dollars to gold† and announced wage/price controls. Back then that could have bought you a decent piece of land or a good chunk of a house depending on where we're talking about. How far does $5,000 go now? Wouldn't get you in the door of a university for a year. A follow on point is. Who says what that CPI is? Looks like it is near enough the same people who control the money supply. That's an actual problem. The quote that I lifted from the article refers to an actual thing: https://www.investopedia.com/terms/t/timevalueofmoney.asp https://www.investopedia.com/terms/t/timevalueofmoney.asp The whole thinking behind TVM is that you have _positive_ interest rates. If you enter a negative interest rate environment you break TVM, which is about as fundamental a law/rule you can get in monetary theory. “The world now has $13 trillion of negative yielding bonds”: https://www.axios.com/negative-yielding-bonds-europe-japan-4e72a748-a617-4316-87a6-db64f0bd3440.html https://www.axios.com/negative-yielding-bonds-europe-japan-4... So yes, it _is_ that the TVM is disappearing. † an event which is correlated with what is happening now, some would even say it caused it: https://www.federalreservehistory.org/essays/gold_convertibility_ends https://www.federalreservehistory.org/essays/gold_convertibi...
andrewflnr 7y ago
I'm sure this is a hugely ignorant question, so I'm asking honestly... > Some funds track government bond indexes, meaning they must buy the bonds regardless of the yield. Well, that looks like the problem, to me. How about don't do that? Just choose to invest in literally anything else that doesn't have a known negative ROI.
- parsimo2010 7y ago
  No. The investment vehicle should (strive to) attain it's stated goal. If I invest in a fund that tracks bonds, then I expect it to track bonds. I didn't invest in a fund that said it would give me zero percent yield, I invested in a fund that said it would track bonds. If you want a fund that invests in literally anything that doesn't have a known negative ROI then you need a different fund. If funds try to do what they think investors want rather than what they said they'd do, then they can get in serious trouble.
- SilasX 7y ago
  1) The funds themselves are specifically designed for people who want their money in government bonds. If that doesn't make sense for you as an investor now, then yes, you should get out of the fund, but the fund is still chartered to cater to whichever (insane) people still wish to be in government bonds in a negative rate era. 2) It's not necessarily bad to have bought into the fund. To the extent that interest rates go down, that means the value of the bonds, and therefore of your shares in the fund, goes up. So you could at least pocket that (one-time) return and move your money into a 0-yielding savings account.
- usefulcat 7y ago
  Investors are free to not invest in such funds..
- maxerickson 7y ago
  If you agree to sell me a fish, I'm gonna be frustrated when you fulfill the order with a hotdog. The whole point of the funds is that they manage the buying and management of government bonds, that's the service they provide. You can buy bond funds that only partially invest in government bonds.
pcprincipal 7y ago
Related story - my first job out of school was in investment banking. My desk worked on some esoteric securitization products (basically bonds backed by aircraft and shipping container leases) where all issuance had basically disappeared when I started, which was right after the 2008-9 crisis. These products generally were in the A/BBB area, and generally had traded like high yield bonds before the crisis. When I first started, we struggled to find investors and were generally seeing 6-8% yields on some small deals. By the time I left three years later, yields were getting down to the 4% area, issuance sizes had tripled and new paper was routinely 3-4x oversubscribed. I have some friends who still work there and tell me not only have yields kept coming down, but lower quality leases are being thrown into securitization pools. I 100% agree on all the comments here saying the big story is lower rates driving people into riskier investments. When the next crisis hits, people will talk about how negative rates forced people to reach for junk companies and questionable securitization paper.
- nostromo 7y ago
  Yes, but... isn’t this basically a bunch or rich folks saying “I was forced to take risks with my money because treasury bonds barely pay anything!” 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.
  - SilasX 7y ago
    But the nominal yield (to maturity) has to be higher than inflation to keep up because of taxes.
  - ArturSoler 7y ago
    Because the return on a bond is not just based on the expected risk, but also on the time value of money (generally we prefer consumption now rather than in the future).
    - lotsofpulp 7y ago
      The time value of money is the expected risk of inflation. For example, if a lender lends someone $100, then the interest rate is a combination of the risk of not being paid back, and the return that could have been had if the same $100 were invested elsewhere (with the same risk profile of the original investment).
roenxi 7y ago
The interesting part of this story will be looking back on it in ten years. We are either looking at a situation that is surprising but healthy, or a situation that is verging on being a crisis a very long time coming. So far so good, but I don't like it.
- HNisCurated 7y ago
  There are lots of smart people worried about a sub 0 percent interest rate, or worry about stagnation. Not to mention my peers in every Industry talking about slowdowns or unprofitable years due to tariffs. 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.
- refurb 7y ago
  The biggest risk with TARP was inflation. You throw that much money into the economy and normally inflation goes up. Some assets have gone up, but generally inflation is low. 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.
  - amiga_500 7y ago
    > Some assets have gone up, 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.
turbinerneiter 7y ago
Which of these are true: * companies are seeing record profits * profits are paid out to shareholders * or used to buy back shares * but not reinvested * ROI on capital is high * ROI on work is low * governments are not investing * nations have high depts Apple and the likes are stashing enough cash on island to fund Apollo over and over again. Take Musk away, who is investing in expensive, risky stuff with actual potential to change things? I firmly believe that the tax evasion schemes we are suffering from today are making capitalism less innovative. Usually, you would have to invest your profits in growth or the tax man would take it away (and spend it). Now you can just park it on an island and use it as security to lend money against, which you can use to buy back shares.
- cannonedhamster 7y ago
  Yup. This is happening because rich people broke capitalism when they gamed the system and destroyed oversight by buying governments. When less than 1% of the planet controls 80% of the financial resources there's not much left to move. We're essentially in a neo-fuedal state in the US. Essentially you can point the blame at Reagan for destroying collective bargaining and SCOTUS for continually rolling in favor of corporations since Robert Bork. The natural correction based on history is the blood of the wealthy and then spreading their resources. Some of the wealthy have realized this and started trying to sound the alarm but it's falling in deaf ears. It's things like Jeff Bezos thinking space is the only way to spend his considerable wealth instead of someone like Bill Gates trying to make massive societal changes and improvements. Leave it to a guy with the money to literally wipe out world hunger to think space ships are the only way he could spend his money.
- adventured 7y ago
  > Take Musk away, who is investing in expensive, risky stuff with actual potential to change things? Your point is mostly valid, however there are others. Gates & Buffett will ultimately pour a collective ~$300 billion into education and health. That includes attempting to wipe out various diseases entirely and eg inventing new ways to deliver vaccines cheaply - just about as important to humanity as most anything else we could be doing. Gates is also putting billions into new high-risk energy technology over time, far more than Musk put into starting SpaceX and Tesla. Jeff Bezos will probably put tens of billions into space over decades, ultimately far exceeding the investment scale of Musk in that arena (whether he'll have results worthy of that investment, is yet to be decided). Paul Allen - his estate now - has and will put considerable resources into researching the brain over time. Beyond that he put hundreds of millions of dollars to work in other high- risk scentific endeavours that may yield large results over time.[1] Eli Broad has poured immense resources into the Broad Institute (a billion dollars inflation adjusted), a partnership between Harvard and MIT that has already made a huge impact by blazing the path re CRISPR. The Broad Institute is one of the premiere scientific institutes on the planet. Larry Page is putting resources into flying vehicles. Not a huge amount of money based on his $55b net worth; non the less an interesting technology pursuit that could make a dent in our transportation systems. Sergey Brin - on a personal mission - is attempting to combat Parkinson's, which afflicts 10 million people around the world. If his funding makes a difference in curing Parkinson's, it'll be a big deal and it's certainly a high-risk pursuit. Sean Parker has been funding some of the first attempts at getting into trials with CRISPR. The definition of high-risk with the potential to change everything, not to mention very expensive. MacKenzie Bezos, in her declaration in relation to the Giving Pledge, has said she'll give until the $40 billion is gone. Who knows what good she may accomplish, probably in areas of education, health, equality. She seems to be a very smart woman, so I would suspect she'll do something meaningful. That type of investing is typically high-risk and with the potential to change things. Gordon Moore has spent his retirement figuring out ways to give away his (formerly) $20 billion fortune.[2] Including pushing $1.4 billion into science grants and $1.5 billion into environmental conservation efforts (I consider that arena to be high-impact, even if it's not as sexy as a starship). He has put $200 million into the Thirty Meter Telescope. [1] https://www.philanthropy.com/article/Paul-Allen-s-2-Billion-in/244805 https://www.philanthropy.com/article/Paul-Allen-s-2-Billion-... [2] https://www.moore.org/programs https://www.moore.org/programs
drchewbacca 7y ago
Hypothesis: 1. Advances in fundamental science are what ultimately dictate the growth rate of an economy. For example when you discover quantum mechanics you can make lasers, circuit boards and therefore computers which boosts everything enormously. 2. The more science you have done the harder it is to do more. You can only discover a truth once. For example discovering new elements is extremely hard now compared to when Hennig Brand discovered phospherous in his urine. Consequences: 1. When a society gets the scientific method right it goes through an S shape curve (logistic curve), where science accelerates for a while and then plateuas out. 2. When you hit the plateau of the curve the maximum growth rate of the economy becomes very limited, it's just not possible to have new ideas which are worth developing very fast. 3. Human labour still provides a surplus so what you get is more and more resources piling up with nowhere to invest them. Look at Apple's $245bn cash pile, if they had new ideas they would put that money to use. This will cause bond yields to fall to almost nothing and loads of money to be pumped into any startup with a vague hope of accomplishing something. If we are in this situation it would also mean that the 08 crisis is not needed to explain the slowing growth in the world, things are slowing because we don't have many new ideas. Common objections: 1. But what about X invention that happened in the last few years? Invention still happens on the plateau, just slower, NN's, crispr, exoplanets, smartphones are cool, they're not relativity, quantum mechanics, electrification, aeroplanes etc. 2. Scientific progress is exponential! : Accurately fitting a curve to a logistic curve gives you an exponential up until it shifts on you and starts slowing. 3. China and India are still growing strong. : Essentially they are still deploying the previous discoveries. China's growth is slowing over time precisely as it has less and less discoveries to deploy. More to read: DOE finds it can't get supercomputers like it used to. https://www.nextplatform.com/2019/05/06/doe-on-collision-course-with-end-of-moores-law/ https://www.nextplatform.com/2019/05/06/doe-on-collision-cou... https://www.theatlantic.com/science/archive/2018/11/diminishing-returns-science/575665/ https://www.theatlantic.com/science/archive/2018/11/diminish... https://slatestarcodex.com/2018/11/26/is-science-slowing-down-2/ https://slatestarcodex.com/2018/11/26/is-science-slowing-dow...
- HNisCurated 7y ago
  My one criticism is that 30 years ago how difficult was it to program? Half million humans knew this at Best. Between accessibility to technology and resources to learn it, imagine the scale of new minds. The only reason we'd see stagnation is if the human mind couldn't comprehend what is needed to build a system. Like CERN
viburnum 7y ago
Kind of weird that people expected to get paid simply for having money in the first place.
- lyttlerock 7y ago
  I think philosophically this has merit (see Riba[0]). Economically, I feel like it makes perfect sense to get paid for providing a service (i.e. loaning money). [0] https://en.wikipedia.org/wiki/Riba https://en.wikipedia.org/wiki/Riba
- simplicio 7y ago
  Makes more sense if you think about it as being paid to forgo consumption. Your being paid not for having money, but for not using it right away and letting someone else use it instead. Of course, if no one else has anything better to do with it, the value of this "service" drops to zero, as seems to be happening now.
- deleted 7y ago
  [deleted]
- deleted 7y ago
  [deleted]
- dymk 7y ago
  You're getting paid by the bank because you're effectively loaning the bank money
- atemerev 7y ago
  Not “having”, but lending it for some time to other people.
  - rhizome 7y ago
    So a passbook savings account.
- deleted 7y ago
  [deleted]
whatshisface 7y ago
>Banks see their margins squeezed. They’re earning next to nothing from lending but still need to offer depositors a rate above zero to keep their business. I disagree. If every bank offers negative interest then savers will have no choice: and if that's what the market says has to happen, it will happen. Negative interest has happened before in history.
- Uehreka 7y ago
  What if consumers decide at that point to withdraw their money and keep it in a safe at home?
  - gruez 7y ago
    https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-negative-interest-rates-work/ https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-nega... tl;dr: by unlinking the value of cash vs electronic money, and manipulating the exchange rate.
skybrian 7y ago
Seems like it comes down to some investors preferring safety so much that they will pay for the privilege? 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.
- UncleEntity 7y ago
  > But, the market seems to be saying that there are too few good investment opportunities. Maybe consumption should be higher? 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.
  - skybrian 7y ago
    Central banks control the supply of some very safe investments and usually that determines the price. But, someone still needs to own government debt and that depends on demand. 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.
- roenxi 7y ago
  Possible but highly unlikely; they could literally keep money in a sack under their bed and get better returns. Not much difference between a sack under the bed and a bank account if you don't tell anyone about the sack. 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.
  - your-nanny 7y ago
seibelj 7y ago
With negative interest rates, it truly will make financial sense to put all of your money under the mattress, so to speak. 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.
- jnordwick 7y ago
  Interest rates are always positive. You are referring to yields which are part interest rate and part trading issues. Yields can and do go negtaive from time to time from the trading issues around the products. The interest rate (as shown on the coupon payment on the bond) will always be positive. 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.
  - beefield 7y ago
    There are mortgages in Europe which are indexed to Euribors, which have been negative for a while, and you have been able to end up having a mortgage where index + margin is below zero. Obviously banks argue that actually mathematics is wrong and negative numbers do not exist, so customer needs to pay more than what was originally agreed, and I am not sure if that issue has been sorted out in courts. 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)
    - jnordwick 7y ago
      Euribor rates are just short end bank-to-bank reference pts. The interbank markets are mostly technically driven on the short end. Central bank policies (eg reserve requirements) play the largest role. 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.
jotto 7y ago
Can someone explain the basics? Why buy a bond if it loses money? Why not hold cash?
- technobum 7y ago
  Imagine Venezuela before the hyperinflation.
  - your-nanny 7y ago
    why
- dawhizkid 7y ago
  Bank accounts are only FDIC insured (or equivalent) up to some limit. If you have hundreds of millions and would otherwise stuff that in a bank account buying bonds are a safe alternative to get around that limit.
  - why_only_15 7y ago
    That doesn't really make sense, because if you have hundreds of millions of dollars you can just hold the money yourself.
    - Dylan16807 7y ago
      Vaults cost money. Insurance costs money. And it's still not quite as safe. The ability to hold the money yourself acts as a soft cap on how negative rates can be, but that cap is not at 0%.
    - deleted 7y ago
      [deleted]
  - BurningFrog 7y ago
    OK, but is that really who is buying all these bonds?
EGreg 7y ago
Does that mean more capital will enter non perishable commodities (like gold) and cryptocurrency?
dehrmann 7y ago
In other news, the S&P 500 and Nasdaq closed at record highs on Friday. The obvious explanation for both is there's a lot of money looking for somewhere to park, driving asset prices up and bond yields down. There's either something not captured in inflation numbers, or most of the stimulus money just got invested and not spent.
- amiga_500 7y ago
  There are two sides to every trade. When I buy into S&P, along with others, forcing the price up, someone else is selling and gets my money. What do they do with it? I can't know. It's not going into a bank account called "S&P", where it's parked, it's a transitory snapshot of a transaction.
- keeganpoppen 7y ago
  yes. I still find myself looking around from time to time wondering how it's all gonna end... feels like something should pop eventually, but what? or why?
- dgudkov 7y ago
  >There's either something not captured in inflation numbers My pet theory is that real inflation is higher than the official one, and is around 4-5%. The cause of the inflation is a gradual loss of quality basically everywhere except high-tech. When the official inflation rate is calculated the basic assumption is that each item (which price is compared YoY) is exactly the same as it was last year. In another words, it assumes that its quality remains constant. However, it's not always true (I believe it rarely is). Sometimes quality goes up (e.g. due to the Moore's Law in high tech). Sometimes quality goes down (e.g. due to cheaper food ingredients). When quality goes down but price stays the same, the official inflation would be 0%, but the real inflation would be greater than 0%. I'm not aware if there is any way to account the change of quality in the inflation calculations. I suspect it's just not possible and therefore any published price-based inflation rates are bogus.
MrRadar 7y ago
This story somewhat reminds me of The Giant Pool of Money[1], a landmark This American Life story on the origins of the 2008 financial crisis (remarkably) reported in the early-middle stages of the crisis (May 2008). One of the things it points to as fueling the sub-prime mortgage crisis was an impossible-to-meet demand for mortgages to be bundled in to CDOs which lead to mortgage lenders lowering their standards to increase supply to try to meet the demand. Why was the demand so high? During the early-to-mid 2000s the global money supply had basically doubled (the titular Giant Pool of Money) and that new cash needed somewhere "safe" to be parked and CDOs were the highest-yielding "safe" investments. 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. [1] https://www.thisamericanlife.org/355/the-giant-pool-of-money https://www.thisamericanlife.org/355/the-giant-pool-of-money
- dnadler 7y ago
  Government rates are set by the market at auction. The government does not set the rate of their own bonds, they just offer to sell a certain amount, and the auction determines the rate. 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.
  - MrRadar 7y ago
    Thanks for the correction, fixed.
diminoten 7y ago
So can someone explain to me how these high-yield savings accounts are playing into this? I read somewhere that these savings accounts are basically loss leaders and don't actually matter much cost wise to the banks offering them, but if I can park my cash in a 2.4% APR savings account, why would I ever buy a 6 month treasure note that's at ~2%?
- lh7777 7y ago
  I don't if/how the banks make money with high-yield accounts, but you might be better off with treasury bills if: 1. You're in a high income tax state -- interest is taxed as income but t-bill yields are exempt from state taxes. 2. You have more than the $250k FDIC limit (although that limit is per bank, so you can safely exceed it by opening accounts with multiple institutions). 3. You expect interest rates will decrease in the future and want to lock in your rate for a certain amount of time (of course, a high-yield CD would do the same thing, potentially at a better rate).
aj7 7y ago
In other words, billionaires/oligarchs have sequestered so much cash that it has outrun investment opportunities. What does that tell you about the theory that tax reduction spurs investment?
- Inthenameofmine 7y ago
  It's more like a heart attack. There's plenty of blood, but the circulation to the heart itself (the people, ie demand side) has stopped. The doctor is pumping ever more blood into the patient without fixing the clogging to the heart itself. 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.
  - killjoywashere 7y ago
    Wait, for those of us who aren't borrowing, how the hell is inflation not a net penalty?
    - mrrrgn 7y ago
      I guess it's not a penalty if you are able to invest the money you get from the helicopter drop in assets, or a sweet gaming rig, while other people are just paying down debt?
      - killjoywashere 7y ago
        On the theory that everyone gets cash, and for those with debt, the cash goes to the debt first, sure. But If I'm reading the proposal correctly, the argument is to just drop money into the debts. Suckers who lived responsible lives up front are left in the dust. This seems ... not healthy for society in the long term.
- anonymous5133 7y ago
  The overall statement is a fallacy, correlation does not imply causation. There are plenty of good investment opportunities out there, the truth is that you need to find them yourself. The next big companies in the world are purely in their "unfunded idea" stage. 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.
nshepperd 7y ago
> More than a decade on from the credit crisis, inflation is still scarce, with wages increasing only modestly despite large drops in unemployment. The ECB, for example, isn’t expected to get to its close-to-2% inflation target over the next decade, according to a market-derived measure. 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-tight-purse-strings-are-a-worry-when-borrowing-is-free 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?
- e40 7y ago
  > Why does it seem like nobody (with the relevant authority) is willing to do anything but stand around in paralysis worrying? 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.
- efficax 7y ago
  > 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. 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.
  - nshepperd 7y ago
    Yeah, except that the Fed has decided to undo all of that by selling off the assets it bought, effectively burning the money it spent so much effort printing. https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
tedsanders 7y ago
Contention: The cultural assumption that saving ought to be rewarded is misguided. 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.
- nautilus12 7y ago
  Could this actually just be a biproduct of large generations that don't prioritize investment yet?
  - buboard 7y ago
    Implying that they will in the future?
  - nickjj 7y ago
    I don't pay too much attention to this type of thing but I think it might be related to wages not going up but the cost of living skyrocketing. 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.
    - 7y ago
chiefalchemist 7y ago
> "That means investors effectively pay the German government 0.2% for the privilege of buying its benchmark bonds;" Is this statement accurate? I mean, if this is a traded bond then the German gov is out of the picture, sans the pay out at the end. The beneficiary (?) of this under water situation is the seller, not the gov who floated the bond.
tamaharbor 7y ago
When I see a headline like this, I know it is time to sell bonds.
chiefalchemist 7y ago
Gain via interest is a function of inflation. That is 4% interest in the context of 5% inflation is a 1% loss. Long to short, in the context of deflation (and associated financial uncertainty) these bonds would be good to have. With the bond curve currently inverted and to many a recession eminent, if the "smart money" is holding these bonds then please sign me up.
- kurthr 7y ago
  Exactly, just because rates/inflation are low doesn't mean you can't have a bubble burst and a recession. It is just that the policy response is more difficult, because there is no room to maneuver on bond rates... nominally the only response is more (unbacked) currency issuance... which will cause inflation even without growth or requiring new loans.
  - deleted 7y ago
    [deleted]
deleted 7y ago
[deleted]
igravious 7y ago
I want to give a shout out to Max Keiser and Stacy Herbert over at “The Keiser Report” on RT at https://www.youtube.com/watch?v=u3ojPk8CQns https://www.youtube.com/watch?v=u3ojPk8CQns for pointing me towards this eye-opening Bloomberg article. Even though the Bloomberg article is titled “The Black Hole Engulfing the World's Bond Markets” I decided to editorially change the headline to the more meaningful and less metaphoric “The time value of money has essentially disappeared”. I know this is usually against the spirit of HN but I hope you understand why I did it. This is what's in the episode. “In this episode of the Keiser Report, Max and Stacy discuss the mainstream financial press turning to the metaphors and analogies the Keiser Report started using a decade ago about the obvious blackhole of debt that would put central bankers into a quicksand of negative rate policy trap. A full 25% of global sovereign debt is now negative yielding with a whopping 85% of German debt negative. This means that the time value of money has disappeared, hence a fundamental law of monetary physics has been broken. So, what is next? They look at the historical break from gold which had provided an anchor to time value, and how that hurtled us over the debt event horizon and into a negative yielding world. They also look at a recent exchange between a CNBC host and the treasury secretary on bitcoin and the dollar.”
bsaul 7y ago
Since we're on HN : does this mean good news for start up creators ? Is this the best time to actually raise a lot of investor money ?
a-dub 7y ago
So this still continues because it's seen as short run volatility where the cost of rebalancing and trading out is higher than the expected loss? Or is it seen as a stability measure that protects investments in other asset classes? Or are a lot of investors/managers just asleep at the switch (organizational lagress, internal politics, laziness). Or is it simply market inefficiency? It is difficult to wrap my head around why price discovery is totally failing here...
1e-9 7y ago
I think many people don't understand how negative rates are possible because they are used to having FDIC insurance for their bank account. The issue is that an entity with billions of dollars to protect (such as a pension fund) cannot rely on the FDIC because of the $250K insurance limit. There are not enough banks in the US to spread billions of dollars across, $250K at a time, even if an entity was willing to manage 10's of thousands of bank accounts. A government bond is generally the safest alternative. When demand for the safest level of protection is high, an entity might be willing to pay for the protection because market conditions make them unwilling to accept greater risk. Personally, I believe this is the main reason for very low rates right now. The big fixed income entities expect an economic downturn. It's just a question of how many months away it is.
- ncallaway 7y ago
  This really helps me understand the institutional desire to purchase bonds even at a negative rate (especially when combined with legal requirements around holding safe asset classes). It seems relatively obvious in hindsight, but I was still having a little trouble getting my head around it until I read this. Thanks!

316 points by igravious 7y ago

I think they are coming to the wrong conclusions. They lost the plot at 7, so 8 is based on bad data. If the Time Value of Money has disappeared, then I suggest it is the money that is not worth the time. We have many historical case studies that show what happens on a broader time scale when a society's money is debauched. Time is the one true scarcity we all face. I am working at using it wisely... What have I got to lose? :)

benj111 7y ago
"We have many historical case studies that show what happens on a broader time scale when a society's money is debauched" All those are examples of high inflation, this isn't what we are seeing, and seemingly not what bond buyers are expecting to see.
- raintrees 7y ago
  Wouldn't that depend on which part of the cycle we are in? I repeatedly read that prognosticators are expecting both deflation and rapid inflation, but they are arguing over the order. And I am referring to large time cycles, the ones that play out over societal reformation periods, so I would not expect the bond market to reflect that scale of timing.
  - raintrees 7y ago
    In this I would expect it to be similar to the precious metals market - The major moves play out suddenly after years of "relative" quiet.
    - benj111 7y ago
      Who are the prognosticators? I've not read and not sure you accurately can predict medium/long term inflation rates. And what part of what cycle? I assumed when you said debauched, you meant quantitive easing and general money printing. If you, say, double the money supply there isn't going to be double the things to buy, so the cost of what there is will rise to compensate (inflation), or so the theory goes. That seems distinct from any kind of economic cycle, although obviously if you start printing money when theres deflationary pressures then that could act to stabilise the currency, but that doesn't sound like debauching the currency, and doesn't necessarily mean you need to keep printing the money when the inflationary pressure returns.
      - raintrees 7y ago
        Sorry, I am multi-tasking, and that poorly. I will look up some of the references, the names that seem to be coming to mind (looking over my RSS feeds) are Kuppy from Adventures in Capitalism, Chris Martensen from Peak Prosperity, Simon Black of Sovereign Man, Charles Hugh Smith of Of Two Minds, I think less-doom-prone authors on fee.org and mises.org. It is highly likely a biased list, I seem to have been gravitating towards the overall message of decay/decline, helped along by the citations of urban areas not doing too well in various places throughout the US. I live very rural along the northern coast of California, so more selection-bias there, as well. Yes on my debauchery reference, QE, TARP, increasing debt (temporary removal of the debt ceiling - oh boy), increasing obligations incurring more debt (social programs, retirements and benefits), the general idea of borrowing from our future to live for today that seems to be the current m.o. And now apparently little in the way of an anchor for US currency (or other central bank nations, for that matter) since removal from the Gold standard, and recently the demise of Bretton Woods as other nations seek ways around being forced to use US currency. This leads me to conclude that we are on the down-slope of Charles Hugh Smith's S curve: https://www.oftwominds.com/blogmar19/empires-collapse3-19.html https://www.oftwominds.com/blogmar19/empires-collapse3-19.ht... Have to run, cooking (experimental tomatillos, tomatoes, and Cilantro sauce) as well as doing some remote tech support.
Dylan16807 7y ago
> If the Time Value of Money has disappeared, then I suggest it is the money that is not worth the time. What a baffling statement. "If my money can't spontaneously create new money, then why should I try to earn any?" If anything, lowered time-value increases the importance of trading time for cash. And value being too stable is the opposite of being debauched.
- raintrees 7y ago
  Money is a tool we use to facilitate trade. Price assignation has been distorted by "corrective action." Traditionally, bonds would be purchased as a hedge/guarantee of future value, and not to be charged a loss of that value instead. Anecdotally, I am slowly raising my service prices as my costs rise. To me, this is evidence that my dollar (I'm in the US) is not going as far as it used to. And yet costs in a healthy financial system should normally be driven down, by typical Austrian Economic thinking. As I posted elsewhere, my observations are for a different time scale than bonds are usually measured against. Sorry for the confusion. :) I have been spending too much time thinking macro...
  - benj111 7y ago
    "Anecdotally, I am slowly raising my service prices as my costs rise. To me, this is evidence that my dollar (I'm in the US) is not going as far as it used to. And yet costs in a healthy financial system should normally be driven down, by typical Austrian Economic thinking" I don't think that's correct. You're referring to competition and efficiencies, not inflation. "The Austrian school believes any increase in the money supply not supported by an increase in the production of goods and services leads to an increase in prices" https://www.investopedia.com/articles/economics/09/austrian-school-of-economics.asp https://www.investopedia.com/articles/economics/09/austrian-...

nostromo 7y ago

It’s insane to me that you could buy a 10 year treasury around 1980 that paid 17%. That’s more than double the long term stock market return, and it’s (basically) risk free.

bkohlmann 7y ago
Inflation was nearly that high, so while the nominal rate was high, in real terms it was more in line with historical returns. Mortgage rates were often in double digits too.
gruez 7y ago
But during that time inflation was in the double digits, and peaked at 14.8%. There was a real risk that inflation would go to 20%, which would wipe you out.
- deleted 7y ago
  [deleted]
- AnimalMuppet 7y ago
  Worse: You got 17%, but inflation was 14%, and you had to pay taxes on the 17%. So even at 17%, you were still losing money.
chiph 7y ago
The 1973 oil crisis (and paying for the Vietnam War, etc) had kicked off a cycle of inflation that didn't really end until after the early 1980's when Paul Volcker (Federal Reserve Chairman) shrunk the money supply and raised interest rates. The prime rate hit 21% in 1982. 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.
- SilasX 7y ago
  Oh, man, he must have been kissing the ground to have locked in that mortgage rate before the inflation and high rates kicked in!

parsimo2010 7y ago

I didn't read the whole article (out of free articles on bloomberg and I'm not going to jump through hoops to get around the paywall), but it seems like the premise of the article doesn't match the title here. It's not that TVM has disappeared, it's that people's evaluation of market risk has changed. It has always been the case that people are willing to accept a lower return for lower risk, and that will always continue to be true for rational people. Government bonds used to be the second lowest risk option- the absolute lowest risk used to be cash in a mattress (or a safe/bank vault), which returned zero percent (or just slightly below zero if you have to pay for storage). If a bond yield is negative it's not that TVM is suddenly wrong, it's that enough people seem to think that bonds are lower risk than holding cash. Another option is that enough people think that the only alternative to stocks is bonds, and they forgot all about cash, causing bond yields to dip below cash yields. I doubt that enough people are dumb enough to forget about the cash option, so I don't really think this is the case. I personally think it's silly to think a government bond would be lower risk than keeping my money in a safe, but think about the market movers (investment funds). You can't keep a billion dollars at your house, so you probably have to keep it at the bank. A negative bond yield indicates that you think the government is less likely to disappear than a bank, which at least makes some sense.

igravious 7y ago
A number of points here. Cash in a safe appreciates or depreciates relative to the current deflationary or inflationary environment. Imagine if you had $5,000 right about when Nixon ended convertibility of US dollars to gold† and announced wage/price controls. Back then that could have bought you a decent piece of land or a good chunk of a house depending on where we're talking about. How far does $5,000 go now? Wouldn't get you in the door of a university for a year. A follow on point is. Who says what that CPI is? Looks like it is near enough the same people who control the money supply. That's an actual problem. The quote that I lifted from the article refers to an actual thing: https://www.investopedia.com/terms/t/timevalueofmoney.asp https://www.investopedia.com/terms/t/timevalueofmoney.asp The whole thinking behind TVM is that you have _positive_ interest rates. If you enter a negative interest rate environment you break TVM, which is about as fundamental a law/rule you can get in monetary theory. “The world now has $13 trillion of negative yielding bonds”: https://www.axios.com/negative-yielding-bonds-europe-japan-4e72a748-a617-4316-87a6-db64f0bd3440.html https://www.axios.com/negative-yielding-bonds-europe-japan-4... So yes, it _is_ that the TVM is disappearing. † an event which is correlated with what is happening now, some would even say it caused it: https://www.federalreservehistory.org/essays/gold_convertibility_ends https://www.federalreservehistory.org/essays/gold_convertibi...

andrewflnr 7y ago

I'm sure this is a hugely ignorant question, so I'm asking honestly... > Some funds track government bond indexes, meaning they must buy the bonds regardless of the yield. Well, that looks like the problem, to me. How about don't do that? Just choose to invest in literally anything else that doesn't have a known negative ROI.

parsimo2010 7y ago
No. The investment vehicle should (strive to) attain it's stated goal. If I invest in a fund that tracks bonds, then I expect it to track bonds. I didn't invest in a fund that said it would give me zero percent yield, I invested in a fund that said it would track bonds. If you want a fund that invests in literally anything that doesn't have a known negative ROI then you need a different fund. If funds try to do what they think investors want rather than what they said they'd do, then they can get in serious trouble.
SilasX 7y ago
1) The funds themselves are specifically designed for people who want their money in government bonds. If that doesn't make sense for you as an investor now, then yes, you should get out of the fund, but the fund is still chartered to cater to whichever (insane) people still wish to be in government bonds in a negative rate era. 2) It's not necessarily bad to have bought into the fund. To the extent that interest rates go down, that means the value of the bonds, and therefore of your shares in the fund, goes up. So you could at least pocket that (one-time) return and move your money into a 0-yielding savings account.
usefulcat 7y ago
Investors are free to not invest in such funds..
maxerickson 7y ago
If you agree to sell me a fish, I'm gonna be frustrated when you fulfill the order with a hotdog. The whole point of the funds is that they manage the buying and management of government bonds, that's the service they provide. You can buy bond funds that only partially invest in government bonds.

pcprincipal 7y ago

Related story - my first job out of school was in investment banking. My desk worked on some esoteric securitization products (basically bonds backed by aircraft and shipping container leases) where all issuance had basically disappeared when I started, which was right after the 2008-9 crisis. These products generally were in the A/BBB area, and generally had traded like high yield bonds before the crisis. When I first started, we struggled to find investors and were generally seeing 6-8% yields on some small deals. By the time I left three years later, yields were getting down to the 4% area, issuance sizes had tripled and new paper was routinely 3-4x oversubscribed. I have some friends who still work there and tell me not only have yields kept coming down, but lower quality leases are being thrown into securitization pools. I 100% agree on all the comments here saying the big story is lower rates driving people into riskier investments. When the next crisis hits, people will talk about how negative rates forced people to reach for junk companies and questionable securitization paper.

nostromo 7y ago
Yes, but... isn’t this basically a bunch or rich folks saying “I was forced to take risks with my money because treasury bonds barely pay anything!” 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.
- SilasX 7y ago
  But the nominal yield (to maturity) has to be higher than inflation to keep up because of taxes.
- ArturSoler 7y ago
  Because the return on a bond is not just based on the expected risk, but also on the time value of money (generally we prefer consumption now rather than in the future).
  - lotsofpulp 7y ago
    The time value of money is the expected risk of inflation. For example, if a lender lends someone $100, then the interest rate is a combination of the risk of not being paid back, and the return that could have been had if the same $100 were invested elsewhere (with the same risk profile of the original investment).

roenxi 7y ago

The interesting part of this story will be looking back on it in ten years. We are either looking at a situation that is surprising but healthy, or a situation that is verging on being a crisis a very long time coming. So far so good, but I don't like it.

HNisCurated 7y ago
There are lots of smart people worried about a sub 0 percent interest rate, or worry about stagnation. Not to mention my peers in every Industry talking about slowdowns or unprofitable years due to tariffs. 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.
refurb 7y ago
The biggest risk with TARP was inflation. You throw that much money into the economy and normally inflation goes up. Some assets have gone up, but generally inflation is low. 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.
- amiga_500 7y ago
  > Some assets have gone up, 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.

turbinerneiter 7y ago

Which of these are true: * companies are seeing record profits * profits are paid out to shareholders * or used to buy back shares * but not reinvested * ROI on capital is high * ROI on work is low * governments are not investing * nations have high depts Apple and the likes are stashing enough cash on island to fund Apollo over and over again. Take Musk away, who is investing in expensive, risky stuff with actual potential to change things? I firmly believe that the tax evasion schemes we are suffering from today are making capitalism less innovative. Usually, you would have to invest your profits in growth or the tax man would take it away (and spend it). Now you can just park it on an island and use it as security to lend money against, which you can use to buy back shares.

cannonedhamster 7y ago
Yup. This is happening because rich people broke capitalism when they gamed the system and destroyed oversight by buying governments. When less than 1% of the planet controls 80% of the financial resources there's not much left to move. We're essentially in a neo-fuedal state in the US. Essentially you can point the blame at Reagan for destroying collective bargaining and SCOTUS for continually rolling in favor of corporations since Robert Bork. The natural correction based on history is the blood of the wealthy and then spreading their resources. Some of the wealthy have realized this and started trying to sound the alarm but it's falling in deaf ears. It's things like Jeff Bezos thinking space is the only way to spend his considerable wealth instead of someone like Bill Gates trying to make massive societal changes and improvements. Leave it to a guy with the money to literally wipe out world hunger to think space ships are the only way he could spend his money.
adventured 7y ago
> Take Musk away, who is investing in expensive, risky stuff with actual potential to change things? Your point is mostly valid, however there are others. Gates & Buffett will ultimately pour a collective ~$300 billion into education and health. That includes attempting to wipe out various diseases entirely and eg inventing new ways to deliver vaccines cheaply - just about as important to humanity as most anything else we could be doing. Gates is also putting billions into new high-risk energy technology over time, far more than Musk put into starting SpaceX and Tesla. Jeff Bezos will probably put tens of billions into space over decades, ultimately far exceeding the investment scale of Musk in that arena (whether he'll have results worthy of that investment, is yet to be decided). Paul Allen - his estate now - has and will put considerable resources into researching the brain over time. Beyond that he put hundreds of millions of dollars to work in other high- risk scentific endeavours that may yield large results over time.[1] Eli Broad has poured immense resources into the Broad Institute (a billion dollars inflation adjusted), a partnership between Harvard and MIT that has already made a huge impact by blazing the path re CRISPR. The Broad Institute is one of the premiere scientific institutes on the planet. Larry Page is putting resources into flying vehicles. Not a huge amount of money based on his $55b net worth; non the less an interesting technology pursuit that could make a dent in our transportation systems. Sergey Brin - on a personal mission - is attempting to combat Parkinson's, which afflicts 10 million people around the world. If his funding makes a difference in curing Parkinson's, it'll be a big deal and it's certainly a high-risk pursuit. Sean Parker has been funding some of the first attempts at getting into trials with CRISPR. The definition of high-risk with the potential to change everything, not to mention very expensive. MacKenzie Bezos, in her declaration in relation to the Giving Pledge, has said she'll give until the $40 billion is gone. Who knows what good she may accomplish, probably in areas of education, health, equality. She seems to be a very smart woman, so I would suspect she'll do something meaningful. That type of investing is typically high-risk and with the potential to change things. Gordon Moore has spent his retirement figuring out ways to give away his (formerly) $20 billion fortune.[2] Including pushing $1.4 billion into science grants and $1.5 billion into environmental conservation efforts (I consider that arena to be high-impact, even if it's not as sexy as a starship). He has put $200 million into the Thirty Meter Telescope. [1] https://www.philanthropy.com/article/Paul-Allen-s-2-Billion-in/244805 https://www.philanthropy.com/article/Paul-Allen-s-2-Billion-... [2] https://www.moore.org/programs https://www.moore.org/programs

drchewbacca 7y ago

Hypothesis: 1. Advances in fundamental science are what ultimately dictate the growth rate of an economy. For example when you discover quantum mechanics you can make lasers, circuit boards and therefore computers which boosts everything enormously. 2. The more science you have done the harder it is to do more. You can only discover a truth once. For example discovering new elements is extremely hard now compared to when Hennig Brand discovered phospherous in his urine. Consequences: 1. When a society gets the scientific method right it goes through an S shape curve (logistic curve), where science accelerates for a while and then plateuas out. 2. When you hit the plateau of the curve the maximum growth rate of the economy becomes very limited, it's just not possible to have new ideas which are worth developing very fast. 3. Human labour still provides a surplus so what you get is more and more resources piling up with nowhere to invest them. Look at Apple's $245bn cash pile, if they had new ideas they would put that money to use. This will cause bond yields to fall to almost nothing and loads of money to be pumped into any startup with a vague hope of accomplishing something. If we are in this situation it would also mean that the 08 crisis is not needed to explain the slowing growth in the world, things are slowing because we don't have many new ideas. Common objections: 1. But what about X invention that happened in the last few years? Invention still happens on the plateau, just slower, NN's, crispr, exoplanets, smartphones are cool, they're not relativity, quantum mechanics, electrification, aeroplanes etc. 2. Scientific progress is exponential! : Accurately fitting a curve to a logistic curve gives you an exponential up until it shifts on you and starts slowing. 3. China and India are still growing strong. : Essentially they are still deploying the previous discoveries. China's growth is slowing over time precisely as it has less and less discoveries to deploy. More to read: DOE finds it can't get supercomputers like it used to. https://www.nextplatform.com/2019/05/06/doe-on-collision-course-with-end-of-moores-law/ https://www.nextplatform.com/2019/05/06/doe-on-collision-cou... https://www.theatlantic.com/science/archive/2018/11/diminishing-returns-science/575665/ https://www.theatlantic.com/science/archive/2018/11/diminish... https://slatestarcodex.com/2018/11/26/is-science-slowing-down-2/ https://slatestarcodex.com/2018/11/26/is-science-slowing-dow...

HNisCurated 7y ago
My one criticism is that 30 years ago how difficult was it to program? Half million humans knew this at Best. Between accessibility to technology and resources to learn it, imagine the scale of new minds. The only reason we'd see stagnation is if the human mind couldn't comprehend what is needed to build a system. Like CERN

viburnum 7y ago

Kind of weird that people expected to get paid simply for having money in the first place.

lyttlerock 7y ago
I think philosophically this has merit (see Riba[0]). Economically, I feel like it makes perfect sense to get paid for providing a service (i.e. loaning money). [0] https://en.wikipedia.org/wiki/Riba https://en.wikipedia.org/wiki/Riba
simplicio 7y ago
Makes more sense if you think about it as being paid to forgo consumption. Your being paid not for having money, but for not using it right away and letting someone else use it instead. Of course, if no one else has anything better to do with it, the value of this "service" drops to zero, as seems to be happening now.
deleted 7y ago
[deleted]
deleted 7y ago
[deleted]
dymk 7y ago
You're getting paid by the bank because you're effectively loaning the bank money
atemerev 7y ago
Not “having”, but lending it for some time to other people.
- rhizome 7y ago
  So a passbook savings account.
deleted 7y ago
[deleted]

whatshisface 7y ago

>Banks see their margins squeezed. They’re earning next to nothing from lending but still need to offer depositors a rate above zero to keep their business. I disagree. If every bank offers negative interest then savers will have no choice: and if that's what the market says has to happen, it will happen. Negative interest has happened before in history.

Uehreka 7y ago
What if consumers decide at that point to withdraw their money and keep it in a safe at home?
- gruez 7y ago
  https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-negative-interest-rates-work/ https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-nega... tl;dr: by unlinking the value of cash vs electronic money, and manipulating the exchange rate.

skybrian 7y ago

Seems like it comes down to some investors preferring safety so much that they will pay for the privilege? 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.

UncleEntity 7y ago
> But, the market seems to be saying that there are too few good investment opportunities. Maybe consumption should be higher? 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.
- skybrian 7y ago
  Central banks control the supply of some very safe investments and usually that determines the price. But, someone still needs to own government debt and that depends on demand. 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.
roenxi 7y ago
Possible but highly unlikely; they could literally keep money in a sack under their bed and get better returns. Not much difference between a sack under the bed and a bank account if you don't tell anyone about the sack. 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.
- your-nanny 7y ago

seibelj 7y ago

With negative interest rates, it truly will make financial sense to put all of your money under the mattress, so to speak. 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.

jnordwick 7y ago
Interest rates are always positive. You are referring to yields which are part interest rate and part trading issues. Yields can and do go negtaive from time to time from the trading issues around the products. The interest rate (as shown on the coupon payment on the bond) will always be positive. 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.
- beefield 7y ago
  There are mortgages in Europe which are indexed to Euribors, which have been negative for a while, and you have been able to end up having a mortgage where index + margin is below zero. Obviously banks argue that actually mathematics is wrong and negative numbers do not exist, so customer needs to pay more than what was originally agreed, and I am not sure if that issue has been sorted out in courts. 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)
  - jnordwick 7y ago
    Euribor rates are just short end bank-to-bank reference pts. The interbank markets are mostly technically driven on the short end. Central bank policies (eg reserve requirements) play the largest role. 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.

jotto 7y ago

Can someone explain the basics? Why buy a bond if it loses money? Why not hold cash?

technobum 7y ago
Imagine Venezuela before the hyperinflation.
- your-nanny 7y ago
  why
dawhizkid 7y ago
Bank accounts are only FDIC insured (or equivalent) up to some limit. If you have hundreds of millions and would otherwise stuff that in a bank account buying bonds are a safe alternative to get around that limit.
- why_only_15 7y ago
  That doesn't really make sense, because if you have hundreds of millions of dollars you can just hold the money yourself.
  - Dylan16807 7y ago
    Vaults cost money. Insurance costs money. And it's still not quite as safe. The ability to hold the money yourself acts as a soft cap on how negative rates can be, but that cap is not at 0%.
  - deleted 7y ago
    [deleted]
- BurningFrog 7y ago
  OK, but is that really who is buying all these bonds?

EGreg 7y ago

Does that mean more capital will enter non perishable commodities (like gold) and cryptocurrency?

dehrmann 7y ago

In other news, the S&P 500 and Nasdaq closed at record highs on Friday. The obvious explanation for both is there's a lot of money looking for somewhere to park, driving asset prices up and bond yields down. There's either something not captured in inflation numbers, or most of the stimulus money just got invested and not spent.

amiga_500 7y ago
There are two sides to every trade. When I buy into S&P, along with others, forcing the price up, someone else is selling and gets my money. What do they do with it? I can't know. It's not going into a bank account called "S&P", where it's parked, it's a transitory snapshot of a transaction.
keeganpoppen 7y ago
yes. I still find myself looking around from time to time wondering how it's all gonna end... feels like something should pop eventually, but what? or why?
dgudkov 7y ago
>There's either something not captured in inflation numbers My pet theory is that real inflation is higher than the official one, and is around 4-5%. The cause of the inflation is a gradual loss of quality basically everywhere except high-tech. When the official inflation rate is calculated the basic assumption is that each item (which price is compared YoY) is exactly the same as it was last year. In another words, it assumes that its quality remains constant. However, it's not always true (I believe it rarely is). Sometimes quality goes up (e.g. due to the Moore's Law in high tech). Sometimes quality goes down (e.g. due to cheaper food ingredients). When quality goes down but price stays the same, the official inflation would be 0%, but the real inflation would be greater than 0%. I'm not aware if there is any way to account the change of quality in the inflation calculations. I suspect it's just not possible and therefore any published price-based inflation rates are bogus.

MrRadar 7y ago

This story somewhat reminds me of The Giant Pool of Money[1], a landmark This American Life story on the origins of the 2008 financial crisis (remarkably) reported in the early-middle stages of the crisis (May 2008). One of the things it points to as fueling the sub-prime mortgage crisis was an impossible-to-meet demand for mortgages to be bundled in to CDOs which lead to mortgage lenders lowering their standards to increase supply to try to meet the demand. Why was the demand so high? During the early-to-mid 2000s the global money supply had basically doubled (the titular Giant Pool of Money) and that new cash needed somewhere "safe" to be parked and CDOs were the highest-yielding "safe" investments. 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. [1] https://www.thisamericanlife.org/355/the-giant-pool-of-money https://www.thisamericanlife.org/355/the-giant-pool-of-money

dnadler 7y ago
Government rates are set by the market at auction. The government does not set the rate of their own bonds, they just offer to sell a certain amount, and the auction determines the rate. 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.
- MrRadar 7y ago
  Thanks for the correction, fixed.

diminoten 7y ago

So can someone explain to me how these high-yield savings accounts are playing into this? I read somewhere that these savings accounts are basically loss leaders and don't actually matter much cost wise to the banks offering them, but if I can park my cash in a 2.4% APR savings account, why would I ever buy a 6 month treasure note that's at ~2%?

lh7777 7y ago
I don't if/how the banks make money with high-yield accounts, but you might be better off with treasury bills if: 1. You're in a high income tax state -- interest is taxed as income but t-bill yields are exempt from state taxes. 2. You have more than the $250k FDIC limit (although that limit is per bank, so you can safely exceed it by opening accounts with multiple institutions). 3. You expect interest rates will decrease in the future and want to lock in your rate for a certain amount of time (of course, a high-yield CD would do the same thing, potentially at a better rate).

aj7 7y ago

In other words, billionaires/oligarchs have sequestered so much cash that it has outrun investment opportunities. What does that tell you about the theory that tax reduction spurs investment?

Inthenameofmine 7y ago
It's more like a heart attack. There's plenty of blood, but the circulation to the heart itself (the people, ie demand side) has stopped. The doctor is pumping ever more blood into the patient without fixing the clogging to the heart itself. 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.
- killjoywashere 7y ago
  Wait, for those of us who aren't borrowing, how the hell is inflation not a net penalty?
  - mrrrgn 7y ago
    I guess it's not a penalty if you are able to invest the money you get from the helicopter drop in assets, or a sweet gaming rig, while other people are just paying down debt?
    - killjoywashere 7y ago
      On the theory that everyone gets cash, and for those with debt, the cash goes to the debt first, sure. But If I'm reading the proposal correctly, the argument is to just drop money into the debts. Suckers who lived responsible lives up front are left in the dust. This seems ... not healthy for society in the long term.
anonymous5133 7y ago
The overall statement is a fallacy, correlation does not imply causation. There are plenty of good investment opportunities out there, the truth is that you need to find them yourself. The next big companies in the world are purely in their "unfunded idea" stage. 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.

nshepperd 7y ago

> More than a decade on from the credit crisis, inflation is still scarce, with wages increasing only modestly despite large drops in unemployment. The ECB, for example, isn’t expected to get to its close-to-2% inflation target over the next decade, according to a market-derived measure. 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-tight-purse-strings-are-a-worry-when-borrowing-is-free 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?

e40 7y ago
> Why does it seem like nobody (with the relevant authority) is willing to do anything but stand around in paralysis worrying? 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.
efficax 7y ago
> 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. 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.
- nshepperd 7y ago
  Yeah, except that the Fed has decided to undo all of that by selling off the assets it bought, effectively burning the money it spent so much effort printing. https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

tedsanders 7y ago

Contention: The cultural assumption that saving ought to be rewarded is misguided. 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.

nautilus12 7y ago
Could this actually just be a biproduct of large generations that don't prioritize investment yet?
- buboard 7y ago
  Implying that they will in the future?
- nickjj 7y ago
  I don't pay too much attention to this type of thing but I think it might be related to wages not going up but the cost of living skyrocketing. 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.
  - 7y ago

chiefalchemist 7y ago

> "That means investors effectively pay the German government 0.2% for the privilege of buying its benchmark bonds;" Is this statement accurate? I mean, if this is a traded bond then the German gov is out of the picture, sans the pay out at the end. The beneficiary (?) of this under water situation is the seller, not the gov who floated the bond.

tamaharbor 7y ago

When I see a headline like this, I know it is time to sell bonds.

chiefalchemist 7y ago

Gain via interest is a function of inflation. That is 4% interest in the context of 5% inflation is a 1% loss. Long to short, in the context of deflation (and associated financial uncertainty) these bonds would be good to have. With the bond curve currently inverted and to many a recession eminent, if the "smart money" is holding these bonds then please sign me up.

kurthr 7y ago
Exactly, just because rates/inflation are low doesn't mean you can't have a bubble burst and a recession. It is just that the policy response is more difficult, because there is no room to maneuver on bond rates... nominally the only response is more (unbacked) currency issuance... which will cause inflation even without growth or requiring new loans.
- deleted 7y ago
  [deleted]

deleted 7y ago

[deleted]

igravious 7y ago

I want to give a shout out to Max Keiser and Stacy Herbert over at “The Keiser Report” on RT at https://www.youtube.com/watch?v=u3ojPk8CQns https://www.youtube.com/watch?v=u3ojPk8CQns for pointing me towards this eye-opening Bloomberg article. Even though the Bloomberg article is titled “The Black Hole Engulfing the World's Bond Markets” I decided to editorially change the headline to the more meaningful and less metaphoric “The time value of money has essentially disappeared”. I know this is usually against the spirit of HN but I hope you understand why I did it. This is what's in the episode. “In this episode of the Keiser Report, Max and Stacy discuss the mainstream financial press turning to the metaphors and analogies the Keiser Report started using a decade ago about the obvious blackhole of debt that would put central bankers into a quicksand of negative rate policy trap. A full 25% of global sovereign debt is now negative yielding with a whopping 85% of German debt negative. This means that the time value of money has disappeared, hence a fundamental law of monetary physics has been broken. So, what is next? They look at the historical break from gold which had provided an anchor to time value, and how that hurtled us over the debt event horizon and into a negative yielding world. They also look at a recent exchange between a CNBC host and the treasury secretary on bitcoin and the dollar.”

bsaul 7y ago

Since we're on HN : does this mean good news for start up creators ? Is this the best time to actually raise a lot of investor money ?

a-dub 7y ago

So this still continues because it's seen as short run volatility where the cost of rebalancing and trading out is higher than the expected loss? Or is it seen as a stability measure that protects investments in other asset classes? Or are a lot of investors/managers just asleep at the switch (organizational lagress, internal politics, laziness). Or is it simply market inefficiency? It is difficult to wrap my head around why price discovery is totally failing here...

1e-9 7y ago

I think many people don't understand how negative rates are possible because they are used to having FDIC insurance for their bank account. The issue is that an entity with billions of dollars to protect (such as a pension fund) cannot rely on the FDIC because of the $250K insurance limit. There are not enough banks in the US to spread billions of dollars across, $250K at a time, even if an entity was willing to manage 10's of thousands of bank accounts. A government bond is generally the safest alternative. When demand for the safest level of protection is high, an entity might be willing to pay for the protection because market conditions make them unwilling to accept greater risk. Personally, I believe this is the main reason for very low rates right now. The big fixed income entities expect an economic downturn. It's just a question of how many months away it is.

ncallaway 7y ago
This really helps me understand the institutional desire to purchase bonds even at a negative rate (especially when combined with legal requirements around holding safe asset classes). It seems relatively obvious in hindsight, but I was still having a little trouble getting my head around it until I read this. Thanks!