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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 re

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 $100 were invested elsewhere (with the same risk profile of the original investment).
  - yeslibertarian 7y ago
    Wrong. The time value of money is the "time preference of money" i.e. if you have 1000$, you prefer buying a new iPhone with it today than wait for it for 10 years. You get old, you might even die, future is uncertain, and the time is wasted waiting meanwhile.
  - aj7 7y ago
    Exactly, and the world is awash in goods. The only returns are in some real estate markets, where inflation is called appreciation and is underwritten by “greater fools.”
  - aianus 7y ago
    > The time value of money is the expected risk of inflation. I don't think that's the only source of time value of money. For example, I'm fairly certain I can buy a car for the same price a year from now, but I am willing to pay a huge premium to have the car now so I don't have to ride the bus for two hours a day while I save up the cash to pay for it. That is a preference for present consumption over future consumption that has nothing to do with inflation.
    - lotsofpulp 7y ago
      Consumption and investment are the same thing in a generalized model when comparing returns and figuring out how much interest to charge to keep up with inflation.
    - pas 7y ago
      But those two possible uses of money have different profiles. You would have to price in how much it is worth to you to use the car vs the bus, subtract the amortization of the car - and together that's the target rate/yield that you should ask for your money plus risk of default.
gniv 7y ago
Some of the rich folks are pension fund managers. Therein lies the problem.
ekianjo 7y ago
with negative yields you are not even making inflation, you are way below it
klenwell 7y ago
According the Planet Money's Giant Pool of Money, which I've come to realize is a superb postmortem on the 2008 financial crisis, this is exactly what happened: Adam Davidson: All right. Here's one of his speeches that really drove that army of investment managers crazy. Alan Greenspan: The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance. Adam Davidson: You might not believe me, but that little statement, that is central banker's speak for, hey, global pool of money, screw you. Alex Blumberg: Come on, that's not what he said. Adam Davidson: It is. I speak central banker. Believe me, that's what he said. What he is technically saying is he's going to keep the fed funds rate-- that's when you hear, the fed interest rate-- at the absurdly low level of 1%. And that sends a message to every investor in the world, you are not going to make any money at all on US Treasury bonds for a very long time. Go somewhere else. We can't help you. https://www.thisamericanlife.org/355/transcript https://www.thisamericanlife.org/355/transcript To the question: why should you get a return above inflation at all? I guess one way of looking at it is: do you want to treat low-risk returns for conservative investors as a sort of public utility guaranteed by the government? Or do you want to put it in the hands of private industry?
- tomjen3 7y ago
  If the US can sell treasuries at rates not much above inflation, then it is because they are not loaning enough -- is there really no bridges or other infrastructure that could benefit the economy if they are built?
  - undersuit 7y ago
    I would say most of the solidly profitable infrastructure projects, in the US are gone, combined with pretty much all the state legislatures and Congress being taxation adverse. We're running our governments like businesses and you're not going to find any nimble or disruptive startups in the mix.
  - maxander 7y ago
    Check out the price tags on most infrastructure projects these days. As badly needed as they are, the US government currently doesn’t have re ability to execute them for less than the mid-horizon returns, if that.
nonbel 7y ago
What does your "gut response" tell you about rates on 1 month vs 30 year treasuries? Should they have the same yield?
- topspin 7y ago
  This is the market signaling that it no longer perceives any value in the maturity value of these bonds. They aren't being purchased for their maturity value; they're liquid assets, traded like any other in a market awash with ultra wealthy institutional investors between whom these securities flow like any other asset.
  - nonbel 7y ago
    I just want to know what is "supposed" to happen if we assume bond yields are supposed to be equal to inflation like the parent. Obviously no one is buying negative yielding bonds for the yields except pension funds, etc who are required to by law or not paying attention.
    - topspin 7y ago
      Isn't inflation simply another cost? As long as the value of these bonds (their low risk, as opposed to their maturity value) is greater than whatever cost you care to consider (inflation, negative interest, opportunity cost, etc.) they will be valued instruments. There is no "what should happen" or what is "supposed" to happen; those are fictions in the minds of spectators and until you're prepared to anger some powerful people and institutions they will remain fictions.
      - nonbel 7y ago
        Here is what I was responding to: > My gut response is that, yes, if you’re buying risk-free treasuries, why should you get a return above inflation at all? Rewards and risks should be commensurate. The parent has some sort of ad hoc economic theory ("gut response"), and I am asking them to expand on what the theory entails. "Supposed to happen" means it would be predicted by this theory of theirs.
dnadler 7y ago
US Treasuries may be the closest thing to 'risk-free' that there is, but isn't 100% risk-free. If the investor does not hold the bond to maturity, then he/she is open to interest rate risk (the risk that rates have changed, and so has the bond's value). Even if the investor plans to hold the bond to maturity, then the investor is agreeing to lock up that money until maturity. This carries the risk that the investor won't be able to take advantage of an investment opportunity before then. Or, if he decides to sell at that moment, he must accept interest rate risk. The investor should be compensated for these risks, however small they might be, and that - in my opinion - is why treasuries should yield more than inflation.
- ggg3 7y ago
  that's not what risk means. no investment considers early exit because of difficulty as a risk. even legislation call that "investor profile" or something meaningless or another.
  - dnadler 7y ago
    By selling a bond before maturity, you're open to price fluctuations of the bond. It's not that the investor is exiting early, it's that by exiting early he is no long guaranteed the yield of the bond when he purchased it. Thurs, the yield is not "risk-free", and the risk is that the price moved in the market.
- sjaknanxnnx 7y ago
  I was right there with you until the last three words. Investors ought to be compensated, but there’s no particular reason that compensation should be greater than the inflation rate.
walshemj 7y ago
Agreed a lot of well off people with money don't put in enough thought into this.
AJ007 7y ago
“Rich folks” include pension funds, insurance companies, and sovereign wealth funds. The whole thing seems to me like central bankers confusing cause and effect and trying to squeeze a complex system in to linear regressions. Lots and lots of unpredicted consequences to artificially low interest rates, including effects that do the precise opposite of what was predicted.
- pas 7y ago
  Not necessarily. With these things there is usually a big belief aggregation going on (some central bankers think this, some that), and we end up with a silly compromise. See Japan, see all the idiotic austerity programs. So it is very possible that the central bank is not doing enough.
tigershark 7y ago
Owning negative yield bonds not only you don’t make a return above inflation, but you have to pay for the privilege of owning them. Why do you think that it’s a good thing?
- pas 7y ago
  Usually the interpretation is that it is still better than the alternative. Eg a pension fund has to put money somewhere, but it has to be low-risk. Hence the seemingly absurd demand for negative yields.
trappist 7y ago
Why is it that when we see the unintended yet predictable and easily understood consequences of a policy, in this case monetary policy, all the blame goes to those whose decisions were influenced by that ill-advised policy in that predictable and easily understood way? This doesn't strike me as a good way to avoid bad policy in the future.
celtain 7y ago
In general, it's assumed that it's better for society if you consume later rather than now. Risk-free investment returns are how we incentivize that.
perspective1 7y ago
The west's current monetary policy very much hurts retirees living on dwindling fixed incomes. There ought to be at least some reward associated with savings, even without taking a risk to the principal.
- Retric 7y ago
  Returns need to be associated with value creation. As the world has become more wealthy simply having assets and lending them out stopped creating significant value, thus lowering returns. My completely unsecured credit card only charges 10%, and that’s before inflation.
devnulloverflow 7y ago
> “I was forced to take risks with my money because treasury bonds barely pay anything!” ... is the system working as intended, because the policy rationale behind issuing lots of government bonds is precisely to make investors seek higher risks. When downturns (like 2008) happen, this is investors fleeing to safe, money-like assets and and so wonks recommend that governments flood the markets with bonds, printed money, whatever to make that unprofitable. The problem is with trying to fix the economy with policy levers. You can force people towards riskier investments (especially if they can be disguised as safe ones). But investment that is actually productive on average requires conditions where people on the ground can actually build useful stuff at a profit. But that's an anathema to macro-economists (who want to advise on how use those levers) and also to politicians (who want to be seen to be "doing something").
- pas 7y ago
  Why exactly it's an anathema for those groups? Every state, city, country has a lot of favored sectors and grant opportunities, it's then up to investors to come up with projects that actually turn a profit. VC/startup investors do this by simply doing a semi-blind search, funding everything they think is at least minimally sound. If investors are still unable to turn a profit they are not taking on enough risk. (They are not thinking big enough.) And that might be okay. There's no moral imperative to keep every investment fund alive, every investor happy. And the only difference between business as usual periods and now is that the numbers are now scary (negative yields!). But the fundamentals haven't changed. Negative yields just mean that too many investors are risk averse, too many people (pension funds, passive funds, low-risk funds, inflation tracking funds, basic savings accounts) just want to park money. And that's okay. Eventually one of the following will happen: the fund managers will take on more risk, the people behind the funds will use the money for something else (eg spend it), or the people behind the funds will pester Congress to spend more and finance it all from debt.
Lazare 7y ago
It's not just rich folks. Via pensions funds, this is also about a lot of teachers, social workers, government employees and normal folk. Pensions were funded (or not) based on assumptions about yields. If actual yields are not hitting those assumptions (and they're not), it's not the rich that'll be eating cat food in their retirement. (Of course, fixing the funding shortfall by making risky bets on exotic high-yield investments is uh...what's the word? Oh yeah, terrible! But let's not pretend this is strictly a problem for the 1%.)

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 $100 were invested elsewhere (with the same risk profile of the original investment).
- yeslibertarian 7y ago
  Wrong. The time value of money is the "time preference of money" i.e. if you have 1000$, you prefer buying a new iPhone with it today than wait for it for 10 years. You get old, you might even die, future is uncertain, and the time is wasted waiting meanwhile.
- aj7 7y ago
  Exactly, and the world is awash in goods. The only returns are in some real estate markets, where inflation is called appreciation and is underwritten by “greater fools.”
- aianus 7y ago
  > The time value of money is the expected risk of inflation. I don't think that's the only source of time value of money. For example, I'm fairly certain I can buy a car for the same price a year from now, but I am willing to pay a huge premium to have the car now so I don't have to ride the bus for two hours a day while I save up the cash to pay for it. That is a preference for present consumption over future consumption that has nothing to do with inflation.
  - lotsofpulp 7y ago
    Consumption and investment are the same thing in a generalized model when comparing returns and figuring out how much interest to charge to keep up with inflation.
  - pas 7y ago
    But those two possible uses of money have different profiles. You would have to price in how much it is worth to you to use the car vs the bus, subtract the amortization of the car - and together that's the target rate/yield that you should ask for your money plus risk of default.

gniv 7y ago

Some of the rich folks are pension fund managers. Therein lies the problem.

ekianjo 7y ago

with negative yields you are not even making inflation, you are way below it

klenwell 7y ago

According the Planet Money's Giant Pool of Money, which I've come to realize is a superb postmortem on the 2008 financial crisis, this is exactly what happened: Adam Davidson: All right. Here's one of his speeches that really drove that army of investment managers crazy. Alan Greenspan: The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance. Adam Davidson: You might not believe me, but that little statement, that is central banker's speak for, hey, global pool of money, screw you. Alex Blumberg: Come on, that's not what he said. Adam Davidson: It is. I speak central banker. Believe me, that's what he said. What he is technically saying is he's going to keep the fed funds rate-- that's when you hear, the fed interest rate-- at the absurdly low level of 1%. And that sends a message to every investor in the world, you are not going to make any money at all on US Treasury bonds for a very long time. Go somewhere else. We can't help you. https://www.thisamericanlife.org/355/transcript https://www.thisamericanlife.org/355/transcript To the question: why should you get a return above inflation at all? I guess one way of looking at it is: do you want to treat low-risk returns for conservative investors as a sort of public utility guaranteed by the government? Or do you want to put it in the hands of private industry?

tomjen3 7y ago
If the US can sell treasuries at rates not much above inflation, then it is because they are not loaning enough -- is there really no bridges or other infrastructure that could benefit the economy if they are built?
- undersuit 7y ago
  I would say most of the solidly profitable infrastructure projects, in the US are gone, combined with pretty much all the state legislatures and Congress being taxation adverse. We're running our governments like businesses and you're not going to find any nimble or disruptive startups in the mix.
- maxander 7y ago
  Check out the price tags on most infrastructure projects these days. As badly needed as they are, the US government currently doesn’t have re ability to execute them for less than the mid-horizon returns, if that.

nonbel 7y ago

What does your "gut response" tell you about rates on 1 month vs 30 year treasuries? Should they have the same yield?

topspin 7y ago
This is the market signaling that it no longer perceives any value in the maturity value of these bonds. They aren't being purchased for their maturity value; they're liquid assets, traded like any other in a market awash with ultra wealthy institutional investors between whom these securities flow like any other asset.
- nonbel 7y ago
  I just want to know what is "supposed" to happen if we assume bond yields are supposed to be equal to inflation like the parent. Obviously no one is buying negative yielding bonds for the yields except pension funds, etc who are required to by law or not paying attention.
  - topspin 7y ago
    Isn't inflation simply another cost? As long as the value of these bonds (their low risk, as opposed to their maturity value) is greater than whatever cost you care to consider (inflation, negative interest, opportunity cost, etc.) they will be valued instruments. There is no "what should happen" or what is "supposed" to happen; those are fictions in the minds of spectators and until you're prepared to anger some powerful people and institutions they will remain fictions.
    - nonbel 7y ago
      Here is what I was responding to: > My gut response is that, yes, if you’re buying risk-free treasuries, why should you get a return above inflation at all? Rewards and risks should be commensurate. The parent has some sort of ad hoc economic theory ("gut response"), and I am asking them to expand on what the theory entails. "Supposed to happen" means it would be predicted by this theory of theirs.

dnadler 7y ago

US Treasuries may be the closest thing to 'risk-free' that there is, but isn't 100% risk-free. If the investor does not hold the bond to maturity, then he/she is open to interest rate risk (the risk that rates have changed, and so has the bond's value). Even if the investor plans to hold the bond to maturity, then the investor is agreeing to lock up that money until maturity. This carries the risk that the investor won't be able to take advantage of an investment opportunity before then. Or, if he decides to sell at that moment, he must accept interest rate risk. The investor should be compensated for these risks, however small they might be, and that - in my opinion - is why treasuries should yield more than inflation.

ggg3 7y ago
that's not what risk means. no investment considers early exit because of difficulty as a risk. even legislation call that "investor profile" or something meaningless or another.
- dnadler 7y ago
  By selling a bond before maturity, you're open to price fluctuations of the bond. It's not that the investor is exiting early, it's that by exiting early he is no long guaranteed the yield of the bond when he purchased it. Thurs, the yield is not "risk-free", and the risk is that the price moved in the market.
sjaknanxnnx 7y ago
I was right there with you until the last three words. Investors ought to be compensated, but there’s no particular reason that compensation should be greater than the inflation rate.

walshemj 7y ago

Agreed a lot of well off people with money don't put in enough thought into this.

AJ007 7y ago

“Rich folks” include pension funds, insurance companies, and sovereign wealth funds. The whole thing seems to me like central bankers confusing cause and effect and trying to squeeze a complex system in to linear regressions. Lots and lots of unpredicted consequences to artificially low interest rates, including effects that do the precise opposite of what was predicted.

pas 7y ago
Not necessarily. With these things there is usually a big belief aggregation going on (some central bankers think this, some that), and we end up with a silly compromise. See Japan, see all the idiotic austerity programs. So it is very possible that the central bank is not doing enough.

tigershark 7y ago

Owning negative yield bonds not only you don’t make a return above inflation, but you have to pay for the privilege of owning them. Why do you think that it’s a good thing?

pas 7y ago
Usually the interpretation is that it is still better than the alternative. Eg a pension fund has to put money somewhere, but it has to be low-risk. Hence the seemingly absurd demand for negative yields.

trappist 7y ago

Why is it that when we see the unintended yet predictable and easily understood consequences of a policy, in this case monetary policy, all the blame goes to those whose decisions were influenced by that ill-advised policy in that predictable and easily understood way? This doesn't strike me as a good way to avoid bad policy in the future.

celtain 7y ago

In general, it's assumed that it's better for society if you consume later rather than now. Risk-free investment returns are how we incentivize that.

perspective1 7y ago

The west's current monetary policy very much hurts retirees living on dwindling fixed incomes. There ought to be at least some reward associated with savings, even without taking a risk to the principal.

Retric 7y ago
Returns need to be associated with value creation. As the world has become more wealthy simply having assets and lending them out stopped creating significant value, thus lowering returns. My completely unsecured credit card only charges 10%, and that’s before inflation.

devnulloverflow 7y ago

> “I was forced to take risks with my money because treasury bonds barely pay anything!” ... is the system working as intended, because the policy rationale behind issuing lots of government bonds is precisely to make investors seek higher risks. When downturns (like 2008) happen, this is investors fleeing to safe, money-like assets and and so wonks recommend that governments flood the markets with bonds, printed money, whatever to make that unprofitable. The problem is with trying to fix the economy with policy levers. You can force people towards riskier investments (especially if they can be disguised as safe ones). But investment that is actually productive on average requires conditions where people on the ground can actually build useful stuff at a profit. But that's an anathema to macro-economists (who want to advise on how use those levers) and also to politicians (who want to be seen to be "doing something").

pas 7y ago
Why exactly it's an anathema for those groups? Every state, city, country has a lot of favored sectors and grant opportunities, it's then up to investors to come up with projects that actually turn a profit. VC/startup investors do this by simply doing a semi-blind search, funding everything they think is at least minimally sound. If investors are still unable to turn a profit they are not taking on enough risk. (They are not thinking big enough.) And that might be okay. There's no moral imperative to keep every investment fund alive, every investor happy. And the only difference between business as usual periods and now is that the numbers are now scary (negative yields!). But the fundamentals haven't changed. Negative yields just mean that too many investors are risk averse, too many people (pension funds, passive funds, low-risk funds, inflation tracking funds, basic savings accounts) just want to park money. And that's okay. Eventually one of the following will happen: the fund managers will take on more risk, the people behind the funds will use the money for something else (eg spend it), or the people behind the funds will pester Congress to spend more and finance it all from debt.

Lazare 7y ago

It's not just rich folks. Via pensions funds, this is also about a lot of teachers, social workers, government employees and normal folk. Pensions were funded (or not) based on assumptions about yields. If actual yields are not hitting those assumptions (and they're not), it's not the rich that'll be eating cat food in their retirement. (Of course, fixing the funding shortfall by making risky bets on exotic high-yield investments is uh...what's the word? Oh yeah, terrible! But let's not pretend this is strictly a problem for the 1%.)