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Contention: The cultural assumption that saving ought to be rewarded is misguided. Reasoning: When a bank lets you transform production today into future consu

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.
  - sunshinerag 7y ago
    You mean inflation is high. But they claim inflation is not high.
- gwern 7y ago
  If that were the case, the people who do take out loans etc should be realizing supernormal returns as they exploit the low-hanging fruit being ignored. Do they?
  - anigbrowl 7y ago
    Check into it and let us know.
- 0x8BADF00D 7y ago
  The average person is so levered up they cannot afford to invest.
  - IggleSniggle 7y ago
    I really don’t think this is true anymore, with regard to the people that are capable of being levered up (ie the top 30% in USA)
- skybrian 7y ago
  You have it backwards. There are investors (such as banks and pension funds) who want certain very safe investments (government bonds) but governments are unwilling to supply it. So, if anything, this would be too much savings rather than not enough. But really, it's not about consumers, but about banks not making as many loans as governments want them to. That suggests a lack of safe investment opportunities. Maybe, instead of pressuring banks to make investments that they don't want to make, governments could stimulate demand in some other way? There are certainly people who, if you give them money, they will spend it.
kgwgk 7y ago
> But as fewer people need to borrow The problem with this theory is that debt is quite high globally and in all sectors (households, corporate, government).
- ethbro 7y ago
  Debt normalized to cash flow or equity is probably the more relevant measure. If there's cheap government money on the table, everyone would be crazy not to avail themselves, as long as the potential use expands one's business.
  - kgwgk 7y ago
    Sure, but the point is that money is cheap because government is throwing buckets of it on the table and not because people didn't want money in the first place.
    - JamesBarney 7y ago
      The Fed sets interest rates based on inflation and unemployment (the dual mandate). And what has changed from 20-30 years ago is not that the Fed is extra dovish. If so you would see historically high and accelerating inflation, and incredibly hot job market. So it's not the Fed that has change it's the environment. Due to fundamental changes in the global economy we are living in a world of incredibly low natural interest rates.
      - kgwgk 7y ago
        Looking at this chart https://www.stlouisfed.org/~/media/Publications/Regional-Economist/Image-Issues/January-2014/fig2_balancesheet.jpg https://www.stlouisfed.org/~/media/Publications/Regional-Eco... it looks like something has changed at the Fed from 15 years ago. I'm not sure one can fully blame the enviromnment. https://www.stlouisfed.org/publications/regional-economist/january-2014/the-rise-and-eventual-fall-in-the-feds-balance-sheet https://www.stlouisfed.org/publications/regional-economist/j... Edit: they had started to reduce the size of the balance sheet [1], but who knows how long will it take [2]. [1] https://www.ft.com/content/16649a54-b38a-11e8-bbc3-ccd7de085ffe https://www.ft.com/content/16649a54-b38a-11e8-bbc3-ccd7de085... [2] https://www.bloomberg.com/news/articles/2019-07-19/the-fed-s-3-8-trillion-balance-sheet-is-unlikely-to-shrink-more https://www.bloomberg.com/news/articles/2019-07-19/the-fed-s...
vajrabum 7y ago
Uhh, there's a practical human problem with that notion and it is that when you're younger if you don't save for when you're older then you'll be destitute. Social Security alone is pretty hard to live on. As for what the bond market is telling us an alternate thesis (supported by the public statements of Trump and the Fed Chairman) is pretty much they don't want a recession in an election year and have eased interest rates not because it's good for the economy but because it's good for the incumbent. In short it's interest rate policy not the market which is setting the price.
- excalibur 7y ago
  Not sure who you mean by younger. I'm pushing 40, and I've been aware my entire working life that social security would not be there for our generation when we reach retirement age, but we would still be expected to pay into the system to support our elders and/or their elected officials. The only way we're likely to get any kind of return on that investment is if we become disabled.
  - jayd16 7y ago
    This defeatist thinking and odds are its simply wrong for gen X. The Millenial generation is large enough you'll most likely see social security.
  - AnimalMuppet 7y ago
    I don't know. All my life I thought that way. But I'm 57 now, and it looks like I might get at least something...
- jayd16 7y ago
  I agree with you BUT social security can also be seen as a pay as you go system where the young care for the old. The notion that saving must take place is somewhat tied to American individualism. If we didn't treat things like wellfare as disdainful and something you could actually rely on, we wouldn't need to worry about personal savings as much.
isoskeles 7y ago
> Contention: The cultural assumption that saving ought to be rewarded is misguided. This is an odd contention that I don't agree with entirely based on the usage of "rewarded." Interest isn't a reward, it's simply the price of money, and depending on your personal current values/needs/wants (spend now or save now), it can look either like a reward or a punishment. So this ends up reading only as a topsy-turvy ex-post-facto justification for central bank policy that favors / provides cover for governments that spend more than they earn, which they all do afaik. I do agree with some elements of your extrapolation though. It is possible that we are going from a world of relative growth to one of stasis. Or, at least, I don't think it's necessarily a bad thing if economies do not "grow", especially not in cases where population growth is slowing or even reversing.
deleted 7y ago
[deleted]
JamesBarney 7y ago
One of the biggest risks with a natural interest rate of 0 is monetary policy loses all effectiveness. We need to either increase inflation or start playing with other forms of juicing the economy like helicopter drops.
brownbat 7y ago
Another factor - there are probably a few billion people in Asia in rapidly growing economies who need a hedge against all their savings suddenly becoming worthless due to local instability. Suppose you are planning your future, and you think there's a small but real (1-5%) chance that sometime over the next decade your local currency will become devalued to zero. Suppose also that you're expecting significant future costs: elder care for your parents, rising costs of living, etc. In those situations, you're likely to have a very high savings rate, and will tolerate guaranteed returns that are near zero (because factoring in the risk of local returns might make them closer to negative double digits). I'm not a global economist, so I don't know how much this is driving things. But China as a 45% personal savings rate, India is in the 30s, compared to the 6-7% of the US, and anecdotally people have noted significant amounts of foreign investment in "safe" assets. Some of these areas have banks that offer double digit returns for investments, but only on paper - people were talking up the returns from Mongolian savings accounts a few years ago, but then the currency has eroded so quickly that 15-20% returns are actually negative.
deleted 7y ago
[deleted]
ilaksh 7y ago
Except we don't need banks to store money now. We can use math and computer networks aka cryptocurrency. Personally I think what's missing is a way to holistically track real world resources and consumption and tie them to digital money that can then be regulated in a fine grained way. I think that is what is needed to change economics from a society of witch doctors into a technical and practical profession.

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.
- sunshinerag 7y ago
  You mean inflation is high. But they claim inflation is not high.
gwern 7y ago
If that were the case, the people who do take out loans etc should be realizing supernormal returns as they exploit the low-hanging fruit being ignored. Do they?
- anigbrowl 7y ago
  Check into it and let us know.
0x8BADF00D 7y ago
The average person is so levered up they cannot afford to invest.
- IggleSniggle 7y ago
  I really don’t think this is true anymore, with regard to the people that are capable of being levered up (ie the top 30% in USA)
skybrian 7y ago
You have it backwards. There are investors (such as banks and pension funds) who want certain very safe investments (government bonds) but governments are unwilling to supply it. So, if anything, this would be too much savings rather than not enough. But really, it's not about consumers, but about banks not making as many loans as governments want them to. That suggests a lack of safe investment opportunities. Maybe, instead of pressuring banks to make investments that they don't want to make, governments could stimulate demand in some other way? There are certainly people who, if you give them money, they will spend it.

kgwgk 7y ago

> But as fewer people need to borrow The problem with this theory is that debt is quite high globally and in all sectors (households, corporate, government).

ethbro 7y ago
Debt normalized to cash flow or equity is probably the more relevant measure. If there's cheap government money on the table, everyone would be crazy not to avail themselves, as long as the potential use expands one's business.
- kgwgk 7y ago
  Sure, but the point is that money is cheap because government is throwing buckets of it on the table and not because people didn't want money in the first place.
  - JamesBarney 7y ago
    The Fed sets interest rates based on inflation and unemployment (the dual mandate). And what has changed from 20-30 years ago is not that the Fed is extra dovish. If so you would see historically high and accelerating inflation, and incredibly hot job market. So it's not the Fed that has change it's the environment. Due to fundamental changes in the global economy we are living in a world of incredibly low natural interest rates.
    - kgwgk 7y ago
      Looking at this chart https://www.stlouisfed.org/~/media/Publications/Regional-Economist/Image-Issues/January-2014/fig2_balancesheet.jpg https://www.stlouisfed.org/~/media/Publications/Regional-Eco... it looks like something has changed at the Fed from 15 years ago. I'm not sure one can fully blame the enviromnment. https://www.stlouisfed.org/publications/regional-economist/january-2014/the-rise-and-eventual-fall-in-the-feds-balance-sheet https://www.stlouisfed.org/publications/regional-economist/j... Edit: they had started to reduce the size of the balance sheet [1], but who knows how long will it take [2]. [1] https://www.ft.com/content/16649a54-b38a-11e8-bbc3-ccd7de085ffe https://www.ft.com/content/16649a54-b38a-11e8-bbc3-ccd7de085... [2] https://www.bloomberg.com/news/articles/2019-07-19/the-fed-s-3-8-trillion-balance-sheet-is-unlikely-to-shrink-more https://www.bloomberg.com/news/articles/2019-07-19/the-fed-s...

vajrabum 7y ago

Uhh, there's a practical human problem with that notion and it is that when you're younger if you don't save for when you're older then you'll be destitute. Social Security alone is pretty hard to live on. As for what the bond market is telling us an alternate thesis (supported by the public statements of Trump and the Fed Chairman) is pretty much they don't want a recession in an election year and have eased interest rates not because it's good for the economy but because it's good for the incumbent. In short it's interest rate policy not the market which is setting the price.

excalibur 7y ago
Not sure who you mean by younger. I'm pushing 40, and I've been aware my entire working life that social security would not be there for our generation when we reach retirement age, but we would still be expected to pay into the system to support our elders and/or their elected officials. The only way we're likely to get any kind of return on that investment is if we become disabled.
- jayd16 7y ago
  This defeatist thinking and odds are its simply wrong for gen X. The Millenial generation is large enough you'll most likely see social security.
- AnimalMuppet 7y ago
  I don't know. All my life I thought that way. But I'm 57 now, and it looks like I might get at least something...
jayd16 7y ago
I agree with you BUT social security can also be seen as a pay as you go system where the young care for the old. The notion that saving must take place is somewhat tied to American individualism. If we didn't treat things like wellfare as disdainful and something you could actually rely on, we wouldn't need to worry about personal savings as much.

isoskeles 7y ago

> Contention: The cultural assumption that saving ought to be rewarded is misguided. This is an odd contention that I don't agree with entirely based on the usage of "rewarded." Interest isn't a reward, it's simply the price of money, and depending on your personal current values/needs/wants (spend now or save now), it can look either like a reward or a punishment. So this ends up reading only as a topsy-turvy ex-post-facto justification for central bank policy that favors / provides cover for governments that spend more than they earn, which they all do afaik. I do agree with some elements of your extrapolation though. It is possible that we are going from a world of relative growth to one of stasis. Or, at least, I don't think it's necessarily a bad thing if economies do not "grow", especially not in cases where population growth is slowing or even reversing.

deleted 7y ago

[deleted]

JamesBarney 7y ago

One of the biggest risks with a natural interest rate of 0 is monetary policy loses all effectiveness. We need to either increase inflation or start playing with other forms of juicing the economy like helicopter drops.

brownbat 7y ago

Another factor - there are probably a few billion people in Asia in rapidly growing economies who need a hedge against all their savings suddenly becoming worthless due to local instability. Suppose you are planning your future, and you think there's a small but real (1-5%) chance that sometime over the next decade your local currency will become devalued to zero. Suppose also that you're expecting significant future costs: elder care for your parents, rising costs of living, etc. In those situations, you're likely to have a very high savings rate, and will tolerate guaranteed returns that are near zero (because factoring in the risk of local returns might make them closer to negative double digits). I'm not a global economist, so I don't know how much this is driving things. But China as a 45% personal savings rate, India is in the 30s, compared to the 6-7% of the US, and anecdotally people have noted significant amounts of foreign investment in "safe" assets. Some of these areas have banks that offer double digit returns for investments, but only on paper - people were talking up the returns from Mongolian savings accounts a few years ago, but then the currency has eroded so quickly that 15-20% returns are actually negative.

deleted 7y ago

[deleted]

ilaksh 7y ago

Except we don't need banks to store money now. We can use math and computer networks aka cryptocurrency. Personally I think what's missing is a way to holistically track real world resources and consumption and tie them to digital money that can then be regulated in a fine grained way. I think that is what is needed to change economics from a society of witch doctors into a technical and practical profession.