4 ms·

There is a more basic economic question that I am curious about. I don't know how / can't believe how in the 1980s we had the era of 15% interest rates, etc (o

There is a more basic economic question that I am curious about. I don't know how / can't believe how in the 1980s we had the era of 15% interest rates, etc (ok, I have some idea, central bank policies, inflation, etc) -- but it seems now we're in a "forever-0%-interest" situation. The reason I think is that interest/mortgage/etc rates just reflect how much people/banks/etc are willing to receive in profit for parking or lending their money somewhere. This has gone to 0% (almost no profit) because no one can offer good returns on the money. Or the people receiving the money have so many choices that the lenders are forced to compete to 0%. All the VC money sloshing around for free is because there is no more favorable place for that money to find profit and the 1-in-10 (?) shot that startups have is still better odds than average other opportunities. Right now it seems there is too much money searching for returns. And that money is not somehow just going to disappear over time. To take the opposite hypothetical, if you consider the accumulated wealth of all countries now, and the relatively low growth of most of them, how could it be possible that all that money could find good investment return rates? Except for isolated pockets of growth, need for investment, where will we find broad returns anything greater than a few %? So, until something fundamental about the money supply changes, are we in for a long period of pretty much 0% returns? I would love to know some more sophisticated ways to understand the situation.

andromeduck 6y ago
Growth correlates best with productivity and productivity is a factor of capital effiency and manpower, and manpower increases with population.
linuxftw 6y ago
We are in uncharted economic waters, and we have been for about 12 years. Not only is there 0% (or lower!) interest rates, we also have QE (central banks buying government assets directly), we have central banks buying corporate debt now! This is creating market bubbles. Worthless tech stocks is one place. Housing prices have soared. Whatever might happen might happen quickly.
- majormajor 6y ago
  Have we ever been in "charted" economic waters?
chenster 6y ago
> I don't know how / can't believe how in the 1980s we had the era of 15% interest rates, etc (ok, I have some idea, central bank policies, inflation, etc) -- but it seems now we're in a "forever-0%-interest" situation. Yes, 17-20% interest rate was not unusual in 70s, 80s, but home prices were much much lower back.
- WillPostForFood 6y ago
  Inflation adjusted, median price in 1980 was 180k, it peaked up to 280k in 2007, then dropped back down to 190k by 2011, and has now risen back to 280k in 2020. Feels like a correction is due, but if rates stay so low, who knows.
  - tomatocracy 6y ago
    If you think the overall market is one where supply of housing and/or land is constrained, it might be more relevant to adjust for earnings growth, not just inflation. Alternatively, if you think for the market as a whole there are not meaningful constraints on supply of housing or land, the more relevant adjustment might be for increases in construction costs.
- cherrycherry98 6y ago
  I reckon housing prices would be lower now too if interest rates were at that level. Most people care about what their monthly payment is going to be. If they're paying 20% interest the principal is going to have to be low enough to accommodate their budget. Increase rates and watch demand dry up as the monthly cost skyrockets for those financing the purchase. Prices should drop accordingly.
  - nrmitchi 6y ago
    You're right. Interest rates have a direct affect on property value. Note that I do believe that this effect isn't quite as present in the "ultra-luxury" markets (or at least as a much lower impact)
- saberdancer 6y ago
marcosdumay 6y ago
> Right now it seems there is too much money searching for returns. Or too little returns available for all the money. This is the expected end-game for a well developed society, where people have most of what they need so extra capital can't move the needle anymore... What is kinda good. The problem happens where not everybody is included on that "well developed society" and the excluded people don't make a difference because they get too little money to participate.
0xfaded 6y ago
In Denmark's case, the rates are set to defend the krone's peg against the euro. Denmark being above average in terms of stability within the euro zone sets negative rates to shoo people from parking their money there, which would otherwise drive demand and increase the exchange rate for the krone. In Europe as a whole, yes, it is in deep stagnation. There is no where near enough investment opportunity for the wealth within the block, and this is made doubly worse by the governments subsidising all investment, essentially eating half the investment opportunity (while simultaneously creating a beaurocratic nightmare which also needs to be paid for). All the remaining wealth just piles into any old unproductive asset which can out perform the -0.6% bank rate. If you really want a laugh, read up on how banks are competing to acquire physical currency because cash is cheaper to store in a guarded vault than a database entry with the ECB.
- eloff 6y ago
  > If you really want a laugh, read up on how banks are competing to acquire physical currency because cash is cheaper to store in a guarded vault than a database entry with the ECB. I have read about that, and it was worth a good laugh and a "what's the world coming to" kind of head shake. Mind boggling.
- sifar 6y ago
  >> If you really want a laugh, read up on how banks are competing to acquire physical currency because cash is cheaper to store in a guarded vault than a database entry with the ECB. Hahaha, so as the governments the world over propagandize (read black money/corruption) people to move to digital cash the banks are legally allowed to hold mountains of them. And ...even charge people a fee to withdraw there own money as cash. https://www.bloomberg.com/news/articles/2020-01-31/german-banks-are-hoarding-so-many-euros-they-need-more-vaults https://www.bloomberg.com/news/articles/2020-01-31/german-ba...
AnimalMuppet 6y ago
> And that money is not somehow just going to disappear over time. It almost did, in 2008. Something like $3 Trillion evaporated in a very few months. To prevent a disaster that hurt a huge chunk of people, the Fed injected $3 Trillion back into the economy. The Fed was starting to draw that back down, but the economy got jittery, and then Covid happened. We have the problem (too much money) because the price of fixing it was too high (short-term catastrophe).
kzrdude 6y ago
There is an important point missing. The bank can always lend for a better interest than it gives to its customers. In these cases, they lend for a negative interest rate! Thus the customer pays 0% but the bank still makes money on the loan from for example a government bond of -1% that it is linked to.

andromeduck 6y ago

Growth correlates best with productivity and productivity is a factor of capital effiency and manpower, and manpower increases with population.

linuxftw 6y ago

We are in uncharted economic waters, and we have been for about 12 years. Not only is there 0% (or lower!) interest rates, we also have QE (central banks buying government assets directly), we have central banks buying corporate debt now! This is creating market bubbles. Worthless tech stocks is one place. Housing prices have soared. Whatever might happen might happen quickly.

majormajor 6y ago
Have we ever been in "charted" economic waters?

chenster 6y ago

> I don't know how / can't believe how in the 1980s we had the era of 15% interest rates, etc (ok, I have some idea, central bank policies, inflation, etc) -- but it seems now we're in a "forever-0%-interest" situation. Yes, 17-20% interest rate was not unusual in 70s, 80s, but home prices were much much lower back.

WillPostForFood 6y ago
Inflation adjusted, median price in 1980 was 180k, it peaked up to 280k in 2007, then dropped back down to 190k by 2011, and has now risen back to 280k in 2020. Feels like a correction is due, but if rates stay so low, who knows.
- tomatocracy 6y ago
  If you think the overall market is one where supply of housing and/or land is constrained, it might be more relevant to adjust for earnings growth, not just inflation. Alternatively, if you think for the market as a whole there are not meaningful constraints on supply of housing or land, the more relevant adjustment might be for increases in construction costs.
cherrycherry98 6y ago
I reckon housing prices would be lower now too if interest rates were at that level. Most people care about what their monthly payment is going to be. If they're paying 20% interest the principal is going to have to be low enough to accommodate their budget. Increase rates and watch demand dry up as the monthly cost skyrockets for those financing the purchase. Prices should drop accordingly.
- nrmitchi 6y ago
  You're right. Interest rates have a direct affect on property value. Note that I do believe that this effect isn't quite as present in the "ultra-luxury" markets (or at least as a much lower impact)
saberdancer 6y ago

marcosdumay 6y ago

> Right now it seems there is too much money searching for returns. Or too little returns available for all the money. This is the expected end-game for a well developed society, where people have most of what they need so extra capital can't move the needle anymore... What is kinda good. The problem happens where not everybody is included on that "well developed society" and the excluded people don't make a difference because they get too little money to participate.

0xfaded 6y ago

In Denmark's case, the rates are set to defend the krone's peg against the euro. Denmark being above average in terms of stability within the euro zone sets negative rates to shoo people from parking their money there, which would otherwise drive demand and increase the exchange rate for the krone. In Europe as a whole, yes, it is in deep stagnation. There is no where near enough investment opportunity for the wealth within the block, and this is made doubly worse by the governments subsidising all investment, essentially eating half the investment opportunity (while simultaneously creating a beaurocratic nightmare which also needs to be paid for). All the remaining wealth just piles into any old unproductive asset which can out perform the -0.6% bank rate. If you really want a laugh, read up on how banks are competing to acquire physical currency because cash is cheaper to store in a guarded vault than a database entry with the ECB.

eloff 6y ago
> If you really want a laugh, read up on how banks are competing to acquire physical currency because cash is cheaper to store in a guarded vault than a database entry with the ECB. I have read about that, and it was worth a good laugh and a "what's the world coming to" kind of head shake. Mind boggling.
sifar 6y ago
>> If you really want a laugh, read up on how banks are competing to acquire physical currency because cash is cheaper to store in a guarded vault than a database entry with the ECB. Hahaha, so as the governments the world over propagandize (read black money/corruption) people to move to digital cash the banks are legally allowed to hold mountains of them. And ...even charge people a fee to withdraw there own money as cash. https://www.bloomberg.com/news/articles/2020-01-31/german-banks-are-hoarding-so-many-euros-they-need-more-vaults https://www.bloomberg.com/news/articles/2020-01-31/german-ba...

AnimalMuppet 6y ago

> And that money is not somehow just going to disappear over time. It almost did, in 2008. Something like $3 Trillion evaporated in a very few months. To prevent a disaster that hurt a huge chunk of people, the Fed injected $3 Trillion back into the economy. The Fed was starting to draw that back down, but the economy got jittery, and then Covid happened. We have the problem (too much money) because the price of fixing it was too high (short-term catastrophe).

kzrdude 6y ago

There is an important point missing. The bank can always lend for a better interest than it gives to its customers. In these cases, they lend for a negative interest rate! Thus the customer pays 0% but the bank still makes money on the loan from for example a government bond of -1% that it is linked to.