2 ms·

Low interest rates actually do increase preferences (and hence value) for cash-generating assets. The competition (keeping the money in risk-free assets, usual

Low interest rates actually do increase preferences (and hence value) for cash-generating assets. The competition (keeping the money in risk-free assets, usually expressed as T-bills) becomes less valuable, which means that other assets become relatively more valuable. There are a bunch of results from both behavioral economics and psychology that suggest humans can't actually determine absolute value, and can only determine relative value, comparing two alternatives against each other. This also gets at the paradox behind a lot of our intuitive notions of "value creation". If a person buys high and sells low, taking a loss, they've lost value. Or have they? At the time they made the first transaction, they valued the new asset higher; at the time they made the second one, they valued it lower. As my therapist used to say, "The past and the future don't actually exist; there is only the present." I've seen writers try to resolve the paradox by introducing the idea of "time preferences" or "future selves". You, right now, are not the same person you will be in the future. You can express compassion for your future self by taking action - like delaying gratification, investing in personal development, or saving money - that benefits your future self. The degree to which people preference their future self over their present self is culturally dependent, which is why certain ethnic groups and social classes tend to amass large amounts of wealth while others are perpetually living on the edge of subsistence. The rate of interest is a quantitative measure of how much people preference their future self over their present.

klipt 5y ago
> If a person buys high and sells low, taking a loss, they've lost value. Or have they? At the time they made the first transaction, they valued the new asset higher; at the time they made the second one, they valued it lower. Right, it seemed like a good idea at the time. But they're experiencing regret because an alternate past action (just holding cash, or buying a better performing asset) would have given them more value now. Of course you can regret any suboptimal action (anything less optimal than buying the best performing asset), but that's not most people's baseline. I think the baseline for most people is holding cash, hence they mostly feel regret when their assets' cash value decreases. Unless interest rates stay low forever, at some point the asset inflation they cause has to deflate.

klipt 5y ago

> If a person buys high and sells low, taking a loss, they've lost value. Or have they? At the time they made the first transaction, they valued the new asset higher; at the time they made the second one, they valued it lower. Right, it seemed like a good idea at the time. But they're experiencing regret because an alternate past action (just holding cash, or buying a better performing asset) would have given them more value now. Of course you can regret any suboptimal action (anything less optimal than buying the best performing asset), but that's not most people's baseline. I think the baseline for most people is holding cash, hence they mostly feel regret when their assets' cash value decreases. Unless interest rates stay low forever, at some point the asset inflation they cause has to deflate.