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This isn't right. The fed basically controls the very short end of the curve. The 30 year rate is above 2 (it briefly touched around 1.3 or something during th
by danielmarkbruce 5y ago
This isn't right.
The fed basically controls the very short end of the curve. The 30 year rate is above 2 (it briefly touched around 1.3 or something during the start of the covid panic). No one is/was discounting cashflows 10 years into the future at 0 so "all cash flows" didn't have infinite net present value.
- voisin 5y agoStill, 2% over 30 years when inflation is running at 7%+ is negative in real terms. So maybe not infinite, but the key point is that investors are rewarded for holding effectively anything when real rates are negative.
- danielmarkbruce 5y agoIf you are going to use inflation to turn nominal rates into real rates, you also have to adjust (reduce) the cashflows themselves. Ie, you discount real cashflow with real rates or nominal with nominal. You'll find as you reduce the nominal cashflows by the inflation rate to arrive at real cashflows.... they stop being a cashflow pretty quickly.
- hedora 5y agoI just refinanced a mortgage, and discounted the cashflow on assuming an effective interest rate of -2% to -5%, pre-inflation, assuming the borrowed cash is in a diversified portfolio. Maybe I'm an idiot, but if so, I'm not alone. Multiple major investment firms are recommending this to their clients. Anyway, I gotta go count my Krugerrands.
- danielmarkbruce 5y agoYou have to be consistent. You either discount real with real or nominal with nominal. As soon as you are consistent you'll see either the discount rate isn't negative (nominal) or, your cashflow is ~zero (real). Put aside finance theory for a second - does it make sense that, even in theory, my rental house earning $100 per month more than the cost to upkeep it, is worth infinity? Of course not.