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Related story - my first job out of school was in investment banking. My desk worked on some esoteric securitization products (basically bonds backed by aircraf

Related story - my first job out of school was in investment banking. My desk worked on some esoteric securitization products (basically bonds backed by aircraft and shipping container leases) where all issuance had basically disappeared when I started, which was right after the 2008-9 crisis. These products generally were in the A/BBB area, and generally had traded like high yield bonds before the crisis. When I first started, we struggled to find investors and were generally seeing 6-8% yields on some small deals. By the time I left three years later, yields were getting down to the 4% area, issuance sizes had tripled and new paper was routinely 3-4x oversubscribed. I have some friends who still work there and tell me not only have yields kept coming down, but lower quality leases are being thrown into securitization pools. I 100% agree on all the comments here saying the big story is lower rates driving people into riskier investments. When the next crisis hits, people will talk about how negative rates forced people to reach for junk companies and questionable securitization paper.

nostromo 7y ago
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.
- 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.
- SilasX 7y ago
  But the nominal yield (to maturity) has to be higher than inflation to keep up because of taxes.
- 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%.)
kgwgk 7y ago
> When the next crisis hits, people will talk about how negative rates forced people to reach for junk companies and questionable securitization paper. There Is No Alternative!
JumpCrisscross 7y ago
> negative rates forced people to reach for junk companies Negative rates don’t force junky investment decisions. Inflation does. Inflation is low. Investors choosing junk yielding 4% are not being forced to do so by negative yields (or, in America, low yields). They’re choosing to reach for yield.
dmckeon 7y ago
> lower quality leases are being thrown into securitization pools Shocked, shocked, do you hear me! Not to snark at this poster, but in general, if we learn anything from experience in markets, we learn: People want higher returns without higher risks, and other people can profit from convincing buyers that the returns are higher, or the risks are lower. Also, money is more nimble than legislation. While Congress is trying to outlaw the most recently exposed scam or malfeasance, people are inventing the next several workarounds to existing or upcoming law.
- qrbLPHiKpiux 7y ago
  > People want higher returns without higher risks Not only this, but Better, Cheaper, Faster. I'm in Healthcare and it doesn't work like this.
  - lostlogin 7y ago
    Reimbursement for work is on a slow decline, and has been for a while (in radiology at least). Hardware vendors and conference talks are often centred around a theme of ‘doing more with less’. This link is an example and discusses revenue declining but the development of new tools might help to get more value out of imaging. https://www.alliancehealthcareservices-us.com/12-imaging-market-trends-2019/ https://www.alliancehealthcareservices-us.com/12-imaging-mar...
  - chrisgd 7y ago
    The average multiple on a healthcare services business is 10x and HCIT assets are trading on revenue multiples. It works exactly like this everywhere. Livongo, Health Catalyst and Phreesia just went public at multiples that didn’t exist 5 years ago
- kurthr 7y ago
  Heck, I think they mostly write the laws for Congress...
- Lazare 7y ago
  > People want higher returns without higher risks, and other people can profit from convincing buyers that the returns are higher, or the risks are lower. That does happen, but what may be even more common (and more important is a slightly different form: People want high returns, and are willing to accept risks, but are required by law to invest in safe securities, and are happy to pay high fees for people who can find a way around this. A huge driver of this isn't scams or outright fraud, but "regulatory arbitrage". Not saying it's fine, but if your mental model is "how can we protect unsophisticated mom and pop investors from these predators selling exotic asset backed securities", well, they're not the ones buying them. The bigger question is, how can we (or should we?) stop pension funds from knowingly seeking higher risk/higher return investments as part of their ongoing effort to try and reduce their massive unfunded liabilities.
jnordwick 7y ago
You speak as if there is something that can done about it. There is no way for the government to push rates, especially on exotic collateralized products like you describe. The Fed can play around at the low end and set an overnight rate, but not much else. Historically, the Fed has tried and failed over and over to affect the long end. And it certainly doesn't have the stock to dump long bonds to drive yields up. Right now, the yield curve is inverted showing how little they actually effect rates. Long run rates are set in the global market.
- NTDF9 7y ago
  Why can't the Fed manipulate long term interest rates?
  - jnordwick 7y ago
    They don't really have a mechanism, and rates are set in the global market - return on capital is mostly a global issue now and something the fed has no control over. They can target the overnight rate and buy and sell short term funds because they are the majority player there, but even then the actual Fed Funds rate doesn't always equal the target they are trying to set (and not by a few points either). On the long end they are more constrained. They can print a ton of money to cause inflation, but going the other way just isn't as easy. They aren't the major player there either. Long term treasuries compete with every other debt instrument out there government and private. Those rates are global for the most part Just look at the late 90s when the Fed tried to push long term rates up and failed horribly. All they did is invert the curve. It is a repeating scenario. This same conversation comes up about once a decade it seems.
  - JamesBarney 7y ago
    They can, they just don't have a direct tool for doing it. Long term rates are just an aggregation of short term rates over a given time span. So they can adjust long term rates via promises and hints that they will keep short term rates low for a long time. There is a ton of interesting monetary theory about how the Fed can do this and issues they run into.
amiga_500 7y ago
It's called "Financial repression": https://www.bbc.com/news/uk-21863295 https://www.bbc.com/news/uk-21863295 Paul Mason, from 2013.
rolltiide 7y ago
> I 100% agree on all the comments here saying the big story is lower rates driving people into riskier investments. Yeah but Central Banks that set the interest rates say that too, so this is the worst kept secret known to man All the comments here and your observation should just be “hey its working”
peisistratos 7y ago
A famous economist predicted 130 years ago that this would happen. https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit_to_fall https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit...
- danmaz74 7y ago
  Until now, technical innovation has been able to stave off that prediction...
  - lostlogin 7y ago
    And it possibly still can. There is mentioned in that link of the theory being controversial due to automation, where there ends up being less workers and more production.
    - trhway 7y ago
      napkin math. Say we start with economy size A and a year later we have A+P. The profit rate is P/A. Whole economy-wise the P comes from people doing/producing something. Next year same people doing the same would produce the same P. Thus profit rate fell - it is now P/(A+P). As a result we can see that the profit rate can be increased by increasing output - ie. P(next year) > P(this year) due to productivity increase (thus automation) and/or labor force growth (population growth).
  - Gibbon1 7y ago
    I once saw a graph of oil production/consumption over the last 100-150 years. Interestingly the curve is a smooth exponential right up until the late 1960's and then it gets ugly jaggy linear. Say what you will but I think that's really significant.
- nonbel 7y ago
  Interesting, thanks. Can you expand on the link between government-issued bond interest rates going negative and the tendency for profits to decrease over time in a capitalist system? Also, the ratio of theoretical to empirical content on that page is ridiculous given the topic is supposedly an empirical phenomenon requiring explanation. What is there is extremely weak as well. Is there better evidence this phenomenon exists?
JamesBarney 7y ago
This fundamental issue with the economy is driven by a couple of factors. Increases in inequality and wealth concentration means there is more money to loan, and an aging population means there are less young people to borrow the wealthy's money. We have a couple of levers to increase the interest rate. We could reduce inequality to reduce the supply of loan-able funds, we could allow large amounts of immigration to drive up the demand for loan-able funds, or we could keep interest rates high enough that we have a permanently high unemployment. However I do have a strong worry that natural interest rates are too low for our current inflation. This gives the fed very little room to deal with the next crises. They should probably be targeting an inflation rate closer to 3-4% so we don't run into zero lower bound problems.
- state_less 7y ago
  Wouldn't it be better to have interest rates match the natural interest rate? People paying for loans can't afford the rate payment, so these payments should be lowered to reflect the ability to pay back the loan (including into negative territory). If you're the U.S. Government, you're essentially telling capital surplus holders, "You can keep you large hordes of money here, but it'll cost you 1% a year." And if you want to take out a loan, it'll still be a risk, since you'll need to make the principle payments, but you'd get a tailwind on the interest paid to you. I'd be happy to learn where I'm wrong if you have any insight.
  - JamesBarney 7y ago
    Yeah it's always great to have the interest rates match the natural interest rate. Btw the definition of the natural interest rate is "The natural rate of interest, sometimes called the neutral rate of interest[1], is the interest rate that supports the economy at full employment/maximum output while keeping inflation constant"
- skybrian 7y ago
  Or, maybe come up with an alternative to making loans? Why is more debt the only answer? People seem not to want it. The government could spend the money. Or it could give the money to the people (universal basic income) and they could spend it. This also fixes the inflation problem. Just don't overshoot.
walshemj 7y ago
I think its driving people into riskier investments that still look like a traditional cash instrument from a bank - instead of looking at say equity / income funds.
cryptica 7y ago
The whole world economy makes no sense. The finance and tech industries in particular are a mess; there seems to be no correlation between value creation and profit. Whenever I hear successful entrepreneurs bash cryptocurrencies, I wonder how they can simultaneously hold the following 3 thoughts inside their heads: - My company became successful in the last 10 years because it added value to the economy. - Cryptocurrencies became successful in the last 10 years in spite of subtracting value from the economy; they are the exception to an otherwise efficient market. - Capitalism works. If cryptocurrencies were an exception to an otherwise highly efficient and meritocratic economy, could we say the same about bonds which have negative yields? Maybe the following thoughts are more logically consistent: - My company became successful in the last 10 years because I exploited a vulnerability in the economy. - Cryptocurrencies became successful in the last 10 years because they exploited a vulnerability in the economy. - Capitalism doesn't work because it's vulnerable to hacks. Also, to explain the current bonds situation: - Bonds can have positive value in spite of negative yields because some investors believe that the vulnerabilities in the economy can be patched (e.g. it's possible to increase interest rates) and that bonds will eventually return to positive yields.
- anonymous5133 7y ago
  Cryptocurrencies add value to the economy. At the very least, it is a way for people to hold value into the future and plays a similar role to gold. Other cryptocurrencies can be used to buy/sell stuff.

nostromo 7y ago

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.

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.
SilasX 7y ago
But the nominal yield (to maturity) has to be higher than inflation to keep up because of taxes.
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%.)

kgwgk 7y ago

> When the next crisis hits, people will talk about how negative rates forced people to reach for junk companies and questionable securitization paper. There Is No Alternative!

JumpCrisscross 7y ago

> negative rates forced people to reach for junk companies Negative rates don’t force junky investment decisions. Inflation does. Inflation is low. Investors choosing junk yielding 4% are not being forced to do so by negative yields (or, in America, low yields). They’re choosing to reach for yield.

dmckeon 7y ago

> lower quality leases are being thrown into securitization pools Shocked, shocked, do you hear me! Not to snark at this poster, but in general, if we learn anything from experience in markets, we learn: People want higher returns without higher risks, and other people can profit from convincing buyers that the returns are higher, or the risks are lower. Also, money is more nimble than legislation. While Congress is trying to outlaw the most recently exposed scam or malfeasance, people are inventing the next several workarounds to existing or upcoming law.

qrbLPHiKpiux 7y ago
> People want higher returns without higher risks Not only this, but Better, Cheaper, Faster. I'm in Healthcare and it doesn't work like this.
- lostlogin 7y ago
  Reimbursement for work is on a slow decline, and has been for a while (in radiology at least). Hardware vendors and conference talks are often centred around a theme of ‘doing more with less’. This link is an example and discusses revenue declining but the development of new tools might help to get more value out of imaging. https://www.alliancehealthcareservices-us.com/12-imaging-market-trends-2019/ https://www.alliancehealthcareservices-us.com/12-imaging-mar...
- chrisgd 7y ago
  The average multiple on a healthcare services business is 10x and HCIT assets are trading on revenue multiples. It works exactly like this everywhere. Livongo, Health Catalyst and Phreesia just went public at multiples that didn’t exist 5 years ago
kurthr 7y ago
Heck, I think they mostly write the laws for Congress...
Lazare 7y ago
> People want higher returns without higher risks, and other people can profit from convincing buyers that the returns are higher, or the risks are lower. That does happen, but what may be even more common (and more important is a slightly different form: People want high returns, and are willing to accept risks, but are required by law to invest in safe securities, and are happy to pay high fees for people who can find a way around this. A huge driver of this isn't scams or outright fraud, but "regulatory arbitrage". Not saying it's fine, but if your mental model is "how can we protect unsophisticated mom and pop investors from these predators selling exotic asset backed securities", well, they're not the ones buying them. The bigger question is, how can we (or should we?) stop pension funds from knowingly seeking higher risk/higher return investments as part of their ongoing effort to try and reduce their massive unfunded liabilities.

jnordwick 7y ago

You speak as if there is something that can done about it. There is no way for the government to push rates, especially on exotic collateralized products like you describe. The Fed can play around at the low end and set an overnight rate, but not much else. Historically, the Fed has tried and failed over and over to affect the long end. And it certainly doesn't have the stock to dump long bonds to drive yields up. Right now, the yield curve is inverted showing how little they actually effect rates. Long run rates are set in the global market.

NTDF9 7y ago
Why can't the Fed manipulate long term interest rates?
- jnordwick 7y ago
  They don't really have a mechanism, and rates are set in the global market - return on capital is mostly a global issue now and something the fed has no control over. They can target the overnight rate and buy and sell short term funds because they are the majority player there, but even then the actual Fed Funds rate doesn't always equal the target they are trying to set (and not by a few points either). On the long end they are more constrained. They can print a ton of money to cause inflation, but going the other way just isn't as easy. They aren't the major player there either. Long term treasuries compete with every other debt instrument out there government and private. Those rates are global for the most part Just look at the late 90s when the Fed tried to push long term rates up and failed horribly. All they did is invert the curve. It is a repeating scenario. This same conversation comes up about once a decade it seems.
- JamesBarney 7y ago
  They can, they just don't have a direct tool for doing it. Long term rates are just an aggregation of short term rates over a given time span. So they can adjust long term rates via promises and hints that they will keep short term rates low for a long time. There is a ton of interesting monetary theory about how the Fed can do this and issues they run into.

amiga_500 7y ago

It's called "Financial repression": https://www.bbc.com/news/uk-21863295 https://www.bbc.com/news/uk-21863295 Paul Mason, from 2013.

rolltiide 7y ago

> I 100% agree on all the comments here saying the big story is lower rates driving people into riskier investments. Yeah but Central Banks that set the interest rates say that too, so this is the worst kept secret known to man All the comments here and your observation should just be “hey its working”

peisistratos 7y ago

A famous economist predicted 130 years ago that this would happen. https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit_to_fall https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit...

danmaz74 7y ago
Until now, technical innovation has been able to stave off that prediction...
- lostlogin 7y ago
  And it possibly still can. There is mentioned in that link of the theory being controversial due to automation, where there ends up being less workers and more production.
  - trhway 7y ago
    napkin math. Say we start with economy size A and a year later we have A+P. The profit rate is P/A. Whole economy-wise the P comes from people doing/producing something. Next year same people doing the same would produce the same P. Thus profit rate fell - it is now P/(A+P). As a result we can see that the profit rate can be increased by increasing output - ie. P(next year) > P(this year) due to productivity increase (thus automation) and/or labor force growth (population growth).
- Gibbon1 7y ago
  I once saw a graph of oil production/consumption over the last 100-150 years. Interestingly the curve is a smooth exponential right up until the late 1960's and then it gets ugly jaggy linear. Say what you will but I think that's really significant.
nonbel 7y ago
Interesting, thanks. Can you expand on the link between government-issued bond interest rates going negative and the tendency for profits to decrease over time in a capitalist system? Also, the ratio of theoretical to empirical content on that page is ridiculous given the topic is supposedly an empirical phenomenon requiring explanation. What is there is extremely weak as well. Is there better evidence this phenomenon exists?

JamesBarney 7y ago

This fundamental issue with the economy is driven by a couple of factors. Increases in inequality and wealth concentration means there is more money to loan, and an aging population means there are less young people to borrow the wealthy's money. We have a couple of levers to increase the interest rate. We could reduce inequality to reduce the supply of loan-able funds, we could allow large amounts of immigration to drive up the demand for loan-able funds, or we could keep interest rates high enough that we have a permanently high unemployment. However I do have a strong worry that natural interest rates are too low for our current inflation. This gives the fed very little room to deal with the next crises. They should probably be targeting an inflation rate closer to 3-4% so we don't run into zero lower bound problems.

state_less 7y ago
Wouldn't it be better to have interest rates match the natural interest rate? People paying for loans can't afford the rate payment, so these payments should be lowered to reflect the ability to pay back the loan (including into negative territory). If you're the U.S. Government, you're essentially telling capital surplus holders, "You can keep you large hordes of money here, but it'll cost you 1% a year." And if you want to take out a loan, it'll still be a risk, since you'll need to make the principle payments, but you'd get a tailwind on the interest paid to you. I'd be happy to learn where I'm wrong if you have any insight.
- JamesBarney 7y ago
  Yeah it's always great to have the interest rates match the natural interest rate. Btw the definition of the natural interest rate is "The natural rate of interest, sometimes called the neutral rate of interest[1], is the interest rate that supports the economy at full employment/maximum output while keeping inflation constant"
skybrian 7y ago
Or, maybe come up with an alternative to making loans? Why is more debt the only answer? People seem not to want it. The government could spend the money. Or it could give the money to the people (universal basic income) and they could spend it. This also fixes the inflation problem. Just don't overshoot.

walshemj 7y ago

I think its driving people into riskier investments that still look like a traditional cash instrument from a bank - instead of looking at say equity / income funds.

cryptica 7y ago

The whole world economy makes no sense. The finance and tech industries in particular are a mess; there seems to be no correlation between value creation and profit. Whenever I hear successful entrepreneurs bash cryptocurrencies, I wonder how they can simultaneously hold the following 3 thoughts inside their heads: - My company became successful in the last 10 years because it added value to the economy. - Cryptocurrencies became successful in the last 10 years in spite of subtracting value from the economy; they are the exception to an otherwise efficient market. - Capitalism works. If cryptocurrencies were an exception to an otherwise highly efficient and meritocratic economy, could we say the same about bonds which have negative yields? Maybe the following thoughts are more logically consistent: - My company became successful in the last 10 years because I exploited a vulnerability in the economy. - Cryptocurrencies became successful in the last 10 years because they exploited a vulnerability in the economy. - Capitalism doesn't work because it's vulnerable to hacks. Also, to explain the current bonds situation: - Bonds can have positive value in spite of negative yields because some investors believe that the vulnerabilities in the economy can be patched (e.g. it's possible to increase interest rates) and that bonds will eventually return to positive yields.

anonymous5133 7y ago
Cryptocurrencies add value to the economy. At the very least, it is a way for people to hold value into the future and plays a similar role to gold. Other cryptocurrencies can be used to buy/sell stuff.