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I don't buy this analogy. Bankruptcy isn't the only market discipline. If a firm is underperforming, then it will be bought up and sold for parts. This happe

I don't buy this analogy. Bankruptcy isn't the only market discipline. If a firm is underperforming, then it will be bought up and sold for parts. This happens all the time, and low interest rates only make it easier. Anyway, the article's main mistake is in thinking that the Fed controls interest rates. It can only control nominal interest rates, not real interest rates (adjusted for inflation). Like any other competitive market, real interest rates are set by supply and demand. If companies, entrepreneurs, and investors see few ways of investing cash to increase revenue or improve efficiency, then interest rates must be low. Better investment (real) returns can come from new technologies and innovations, or from demographic surges. Yes, we all want better investment opportunities, in real dollars. But the Fed can't control this.

rsync 4y ago
"I don't buy this analogy. Bankruptcy isn't the only market discipline. If a firm is underperforming, then it will be bought up and sold for parts. This happens all the time, and low interest rates only make it easier." The cheap financing allows these firms to disguise the fact that they are underperforming. So whatever form of "market discipline" might occur, these firms are shielded from it because they can just keep rolling over their debt obligations while continuing to pretend they are competitive in the marketplace.
- imtringued 4y ago
  There is this customer who isn't buying anything for the next 10 years, ergo there must be a company that isn't producing anything over the next 10 years. The fact that they roll over their debt tells you nothing about the company, only about the customer.
I_DRINK_KOOLAID 4y ago
> Yes, we all want better investment opportunities, in real dollars. But the Fed can't control this. Better means an optimal risk-reward profile, meaning that you don't lose principal while looking to allocate that capital in search for yield. The Fed controls the rate of the safest investment there is: money held at the Fed AKA the Fed fund rate. Every interest rate is calculated using that fundamental rate as the point of reference because literally every entity in the world has a higher risk of default rate than the U.S. Federal Government. So yes they control the most important thing in global markets: the price of safe money backed by 5000+ nukes, largest air force, 2nd largest airforce, 3rd largest airforce, largest navy, largest economy...
- datadata 4y ago
  Your principal is safe only if you demarcate principal in dollars. This is only a reasonable way to measure principal when inflation is negligible. With inflation widely exceeding interest rates, it is unreasonable to consider the only risk of US debt to be default and you have to consider the inflation loss. Another angle is that all of the military defense backing the USD is coming from dilution of the USD (monetary inflation), or at least that is true as long as we continue to run a deficit.
  - I_DRINK_KOOLAID 4y ago
    > it is unreasonable to consider the only risk of US debt to be default and you have to consider the inflation loss. The Fed mandate says "stable prices AND maximum employment". It says nothing about setting the fed fund rate in a way that enables investors to earn money from lending to an entity which has a zero default risk. They set the rate and investors use that as a reference point to calculate the rate of everything else, starting from the security which mostly resembles the overnight Fed fund rate : the US. Treasury with the shortest duration which if I recall correctly is the 4 weeks US Note. When investors are very scared it happens that they get very defensive and pay the Fed govt. for the privilege of parking their money in US Treasuries. It makes sense even, you only have to get rich once and if you are born in America you are essentially already rich the moment you are born (on a global basis), the desire for capital and wealth preservation has steadily increased over time and the Federal Govt. like any borrower is taking advantage of this thirst for safety from investors at home and abroad, this phenomenon actually reduces the Federal Debt which was a huge topic of concern circa 2011-2014.
    - datadata 4y ago
      > The Fed mandate says "stable prices AND maximum employment". It says nothing about setting the fed fund rate in a way that enables investors to earn money from lending to an entity which has a zero default risk. I was not saying that the Fed mandate says that the fed must do this. I was challenging YOU who said that investors should consider treasuries capital preserving and default risk free. Neither is true-- inflation rate is meant to characterize the buying power of dollars. Whenever inflation rate exceeds the overnight interest rate, then the purchasing power of anyone holding cash or short term treasuries is by definition losing principal in a guaranteed way. Defaulting on a pure fiat system is also basically pointless, dollar denominated debts can always be met with money printing, so inflation is really the only way a default happens. And we did actually default in 1971 when Nixon ended convertibility of dollar to gold. > When investors are very scared it happens that they get very defensive and pay the Fed govt. for the privilege of parking their money in US Treasuries. I think you have something inverted here in your understanding (unless you are talking about negative interest rates?). You pay to borrow, you get to collect interest if you park capital. If you want to park money in US treasuries, that's a long treasury position and the government is paying you for the privilege of being able to use your dollars for a while. How it would work is you start with your asset (say a stock) sell that for dollars, then sell the dollars for a treasury, which pays a coupon upon maturation (gives you back more dollars than it started). So investors with a parked cash position are not paying the government, the government is paying them. When there is a panic, I agree the demand for treasuries goes up, and that is why you see the long term rates go down-- as demand for treasuries goes up, they start to be auctioned at a lower premium. The only people paying the government interest on the treasuries are those who are borrowing money, for example banks.

rsync 4y ago

"I don't buy this analogy. Bankruptcy isn't the only market discipline. If a firm is underperforming, then it will be bought up and sold for parts. This happens all the time, and low interest rates only make it easier." The cheap financing allows these firms to disguise the fact that they are underperforming. So whatever form of "market discipline" might occur, these firms are shielded from it because they can just keep rolling over their debt obligations while continuing to pretend they are competitive in the marketplace.

imtringued 4y ago
There is this customer who isn't buying anything for the next 10 years, ergo there must be a company that isn't producing anything over the next 10 years. The fact that they roll over their debt tells you nothing about the company, only about the customer.

I_DRINK_KOOLAID 4y ago

> Yes, we all want better investment opportunities, in real dollars. But the Fed can't control this. Better means an optimal risk-reward profile, meaning that you don't lose principal while looking to allocate that capital in search for yield. The Fed controls the rate of the safest investment there is: money held at the Fed AKA the Fed fund rate. Every interest rate is calculated using that fundamental rate as the point of reference because literally every entity in the world has a higher risk of default rate than the U.S. Federal Government. So yes they control the most important thing in global markets: the price of safe money backed by 5000+ nukes, largest air force, 2nd largest airforce, 3rd largest airforce, largest navy, largest economy...

datadata 4y ago
Your principal is safe only if you demarcate principal in dollars. This is only a reasonable way to measure principal when inflation is negligible. With inflation widely exceeding interest rates, it is unreasonable to consider the only risk of US debt to be default and you have to consider the inflation loss. Another angle is that all of the military defense backing the USD is coming from dilution of the USD (monetary inflation), or at least that is true as long as we continue to run a deficit.
- I_DRINK_KOOLAID 4y ago
  > it is unreasonable to consider the only risk of US debt to be default and you have to consider the inflation loss. The Fed mandate says "stable prices AND maximum employment". It says nothing about setting the fed fund rate in a way that enables investors to earn money from lending to an entity which has a zero default risk. They set the rate and investors use that as a reference point to calculate the rate of everything else, starting from the security which mostly resembles the overnight Fed fund rate : the US. Treasury with the shortest duration which if I recall correctly is the 4 weeks US Note. When investors are very scared it happens that they get very defensive and pay the Fed govt. for the privilege of parking their money in US Treasuries. It makes sense even, you only have to get rich once and if you are born in America you are essentially already rich the moment you are born (on a global basis), the desire for capital and wealth preservation has steadily increased over time and the Federal Govt. like any borrower is taking advantage of this thirst for safety from investors at home and abroad, this phenomenon actually reduces the Federal Debt which was a huge topic of concern circa 2011-2014.
  - datadata 4y ago
    > The Fed mandate says "stable prices AND maximum employment". It says nothing about setting the fed fund rate in a way that enables investors to earn money from lending to an entity which has a zero default risk. I was not saying that the Fed mandate says that the fed must do this. I was challenging YOU who said that investors should consider treasuries capital preserving and default risk free. Neither is true-- inflation rate is meant to characterize the buying power of dollars. Whenever inflation rate exceeds the overnight interest rate, then the purchasing power of anyone holding cash or short term treasuries is by definition losing principal in a guaranteed way. Defaulting on a pure fiat system is also basically pointless, dollar denominated debts can always be met with money printing, so inflation is really the only way a default happens. And we did actually default in 1971 when Nixon ended convertibility of dollar to gold. > When investors are very scared it happens that they get very defensive and pay the Fed govt. for the privilege of parking their money in US Treasuries. I think you have something inverted here in your understanding (unless you are talking about negative interest rates?). You pay to borrow, you get to collect interest if you park capital. If you want to park money in US treasuries, that's a long treasury position and the government is paying you for the privilege of being able to use your dollars for a while. How it would work is you start with your asset (say a stock) sell that for dollars, then sell the dollars for a treasury, which pays a coupon upon maturation (gives you back more dollars than it started). So investors with a parked cash position are not paying the government, the government is paying them. When there is a panic, I agree the demand for treasuries goes up, and that is why you see the long term rates go down-- as demand for treasuries goes up, they start to be auctioned at a lower premium. The only people paying the government interest on the treasuries are those who are borrowing money, for example banks.