Permanently low interest rates?

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Seppia
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Re: Permanently low interest rates?

Post by Seppia »

https://www.bloomberg.com/news/articles ... ction-year?

Unless Trump loses in 2020 (unlikely), this era may be remembered as the USA’s equivalent to Italy’s 80s: a debt fueled, unsustainable sugar high of prosperity for a declining nation, ultimately setting the stage for decades of going nowhere.

Obviously the USA is 102727384748 times more resilient and stronger than what Italy ever was, but when short term thinking, opportunistic, old politicians use debt any time they can, things ultimately get to a level where it’s impossible to turn back.

Italy has been running “primary surpluses” (meaning before debt interest payments) for years now, but even with interest rates so low in Europe, zero growth + 140% debt to GDP ratio = an unwinnable war with math.
Once you get there, you’re screwed.

In this Nth disproval of a theory that has never worked (see Kansas VS California for another recent example), it is literally unbelievable that trickle down economic theorists aren’t getting laughed of any room on this planet, and that some politicians still present this bullshit with a straight face.

classical_Liberal
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Re: Permanently low interest rates?

Post by classical_Liberal »

Seppia wrote:
Wed Aug 21, 2019 2:12 pm
Italy has been running “primary surpluses” (meaning before debt interest payments) for years now, but even with interest rates so low in Europe, zero growth + 140% debt to GDP ratio = an unwinnable war with math.
Once you get there, you’re screwed.
Italy has no direct control over it's own currency. It can't inflate away it's debt, this is the number 1 problem, IMO. The US can, and to top it off much of the debt is owned by foreign governments/investors, so the negative affects are spread thinner and globally. Not just centered on decreasing the purchasing power of it's own citizenry.

black_son_of_gray
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Re: Permanently low interest rates?

Post by black_son_of_gray »

jacob wrote:
Wed Aug 21, 2019 7:30 am
I once read a paper on option pricing that IIRC started with the axiom that the market always strove to maximize disagreement. [...] I like the triple or N-ple point theory, but I fear that the market is ALWAYS in such a state unless it's moving rapidly. Therefore, it's not directly useful.
A fair point, and I agree with it—but it requires disagreement to work, and there isn't always disagreement on some market-related variables. Which is to say, in any given market and at any given time, there is a common knowledge among investors that almost no one disagrees with. Or maybe a small minority of dissenters exists, but the market's so thin on a particular trade for that position that no one even tries to make it.

For example, let's tease apart inflation, disinflation, deflation, and interest rates in the US over the last 60 years or so (since leaving the gold standard). Here's a graph of inflation data:

Image
(Image link)

Prior to ~1970, the US regularly flipped between inflation and deflation states. As a result, deflation was definitely a possibility in the minds of investors, and investors might disagree on that—and then the axiom of maximum disagreement would apply. But some time after 1970, after the US had been solidly in an inflation state for a while (akin to the ice at -100C), serious consideration of deflation dropped from the common knowledge of investors, and the disagreements that arose when considering interest rate changes ceased to be between inflation/deflation and shifted towards inflation/disinflation. That is, there weren't any disagreements that there would be inflation, just with how much inflation at a given interest rate (which weren't anywhere near zero). And over the decades (i.e. longer than just about every investor has been in the market) that has slowly morphed into market common knowledge. But now that interest rates (and inflation) have crept down towards zero over the past decade, deflation is starting to poke its way back into investment consideration. The ice is still frozen, but sitting at -1C instead of -100C.

I also totally agree with you on the Keynesian beauty contest angle of keeping tabs on how all the different factions are interpreting the situation. I guess my argument as to why the current situation is different (uh oh—I've done it now!) is that I'm saying there is a new category in beauty standards that hasn't been considered for the last few pageants. If you feel like you've got a good idea how the audience judges bikinis in the swimsuit competition, what do you do when a guy comes out on stage in a Speedo?

This triple point idea is almost certainly not directly useful in predicting which outcome is most likely to happen. Where I think it could be useful is in understanding the dynamics of whatever happens (e.g. rapid switching between inflation/deflation states) or in understanding that each of these states is actually possible and maybe even probable, which helps an investor keep an open mind to outcomes and hedge appropriately.

Or, y'know, maybe I just went too far with a metaphor. It's not like I don't do that constantly anyway. :mrgreen:

bigato
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Re: Permanently low interest rates?

Post by bigato »

Very interesting analysis, thank you

Seppia
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Re: Permanently low interest rates?

Post by Seppia »

There was a recent, very interesting, Twitter thread by Paul Krugman on the subject

https://twitter.com/paulkrugman/status/ ... 90112?s=21

jacob
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Re: Permanently low interest rates?

Post by jacob »

@bsog - On way to describe [any] market is WLOG to see it as a battle between P("V") and dP("V")/dt, where P is the price and "Value" is some esoteric quantity calculated by fundamentals, pop culture, mouse clicks, or whatever. Let draw a graph where P is on one axis and P' (the time derivative) is on the second axis.

I submit this covers a large fraction of most investment strategies. Two important ones it doesn't cover (which consequently are not efficient and thus sources of alpha ... at least they were 10 years ago) are quant-strategies based on price momentum based on volume instead of time (this drives day traders up the wall, because volume is just not a natural independent variable for the human trader) and gamma strategies which would be based on P''. (That's why I said WLOG ... feel free to draw more dimensions.)

Now the P and the P' axis are best drawn logarithmicly. WLOG again, think of it as ms, s, 1000s, 1000000s, .... so from millisecond holding/focus (computers), seconds (clicker traders), hours (day traders), ... months, years, decades, forever.

Now if it was actually possible to know, it would be really interesting to see each trader---perhaps with a dot signifying their size---and where they concentrate in this 2D-land.

This goes to the comment you made about agreement/disagreement. Disagreement is 100% on the microscale for a "stable price", this being the very definition of a clearing market. But as you note, the agreement tends to be HIGH on the global scale to the point where the perception of other dimensionalities are completely lost. (Like how humans only perceive 4 dimensions of spacetime even though there are likely 10, 11, or 26 dimensions in "reality".)

For example, if we look at the plot, there are very few people who act as if they take a long term view. 10 years of pain is enough to cause 99.99% of investors to switch strategy. This is kind of where we are now. P("V") are beginning to throw their hats into the P'("V"). In lowbrow terms, value investors for whom stocks have been overvalued since 2014 and have consequently been sitting in cash and moving(*) towards the momentum side (prices always go up). I just saw that Hussman gave up on the previous strategy in 2017.

It's well-known that moves stop just when the last person who will ever change their mind changes their mind. That is, a bull market stops when there are no more convertible bears left. Reasoning being that the source of buying pressure is gone and so prices must go down. This is the point where the "unseen agreement" breaks and prices move a lot. (One unseen agreement is that interest rates will remain permanently low---that central banks can successfully engineer a sustainable zombie economy.)

All this is just to explain the dynamics (why prices move). You're mainly talking about the dimensionality of the problem---which dimensions.

Jason
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Re: Permanently low interest rates?

Post by Jason »

I searched the site engine for Silvio Gesell and it appears a poster named Haplo posted a paper of his in 2012. But the link has expired.

https://www.npr.org/sections/money/2019 ... ed-prophet

Augustus
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Re: Permanently low interest rates?

Post by Augustus »

jacob wrote:
Mon Oct 28, 2019 10:35 am
S&P500 finally reaching new heights surpassing the last record from 20190726.
Total market cap to US GDP now at 144%. Highest point during tech bubble was 148%.
Is the fed cutting rates and starting on QE again making sense to anyone? From what I've read, they're driving money into stocks by keeping rates ridiculously low with the intent to give people no alternative other than investing in overpriced stocks. Seems like throwing gas on a fire. I just don't understand. Lots of people also seem to think we're headed for negative interest rates and more QE to boot, which means even more asset price inflation in the long term.

I feel sincerely bad for the younger generations given that wages seem stagnant, but the cost of housing and other items is going up and the fed seems hellbent on further inflation.

Mister Imperceptible
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Re: Permanently low interest rates?

Post by Mister Imperceptible »

At the highest point in the tech bubble a major asset class was remarkably cheap.

jacob
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Re: Permanently low interest rates?

Post by jacob »

@Augustus - I think cutting rates was a mistake due to political pressure. QE doesn't make sense. Negative rates do to some extent---as a way to remove some of the heat/slush in the system. In the EU, the goal is definitely to create a "there's no alternative but risk-on" scenario. This is misguided, because rather than spending or investing, the low/negative rates just make people save even more. I don't think that's the case in the US, where the overpriced market could also be explained by bull market optimism (which you'll find in spades outside this forum anyway). The other "problem" for those who invest now "for the long run" (a phrase I hear often) is that at this price level, the "long run" is really long before an expected return obtains---whether that's prices going sideways or going down or even up before they come back, I don't know.

@MI - But at this point in the everything bubble, that major asset class is still 2x as expensive as it was during the tech bubble, so while cheap, it's not remarkably cheap. Also, I don't like it due to my "feels" about paying what's essentially a negative interest rate (ETF fees) lest I store it in the mattress (fig or litt) which I don't like either. I wish there was an interest bearing account in that currency.

Mister Imperceptible
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Re: Permanently low interest rates?

Post by Mister Imperceptible »

BRUTE’s old remark that the central bankers have physics penis envy no longer applies. They know it doesn’t work. It’s about perpetuating power and postponing hard decisions. At best we outsourced the fiat bubble contagion to China post-2008 so as to ensure that everyone goes down with us.

It’s about loss of trust. Having to put something in a mattress is because the banking system is untrustworthy. If you put cash in a bank account they inflate it away. If you take it out they make you feel like a criminal, because you are supposed to let them steal it from you slowly at first, then suddenly all at once. The GenXers went all-in and got their faces ripped off in the tech bubble. The Boomers tried to make up for a lifetime of irresponsibility and got their faces ripped off in the housing bubble. Soon the Millennials will have their faces ripped off. The system is designed to rip your face off. The bankers of old were men of prudence who only survived with proper risk control. The bankers of today are finance bros stealing from America’s retirement fund because as the WSP say “You are obligated to no one.” I have to trust myself, the system has proven itself wholly untrustworthy.

The Romans observed in their decline that their trading partners no longer accepted materials or goods, only hard currency. The Denarius was hard at first and soon enough it was worthless.(*) That you can no longer have an interest bearing account in that currency is a symptom of decline. Government bonds are great in a hard standard because you’re skimming off the top of Manifest Destiny. The tech bubble wasn’t just the buying opportunity of a lifetime for an asset, it was the opportunity to sell the top in Peak America. The current imbalance is still great enough to present an exploitable opportunity worthy of Harry Browne. Great for students of history and human nature, terrible for people who believe what they are told.

(*)Note in the graph the gentle slope under the Antonines. This was engineered by the Five Good Emperors to last longer, but not to last. The decline had already begun.

I would think an 8-shot Ruger Redhawk .357 magnum revolver will retain its value more than the paper you use to pay for it, and has the potential for great marginal utility.

7Wannabe5
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Re: Permanently low interest rates?

Post by 7Wannabe5 »

As I noted in c_L's journal, I am being swamped with business loan offers at fairly low rates. Maybe I don't get it, but extremely low interest rates seems to me to signal a lack of enterprising individuals in the market place. Also might signal that Picketty was wrong and the elasticity of capital is much smaller than he supposed.

Anyways, I have no shortage of micro-business ideas in which to invest if/when somebody is wanting to offer me a loan at negative 2% :lol:

Mister Imperceptible
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Re: Permanently low interest rates?

Post by Mister Imperceptible »

Mister Imperceptible wrote:
Tue Oct 29, 2019 9:40 pm
At best we exported the fiat bubble contagion to China post-2008 so as to ensure that everyone goes down with us.
fixed

China’s Biggest Banks Prepare For Hard Times

Mister Imperceptible
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Re: Permanently low interest rates?

Post by Mister Imperceptible »

7Wannabe5 wrote:
Wed Oct 30, 2019 6:27 am
Maybe I don't get it, but extremely low interest rates seems to me to signal a lack of enterprising individuals in the market place.
You are confusing the cause and the effect. The Baby Boomers made an unprecedented amount of promises to themselves that others are now expected to pay.

On a macro level, they cannot increase interest rates because the debts are so large that the interest payments would become unpayable. And the reason loans are being made at such low rates is because in the hunt for short term yield, marginal or otherwise perpetual money-losing anti-businesses are seen as viable or least as the means to generating a marketable security that can be sold to a shmuck.

On a micro level, you should look at the cost of living and the cost of tuition and see how that impacts individual choices.

I consider myself a very enterprising individual. But after graduating from college with $150k in student debt(*) and with the exorbitant costs of living in first-tier cities, I have spent my twenties and early thirties living in my parents basement in the exurbs or in third-tier cities, digging out of debt. I have never known anything other than having to get money. If creating or innovating something can be done by taking risk without prioritizing short term income, I might have been able to do that sooner were it not for Sallie Mae coming each month to extract a pound of flesh. As it is I have worked my way into being a highly paid office dweller.

(*)Speaking of marketable securities being sold to schmucks. But you have to question how getting educated is painted as the only way to get ahead in life by all the elders (parents and teachers alike) and then is made so expensive that at age 17 the youth makes a life-altering and perhaps permanently life-restricting decision.

If the State and the older generations were interested in the country’s youth as innovators and creators, they would allow for an environment in which the younger generation was not viewed as a stable of wage slaves from which to extract rents and interest payments.

7Wannabe5
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Re: Permanently low interest rates?

Post by 7Wannabe5 »

MI wrote:On a macro level, they cannot increase interest rates because the debts are so large that the interest payments would become unpayable. And the reason loans are being made at such low rates is because in the hunt for short term yield, marginal or otherwise perpetual money-losing anti-businesses are seen as viable or least as the means to generating a marketable security that can be sold to a shmuck.
Right, I get this, but these whys and wherefores shouldn't matter from the perspective of your theoretical "anti-businessman" considering the loan offer :lol: I have a friend who is a more genius level ENTP than me. Sometimes he takes a salary man job. Sometimes he partners on a start-up. Sometimes he does contract work. Sometimes he hires a crew and offers up contracts. During the last recession when there were a lot of young programmers sitting around unemployed in cafes in the town where he resided, he was hiring them because they were relatively cheap. What I am observing is that right now money/loans is what is cheap, so that must mean that entrepreneurs/innovators are relatively scarce.

I kind of agree with your reasoning that the educational system is to blame, but I think it has more to do with too much time in daycare and adult-supervised after school activities. Also, I read in a magazine for teens that the average high school student currently only spends 2.5 hours/week working for money. Serious shortage of kids getting early life experience engaged in activities such as manufacturing cinnamon flavored toothpicks and selling them on the playground or putting on a show in the garage and charging quarter for admittance or making up babysitting business cards and putting them in every mailbox in new subdivision, etc, etc, etc,

shemp
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Re: Permanently low interest rates?

Post by shemp »

"Permanently" low interest rates is extremely unlikely, but low for another decade (two decades at most) is possible. The massive worldwide savings glut is driven by aging populations. Pig of baby boomers passing through the lifecycle python, so to speak. In 10-20 years, aging populations will be forced to dis-save, meaning spend accumulated hordes of savings, especially on medical expenses, and that will end the savings glut. Wars or epic natural disasters could end the glut sooner, of course.

Governments will have accumulated massive debts by this time, which can be reduced in real terms by keeping short term interest rates low despite growing inflationary pressures (financial repression). Long term interest rates are not central bank controlled, and will skyrocket under financial repression. Once the wealthy have exchanged their stocks, gold, real estate and cash in favor of long term bonds, governments will raise short term interest rates to stop inflation, which will crush prices of stocks, gold, real estate. There will still be plenty of government debt, which will be expensive to service with high short interest rates, so expect lots of changes to reduce spending, especially government medical care for the elderly. Sickly old people are less numerous and much more expensive than old people in general, hence an inviting target.

Mister Imperceptible
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Re: Permanently low interest rates?

Post by Mister Imperceptible »

shemp wrote:
Tue Nov 05, 2019 6:35 pm
Long term interest rates are not central bank controlled, and will skyrocket under financial repression.
Are you sure? They can keyboard into existence as much money as is required to control rates.

The last time rates were hiked to stop inflation was not until after a full decade of sustained high inflation.

shemp
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Re: Permanently low interest rates?

Post by shemp »

Mister Imperceptible wrote:
Tue Nov 05, 2019 7:00 pm
Are you sure? They can keyboard into existence as much money as is required to control rates.
Central banks could buy up long bonds (and also stocks and gold) to drive down long rates, but they normally only buy short term bonds, to drive down short rates, and let the market handle the long rates (and also stocks and gold).

Mister Imperceptible
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Re: Permanently low interest rates?

Post by Mister Imperceptible »

shemp wrote:
Tue Nov 05, 2019 11:11 pm
I’ve been reading your posts and you have a sinister faith in the power of central authorities to control everything. I am certainly wary of this possibility but I feel there is a limit to this. It assumes a kabal of bankers and politicians can sick a military force on the entire world’s population. I am wondering to what degree loyalties become divided.

shemp
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Re: Permanently low interest rates?

Post by shemp »

Mister Imperceptible wrote:
Tue Nov 05, 2019 11:16 pm
I’ve been reading your posts and you have a sinister faith in the power of central authorities to control everything. I am certainly wary of this possibility but I feel there is a limit to this. It assumes a kabal of bankers and politicians can sick a military force on the entire world’s population. I am wondering to what degree loyalties become divided.
My faith is in mathematival logic and natural science. Given limited resources and two sets of morals, one which proposes sharing and non-violence and the other which proposes the opposite (selfishness and violence), those who embrace the latter set of morals will eat and thus survive and those who embrace the former set will starve. Thus the former set of morals will go extinct.

Of course the elites might fight among themselves, of that's what you mean by divided loyalties. But only the ruthless elites survive. It makes no difference whether the surviving ruthless elites are united or broken into numerous competing groups. What matters is that that all the survivors will be ruthless.

In today's USA military, most soldiers would be unwilling to carry out orders to exterminate masses of civilians, another form of divided loyalties. But there are always some psychopaths in the military, and that's all that's needed. A minority that will eventually grow into a majority when the time is ripe.

All this is obvious if you study history or apply mathematical logic to natural science. We forget how violent humans are because we have temporarily escaped confrontation with the laws of nature due to the industrial revolution. But this won't go on forever.

Populations always rise to the limit of resources, barring violence to control population. But if population rises to the limit of resources, then there is violent competition for resources. Violence either way. Some say world population will stabilize voluntaryily. Once again, suppose two sets of morals, one advocating producing as many children as possible and the other advocating restraint. Those embracing the first set of morals eventually prevail, unless the second group is willing to use violence to enforce their views.

Low interest rates, like the lack of widespread starvation among humans nowadays, lack of wars, etc, is the result of a temporary excess of resources, allowing escape from the usual violent competition in nature (humans are a part of nature, not an exception) for limited resources. When the excess of savings dissipates, interest rates will rise. When resources in general become scarce, wars and other widespread violence by humans competing for limited resources will return.

The non-stop propaganda of the media blinds us to reality. People willingly consume this propaganda because they want to know what to think and what to say to please their corporate masters and prove they will be cooperative and peaceful worker bees. But I'm retired, so don't have to swallow and regurgitate fairy tales to please any master. I can afford to know and speak the truth of what is coming in the future.

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