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If American - which presidential candidate will you vote for? (Sept. Edition)


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http://www.wsj.com/articles/democrats-deplorable-emails-1473981664

 

How much to buy an ambassadorship? The answer is in the latest hacked messages.

 

"Of the top 57 cash cows 18 ended up with ambassadorships. The largest fundraiser listed, Matthew Barzun, who drummed up $3.5 million for Mr. Obama’s first campaign, was named ambassador to Sweden and then ambassador to the United Kingdom. "

 

Guys, this is an investing board, so let's put politics aside and discuss the return on investments of these donations. I can't seem to find the salary and other monetary benefits being a Sweden ambassador. But if i expect a 20% annual return and I put down $3.5 million, I'd have to get back 7-8 million after 4 years to justify it.

 

 

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So can you let me borrow $1M at a -5% APR for 30 years or would 50 years be more preferable?  Actually if you'd prefer I would be willing to promise to not pay you back and keep accepting your interest payments to me indefinitely.

So you have no economic facts to counter my argument, just you anecdotal experience of failure to borrow $1M and -5% and that should disqualify what I've said?

 

Btw, I don't see Switzerland, Germany and Japan having trouble issuing bonds.

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http://www.wsj.com/articles/democrats-deplorable-emails-1473981664

 

How much to buy an ambassadorship? The answer is in the latest hacked messages.

 

"Of the top 57 cash cows 18 ended up with ambassadorships. The largest fundraiser listed, Matthew Barzun, who drummed up $3.5 million for Mr. Obama’s first campaign, was named ambassador to Sweden and then ambassador to the United Kingdom. "

 

Guys, this is an investing board, so let's put politics aside and discuss the return on investments of these donations. I can't seem to find the salary and other monetary benefits being a Sweden ambassador. But if i expect a 20% annual return and I put down $3.5 million, I'd have to get back 7-8 million after 4 years to justify it.

 

What's the issue? Ambassadors have always been prominent donors or supporters regardless of who POTUS is or what party he belongs to. (Especially to the nice places or those that don't have important strategic value)

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0% interest means people have no time preference for money or goods.  Negative interest litterally means that people prefer money and goods later rather than sooner and are willing to pay more the longer you keep it from them.    It is nonsensical and could never be found in a free market without government force and manipulations.

I don't see why you would find it so nonsensical. In a situation when people are over levered and have a desire to delever they prefer savings (pay down debt) to goods. This is turns depresses the demand for credit which drives down interest rates and yes if that desire to delever is widespread enough and strong enough it can make the price negative.

 

Also keep in mind that for the people who delever the interest rate is positive because they're paying down debt they've accumulated years ago at higher rates so effectively they're getting a pretty good deal.

 

The theoretical reason why interest rates can't go below zero is that is that you can keep physical cash which pays zero, but physical cash does have carry costs that makes the minimum price for cash below zero how much below we don't know for sure yet.

 

As you can see that's all market driven supply and demand no government.

 

What exactly are you saying here? People would rather pay down debt than take it on creating a lack of debt. This reduction in supply of debt is so large and demand so high that investors are willing to lose money to get the debt?? The whole point of owning debt is to make money. This reminds me of philosophical arguments that become completely detached from reality and end in absurdity. The question that needs to be answered is, why would someone knowingly lend money at a loss? To claim this is market driven is bizarre given that central banks have printed trillions of dollars to artificially increase demand for debt for the very purpose of lowering interest rates. There's a reason this has never happened in the history of the world.

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0% interest means people have no time preference for money or goods.  Negative interest litterally means that people prefer money and goods later rather than sooner and are willing to pay more the longer you keep it from them.    It is nonsensical and could never be found in a free market without government force and manipulations.

I don't see why you would find it so nonsensical. In a situation when people are over levered and have a desire to delever they prefer savings (pay down debt) to goods. This is turns depresses the demand for credit which drives down interest rates and yes if that desire to delever is widespread enough and strong enough it can make the price negative.

 

Also keep in mind that for the people who delever the interest rate is positive because they're paying down debt they've accumulated years ago at higher rates so effectively they're getting a pretty good deal.

 

The theoretical reason why interest rates can't go below zero is that is that you can keep physical cash which pays zero, but physical cash does have carry costs that makes the minimum price for cash below zero how much below we don't know for sure yet.

 

As you can see that's all market driven supply and demand no government.

 

What exactly are you saying here? People would rather pay down debt than take it on creating a lack of debt. This reduction in supply of debt is so large and demand so high that investors are willing to lose money to get the debt?? The whole point of owning debt is to make money. This reminds me of philosophical arguments that become completely detached from reality and end in absurdity. The question that needs to be answered is, why would someone knowingly lend money at a loss? To claim this is market driven is bizarre given that central banks have printed trillions of dollars to artificially increase demand for debt for the very purpose of lowering interest rates. There's a reason this has never happened in the history of the world.

What i am saying that people would rather pay down debt which reduces demand for debt. At the same time as the levels of debt go down the supply increases as well. This pushes down the price of debt - interest rates.

 

If what you are saying - that interest rates are artificially low. Then what you would expect to see is levering up of the private sector, inflationary pressure, and a booming economy. Instead what you have is a sluggish economy, low inflation with a chance of deflation, and significant deleveraging of the household sector - all indications that that the interest rate is too high not too low.

 

Now you ask since savers are profit seekers why would they lend at negative rates and take losses. I'm not gonna go into the whole economics argument behind it but choose a case that most are probably familiar. Let's pick Berkshire. They have about $73 billion in cash and face negative rates. They have 3 options: to lend it out at negative rates, build secure warehouses surrounded by armed guards and park it there, or spend it.

 

Now of course Berkshire's decision will be dictated by the the level of the rates they'll behave a lot differently if the rate is -5% than if the rate is -0.5%. If rates decline from 0.5% to -0.5% they're likely not going to start building warehouses when rates cross the zero threshold, nor will they change their investment strategy and start spending their cash like crazy just because rates dropped 1%. So instead they take the negative rates and the losses that come with them.

 

Btw, when the fed prints money it increases the supply of money, it does not increase the demand for debt.

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0% interest means people have no time preference for money or goods.  Negative interest litterally means that people prefer money and goods later rather than sooner and are willing to pay more the longer you keep it from them.    It is nonsensical and could never be found in a free market without government force and manipulations.

I don't see why you would find it so nonsensical. In a situation when people are over levered and have a desire to delever they prefer savings (pay down debt) to goods. This is turns depresses the demand for credit which drives down interest rates and yes if that desire to delever is widespread enough and strong enough it can make the price negative.

 

Also keep in mind that for the people who delever the interest rate is positive because they're paying down debt they've accumulated years ago at higher rates so effectively they're getting a pretty good deal.

 

The theoretical reason why interest rates can't go below zero is that is that you can keep physical cash which pays zero, but physical cash does have carry costs that makes the minimum price for cash below zero how much below we don't know for sure yet.

 

As you can see that's all market driven supply and demand no government.

 

What exactly are you saying here? People would rather pay down debt than take it on creating a lack of debt. This reduction in supply of debt is so large and demand so high that investors are willing to lose money to get the debt?? The whole point of owning debt is to make money. This reminds me of philosophical arguments that become completely detached from reality and end in absurdity. The question that needs to be answered is, why would someone knowingly lend money at a loss? To claim this is market driven is bizarre given that central banks have printed trillions of dollars to artificially increase demand for debt for the very purpose of lowering interest rates. There's a reason this has never happened in the history of the world.

What i am saying that people would rather pay down debt which reduces demand for debt. At the same time as the levels of debt go down the supply increases as well. This pushes down the price of debt - interest rates.

 

If what you are saying - that interest rates are artificially low. Then what you would expect to see is levering up of the private sector, inflationary pressure, and a booming economy. Instead what you have is a sluggish economy, low inflation with a chance of deflation, and significant deleveraging of the household sector - all indications that that the interest rate is too high not too low.

 

Now you ask since savers are profit seekers why would they lend at negative rates and take losses. I'm not gonna go into the whole economics argument behind it but choose a case that most are probably familiar. Let's pick Berkshire. They have about $73 billion in cash and face negative rates. They have 3 options: to lend it out at negative rates, build secure warehouses surrounded by armed guards and park it there, or spend it.

 

Now of course Berkshire's decision will be dictated by the the level of the rates they'll behave a lot differently if the rate is -5% than if the rate is -0.5%. If rates decline from 0.5% to -0.5% they're likely not going to start building warehouses when rates cross the zero threshold, nor will they change their investment strategy and start spending their cash like crazy just because rates dropped 1%. So instead they take the negative rates and the losses that come with them.

 

Btw, when the fed prints money it increases the supply of money, it does not increase the demand for debt.

 

There are many assumptions you are making and using a circular argument.  But to take the primary argument of yours that debt is decreasing is not correct.  If you add the government, nonfinancial corporate and household debt, it is not going down.  Afterall, we as tax payers are on hook for the government debt too.

 

http://www.mckinsey.com/global-themes/employment-and-growth/debt-and-not-much-deleveraging

You see US in "increasing leverage" in Exhibit 2 since 2007.

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If what you are saying - that interest rates are artificially low. Then what you would expect to see is levering up of the private sector, inflationary pressure, and a booming economy.

 

Instead what you have is a sluggish economy, low inflation with a chance of deflation, and significant deleveraging of the household sector - all indications that that the interest rate is too high not too low.

 

So you quote three things, but I see a different view than you:

 

1. Inflation:

How are you measuring inflation? PCE (personal consumption expenditures) perhaps is more relevant than CPI? It is debatable. PCE has been rising:

 

https://fred.stlouisfed.org/series/PCE

 

2. De-leveraging

I believe Don has addressed the 'deleverarging' argument, but here is the graph of total securitized consumer credit, if you want a consumer rather than soverign measure: https://fred.stlouisfed.org/series/TOTALSL

 

 

3. Sluggish economy

By what measure? Unemployment is below 5%. The stock market is near or above all-time highs. realGDP is up. I'm not sure how you are measuring this, as many of the main indicators of economic activity point to a very active economy. Perhaps you are looking at home sales? I am not sure that's the best indicator as it is usually considered a lagging indicator.

 

----

 

So the conclusion I see is: increased prices, increased economic activity, and increased leverage. IMHO this is all made possible by very low interest rates.

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If what you are saying - that interest rates are artificially low. Then what you would expect to see is levering up of the private sector, inflationary pressure, and a booming economy.

 

Instead what you have is a sluggish economy, low inflation with a chance of deflation, and significant deleveraging of the household sector - all indications that that the interest rate is too high not too low.

 

So you quote three things, but I see a different view than you:

 

1. Inflation:

How are you measuring inflation? PCE (personal consumption expenditures) perhaps is more relevant than CPI? It is debatable. PCE has been rising:

 

https://fred.stlouisfed.org/series/PCE

 

2. De-leveraging

I believe Don has addressed the 'deleverarging' argument, but here is the graph of total securitized consumer credit, if you want a consumer rather than soverign measure: https://fred.stlouisfed.org/series/TOTALSL

 

 

3. Sluggish economy

By what measure? Unemployment is below 5%. The stock market is near or above all-time highs. realGDP is up. I'm not sure how you are measuring this, as many of the main indicators of economic activity point to a very active economy. Perhaps you are looking at home sales? I am not sure that's the best indicator as it is usually considered a lagging indicator.

 

----

 

So the conclusion I see is: increased prices, increased economic activity, and increased leverage. IMHO this is all made possible by very low interest rates.

It is difficult to show a correlation between debt and economic activity when Greece is one of the highest countries listed in "Increased Leverage" in the McKinsey report cited before.

Difficult to show a correlation between interest rates and GDP too when Japan had low interest rates since early 1990s.

 

The US percapita GDP growth since 2008 is pretty low, hardly ever exceeding 1.5%. If a medicine is not working this long, it is time to change the medicine.

 

http://data.worldbank.org/indicator/NY.GDP.PCAP.KD.ZG?locations=US

I am not clear if the "growth rates" are in real or nominal, but either way it is low.

 

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Investor, maybe you could specify which part of my argument you have a problem with so I can clarify. I didn't want to put a wall of text representative of an economic lecture.

 

In the original post the argument was whether interest rates were too low. The reason why I didn't talk about government debt is because government borrowing demand is quite inelastic, so that won't tell us much about the levels of interest. The private sector's demand for debt is much more elastic so it would tell us a lot more. Also in the private sector, the household sector is really what matters because while there is some variation due to corporate structures, corporates follow households. 

 

Edit: The numbers in that worldbank link are real numbers. Also 1.5% growth in GDP per capita is actually quite good for the US.

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Investor, maybe you could specify which part of my argument you have a problem with so I can clarify. I didn't want to put a wall of text representative of an economic lecture.

 

In the original post the argument was whether interest rates were too low. The reason why I didn't talk about government debt is because government borrowing demand is quite inelastic, so that won't tell us much about the levels of interest. The private sector's demand for debt is much more elastic so it would tell us a lot more. Also in the private sector, the household sector is really what matters because while there is some variation due to corporate structures, corporates follow households. 

 

Edit: The numbers in that worldbank link are real numbers. Also 1.5% growth in GDP per capita is actually quite good for the US.

My argument is neither interest rates OR levels of debt are really correlated to GDP growth. Yes, my argument is that Fed has really little effect on long term economic growth.

 

Example of low interest rates not improving GDP: Japan

Example of higher debt not improving GDP: Greece, Spain

 

The 1.5% GDP growth since 2008 is pretty low, compared to all other recoveries given in the world bank data.

 

What we achieved in last 8 years is much higher total debt, getting stuck at near zero interest rates and historically LOWEST growth rates after a recession.

 

I cannot differentiate between household debt vs Government debt when the households are on hook to pay more taxes - essentially paying back the debt.  For example, whether I buy health insurance or I pay more taxes and government provides health insurance, are essentially same.

 

 

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I'll get back to this later cause I'm busy now, but LC, are you seriously making an economic argument based on levels instead of ratios?

Partially I am. Are we worse off because we are growing at 2%/yr vs. 4%? Should we expect to grow at 4% forever? Perspective is needed.

 

It is difficult to show a correlation between debt and economic activity when Greece is one of the highest countries listed in "Increased Leverage" in the McKinsey report cited before.

Difficult to show a correlation between interest rates and GDP too when Japan had low interest rates since early 1990s.

I'm not trying to create some relationship between interest rates and XYZ. I'm just saying what we've observed over the last 6 or so years in the US was enabled to a large extent by cheap capital. This may not hold true in the future, in other countries, on the moon, etc. :D

 

Perhaps we are working through (or maybe it is permanent) a "demographic bulge" of cheap capital. Human capital is better educated than ever and can be allocated globally for practically no cost. Technology advances every day. Materials are cheaper to mine, products are cheaper to build and distribute, than ever before. Why should interest rates be high?

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LC, you see, we were talking about whether rates are too low or too high, and why would economic actors lend at negative interest rates. You jump hard on that argument, but what you are trying to say has nothing to do with that. You're talking about a completely different thing.

 

To address your post: Yes growing at 4% would make us better off than growing at 2%. But that's quite irrelevant. We can't grow at 4% long term. The number is about 2-2.5%. The bigger lofty numbers are just what politicians say to get testosterone fueled cheers out of the crowds. But in the short term we should see numbers a bit bigger because we were below that and should catch up.

 

What we've observed in the US economy over the past 6 years or so was actually pretty good given the situation. It wasn't ideal by any means, but pretty good, and better than others have done. Much of the credit is due to the Fed who were fighting the war by themselves. I would give Bernake a medal!

 

You say that it was enabled by cheap capital. What I was talking about was that capital wasn't cheap but the Fed did a better job of getting the markets to a clearing equilibrium than other actors which helped.

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It is difficult to show a correlation between debt and economic activity when Greece is one of the highest countries listed in "Increased Leverage" in the McKinsey report cited before.

Difficult to show a correlation between interest rates and GDP too when Japan had low interest rates since early 1990s.

I'm not trying to create some relationship between interest rates and XYZ. I'm just saying what we've observed over the last 6 or so years in the US was enabled to a large extent by cheap capital. This may not hold true in the future, in other countries, on the moon, etc. :D

 

Perhaps we are working through (or maybe it is permanent) a "demographic bulge" of cheap capital. Human capital is better educated than ever and can be allocated globally for practically no cost. Technology advances every day. Materials are cheaper to mine, products are cheaper to build and distribute, than ever before. Why should interest rates be high?

 

"I'm not trying to create some relationship between interest rates and XYZ."

    Then how do you know interest rates have any effect on what happened since 2008? If there is no clinical study on a drug, how would one know taking that drug has cured a disease or a side effect?

 

"Why should interest rates be high?"

    From a practical point of view, retirees typically look for interest income where a 4% return would ensure their savings stretch into retirement.

    But why would any one put that money into a bank account if other assets could grow faster than zero.  For example, if someone can tell for sure S&P 50 will grow at 6% next 5 five years, why would that person put any money into bank at zero percent (and taxed at regular income tax rates than capital gains tax).

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LC, you see, we were talking about whether rates are too low or too high, and why would economic actors lend at negative interest rates. You jump hard on that argument, but what you are trying to say has nothing to do with that. You're talking about a completely different thing.

I literally just posted this: Human capital is better educated than ever and can be allocated globally for practically no cost. Technology advances every day. Materials are cheaper to mine, products are cheaper to build and distribute, than ever before. Why should interest rates be high?

I'm pretty much theorizing a few reasons why interest rates should be low. I'm pretty sure this directly addresses the discussion.

 

Before that I was taking issue with your observations on inflation, economic activity, etc., which I disagree with.

 

I have no idea as to why certain parties would lend at negative rates. Maybe they're foolish. Maybe they're brilliant. Like Don mentioned earlier, if you're willing to, I'll take you up on it.

 

"I'm not trying to create some relationship between interest rates and XYZ."

    Then how do you know interest rates have any effect on what happened since 2008? If there is no clinical study on a drug, how would one know taking that drug has cured a disease or a side effect?

 

"Why should interest rates be high?"

    From a practical point of view, retirees typically look for interest income where a 4% return would ensure their savings stretch into retirement.

    But why would any one put that money into a bank account if other assets could grow faster than zero.  For example, if someone can tell for sure S&P 50 will grow at 6% next 5 five years, why would that person put any money into bank at zero percent (and taxed at regular income tax rates than capital gains tax).

To the first point, I was making an argument about the US during a certain period of time. Not Japan, not Greece. I put out my theory, it's a theory. Feel free to disagree.

 

To your second point, frankly I have no idea what you're getting at. I'm saying low cost of capital across the value chain (raw materials, productivity gains, cheap transportation, cheap human capital), in real terms, translates into low interest rates. Why individual retirees make asset allocation decisions is completely up to them...Maybe they're lazy and would rather spend the time sunning vs. chasing marginal returns.

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Investor, maybe you could specify which part of my argument you have a problem with so I can clarify. I didn't want to put a wall of text representative of an economic lecture.

 

In the original post the argument was whether interest rates were too low. The reason why I didn't talk about government debt is because government borrowing demand is quite inelastic, so that won't tell us much about the levels of interest. The private sector's demand for debt is much more elastic so it would tell us a lot more. Also in the private sector, the household sector is really what matters because while there is some variation due to corporate structures, corporates follow households. 

 

Edit: The numbers in that worldbank link are real numbers. Also 1.5% growth in GDP per capita is actually quite good for the US.

My argument is neither interest rates OR levels of debt are really correlated to GDP growth. Yes, my argument is that Fed has really little effect on long term economic growth.

 

Example of low interest rates not improving GDP: Japan

Example of higher debt not improving GDP: Greece, Spain

 

The 1.5% GDP growth since 2008 is pretty low, compared to all other recoveries given in the world bank data.

 

What we achieved in last 8 years is much higher total debt, getting stuck at near zero interest rates and historically LOWEST growth rates after a recession.

 

I cannot differentiate between household debt vs Government debt when the households are on hook to pay more taxes - essentially paying back the debt.  For example, whether I buy health insurance or I pay more taxes and government provides health insurance, are essentially same.

Investor, i won't go into a whole thing of checking your numbers cause I don't have that much time and there's not that much in it for me. But usually when looking at recessions you look at peak to peak or trough to through, or trough to peak. 2008 wasn't any of those. If you were to measure things right you would not use 2008 but the trough in 2009. Also this recovery being below all others is way out there. This recovery being worse that the previous one yes. But the crash was also worse. It depends how you set your timeline. Are you trying to say that the 1930s were better than the 2010s?

 

You also use different cases. Spain, Greece, Japan, US. Spain and Greece cannot borrow in their own currency whereas Japan and US can. Not to mention a whole other lot of circumstances are different between those 4 countries.

 

Btw, the original argument was whether rates were too low for the US. I already stated why government borrowing demand is inelastic relative to rates but you keep going on about that. You say that people are on the hook for the gov't debt and they'll have to pay it down. There's a whole lot of complicated issues there of why they don't really. But let me distill it a bit. When in the past 100 years did the people have to pay down the debt? 200 years? is it imminent?

 

In your latest post you mention that retirees  would like 4% return then you make some bizarre statements like risk premia do not exist. I don't really get the point.

 

Regarding the Fed, yes, they're cannot influence the long run growth rate of the economy. That's dependent on other things. But then you know, in the long term we're all dead. The Fed's job is the short term. To moderate the the business cycle. To help markets reach equilibria in an efficient manner. To take away the punch bowl when the party is getting out of control and spike the bowl when ppl are getting depressed.

 

In all seriousness, i'm down to debate and engage in topics and debate things if you are serious. But it has to be in a direction. I'm not gonna engage in trolling. I'm not accusing you of anything, but we've moved a lot from the original topic. These are fairly complicated issues and I try to think and give reasoned answers. It's easy to pull on 10 threads but I won't be able to address them all in depth in one answer.

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LC, you see, we were talking about whether rates are too low or too high, and why would economic actors lend at negative interest rates. You jump hard on that argument, but what you are trying to say has nothing to do with that. You're talking about a completely different thing.

I literally just posted this: Human capital is better educated than ever and can be allocated globally for practically no cost. Technology advances every day. Materials are cheaper to mine, products are cheaper to build and distribute, than ever before. Why should interest rates be high?

I'm pretty much theorizing a few reasons why interest rates should be low. I'm pretty sure this directly addresses the discussion.

 

Before that I was taking issue with your observations on inflation, economic activity, etc., which I disagree with.

 

I have no idea as to why certain parties would lend at negative rates. Maybe they're foolish. Maybe they're brilliant. Like Don mentioned earlier, if you're willing to, I'll take you up on it.

 

"I'm not trying to create some relationship between interest rates and XYZ."

    Then how do you know interest rates have any effect on what happened since 2008? If there is no clinical study on a drug, how would one know taking that drug has cured a disease or a side effect?

 

"Why should interest rates be high?"

    From a practical point of view, retirees typically look for interest income where a 4% return would ensure their savings stretch into retirement.

    But why would any one put that money into a bank account if other assets could grow faster than zero.  For example, if someone can tell for sure S&P 50 will grow at 6% next 5 five years, why would that person put any money into bank at zero percent (and taxed at regular income tax rates than capital gains tax).

To the first point, I was making an argument about the US during a certain period of time. Not Japan, not Greece. I put out my theory, it's a theory. Feel free to disagree.

 

To your second point, frankly I have no idea what you're getting at. I'm saying low cost of capital across the value chain (raw materials, productivity gains, cheap transportation, cheap human capital), in real terms, translates into low interest rates. Why individual retirees make asset allocation decisions is completely up to them...Maybe they're lazy and would rather spend the time sunning vs. chasing marginal returns.

LC, it's late and I've had a long day and replied to this thread a few time. I can't review everything and I think either you or me have make a mistake. if it was me I apologize.

 

This discussion started with Don's assertion that rates are too low. The stuff about Greece and Japan and retirees was in response to Investor20.

 

On the other stuff I would agree with you until you contradict yourself. You say:

 

Human capital is better educated than ever and can be allocated globally for practically no cost. Technology advances every day. Materials are cheaper to mine, products are cheaper to build and distribute, than ever before. Why should interest rates be high?

 

Yes that is true. Technology advances, but not at a tremendous pace, faster than before. And human capital in indeed cheap. And you are right. Interest rates should be low in this environment. But human capital is cheap because there is slack in the labor market. Which is a sign of an economy below full employment. If we were approaching full employment we would see the inflation rate moving up, which we don't. But you also said the economy is doing great which doesn't jive with the data we have.

 

To summarize what I've said in previous posts: The economy is doing ok, not stellar and things are improving gradually. Rates are not artificially low, they were probably a bit high in the past but now they're maybe somewhere around where they should be (no one really knows what they should be). There is still significant slack but things are on the right track. The US managed the downturn better than most other countries. Most of the credit goes to the Bernake Fed which while woefully unequipped to deal with the situation did everything it could when others were sitting on their hands.

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This is where I disagree with your perspective. I feel I am repeating myself. You say human capital is cheap due to slack. US unemployment is below 5%. Workers are more educated and mobile than at any other time in history. These are good things and are relatively sustainable.

 

In terms of inflation, I mean, CPI is not a great measure. So what are we looking at here?

Also how's this argument: are we not seeing inflation in certain assets? Stocks bonds etc.? It's late and I need sleep so I'll try and flesh this argument out tmrw. I don't buy the "but there's no inflation" argument. I think it's more nuanced.

 

So there's also the "exported inflation" argument.

 

Regardless, I'll consider it a win-win that we both agree rates should be low, regardless of our different justifications.

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Investor, maybe you could specify which part of my argument you have a problem with so I can clarify. I didn't want to put a wall of text representative of an economic lecture.

 

In the original post the argument was whether interest rates were too low. The reason why I didn't talk about government debt is because government borrowing demand is quite inelastic, so that won't tell us much about the levels of interest. The private sector's demand for debt is much more elastic so it would tell us a lot more. Also in the private sector, the household sector is really what matters because while there is some variation due to corporate structures, corporates follow households. 

 

Edit: The numbers in that worldbank link are real numbers. Also 1.5% growth in GDP per capita is actually quite good for the US.

My argument is neither interest rates OR levels of debt are really correlated to GDP growth. Yes, my argument is that Fed has really little effect on long term economic growth.

 

Example of low interest rates not improving GDP: Japan

Example of higher debt not improving GDP: Greece, Spain

 

The 1.5% GDP growth since 2008 is pretty low, compared to all other recoveries given in the world bank data.

 

What we achieved in last 8 years is much higher total debt, getting stuck at near zero interest rates and historically LOWEST growth rates after a recession.

 

I cannot differentiate between household debt vs Government debt when the households are on hook to pay more taxes - essentially paying back the debt.  For example, whether I buy health insurance or I pay more taxes and government provides health insurance, are essentially same.

Investor, i won't go into a whole thing of checking your numbers cause I don't have that much time and there's not that much in it for me. But usually when looking at recessions you look at peak to peak or trough to through, or trough to peak. 2008 wasn't any of those. If you were to measure things right you would not use 2008 but the trough in 2009. Also this recovery being below all others is way out there. This recovery being worse that the previous one yes. But the crash was also worse. It depends how you set your timeline. Are you trying to say that the 1930s were better than the 2010s?

 

You also use different cases. Spain, Greece, Japan, US. Spain and Greece cannot borrow in their own currency whereas Japan and US can. Not to mention a whole other lot of circumstances are different between those 4 countries.

 

Btw, the original argument was whether rates were too low for the US. I already stated why government borrowing demand is inelastic relative to rates but you keep going on about that. You say that people are on the hook for the gov't debt and they'll have to pay it down. There's a whole lot of complicated issues there of why they don't really. But let me distill it a bit. When in the past 100 years did the people have to pay down the debt? 200 years? is it imminent?

 

In your latest post you mention that retirees  would like 4% return then you make some bizarre statements like risk premia do not exist. I don't really get the point.

 

Regarding the Fed, yes, they're cannot influence the long run growth rate of the economy. That's dependent on other things. But then you know, in the long term we're all dead. The Fed's job is the short term. To moderate the the business cycle. To help markets reach equilibria in an efficient manner. To take away the punch bowl when the party is getting out of control and spike the bowl when ppl are getting depressed.

 

In all seriousness, i'm down to debate and engage in topics and debate things if you are serious. But it has to be in a direction. I'm not gonna engage in trolling. I'm not accusing you of anything, but we've moved a lot from the original topic. These are fairly complicated issues and I try to think and give reasoned answers. It's easy to pull on 10 threads but I won't be able to address them all in depth in one answer.

 

My statements are pretty simple

a) There is no data shown ever that zero interest rates increase demand (Eg. GDP) above what the GDP growth would be above 3% interest rates. Show me if there is data that I missed. It is not an opinion or argument, but rather a fact.

 

b) If one were to tell for sure zero interest rates would be there for next 5 years, any person would then move the money into other asset classes that would hopefully grow above zero (housing, stock market). This is also a fact.

 

So, people putting their money in zero interest rate bank account would necessarily mean there are lot of people who believe other assets (housing, stock market) would also return zero or worse in next 5 years OR interest rates would go up.

 

 

 

 

 

 

 

 

 

 

 

 

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LC, you see, we were talking about whether rates are too low or too high, and why would economic actors lend at negative interest rates. You jump hard on that argument, but what you are trying to say has nothing to do with that. You're talking about a completely different thing.

I literally just posted this: Human capital is better educated than ever and can be allocated globally for practically no cost. Technology advances every day. Materials are cheaper to mine, products are cheaper to build and distribute, than ever before. Why should interest rates be high?

I'm pretty much theorizing a few reasons why interest rates should be low. I'm pretty sure this directly addresses the discussion.

 

Before that I was taking issue with your observations on inflation, economic activity, etc., which I disagree with.

 

I have no idea as to why certain parties would lend at negative rates. Maybe they're foolish. Maybe they're brilliant. Like Don mentioned earlier, if you're willing to, I'll take you up on it.

 

"I'm not trying to create some relationship between interest rates and XYZ."

    Then how do you know interest rates have any effect on what happened since 2008? If there is no clinical study on a drug, how would one know taking that drug has cured a disease or a side effect?

 

"Why should interest rates be high?"

    From a practical point of view, retirees typically look for interest income where a 4% return would ensure their savings stretch into retirement.

    But why would any one put that money into a bank account if other assets could grow faster than zero.  For example, if someone can tell for sure S&P 50 will grow at 6% next 5 five years, why would that person put any money into bank at zero percent (and taxed at regular income tax rates than capital gains tax).

To the first point, I was making an argument about the US during a certain period of time. Not Japan, not Greece. I put out my theory, it's a theory. Feel free to disagree.

 

To your second point, frankly I have no idea what you're getting at. I'm saying low cost of capital across the value chain (raw materials, productivity gains, cheap transportation, cheap human capital), in real terms, translates into low interest rates. Why individual retirees make asset allocation decisions is completely up to them...Maybe they're lazy and would rather spend the time sunning vs. chasing marginal returns.

LC, it's late and I've had a long day and replied to this thread a few time. I can't review everything and I think either you or me have make a mistake. if it was me I apologize.

 

This discussion started with Don's assertion that rates are too low. The stuff about Greece and Japan and retirees was in response to Investor20.

 

On the other stuff I would agree with you until you contradict yourself. You say:

 

Human capital is better educated than ever and can be allocated globally for practically no cost. Technology advances every day. Materials are cheaper to mine, products are cheaper to build and distribute, than ever before. Why should interest rates be high?

 

Yes that is true. Technology advances, but not at a tremendous pace, faster than before. And human capital in indeed cheap. And you are right. Interest rates should be low in this environment. But human capital is cheap because there is slack in the labor market. Which is a sign of an economy below full employment. If we were approaching full employment we would see the inflation rate moving up, which we don't. But you also said the economy is doing great which doesn't jive with the data we have.

 

To summarize what I've said in previous posts: The economy is doing ok, not stellar and things are improving gradually. Rates are not artificially low, they were probably a bit high in the past but now they're maybe somewhere around where they should be (no one really knows what they should be). There is still significant slack but things are on the right track. The US managed the downturn better than most other countries. Most of the credit goes to the Bernake Fed which while woefully unequipped to deal with the situation did everything it could when others were sitting on their hands.

 

I understand the technology argument for lowish interest rates, also people are living longer than ever before which should lengthen time preferences and lower prevailing rates.  But I still can't wrap my head around rates <= to 0%.  Why would anyone lend rather than hoard at 0%, never mind below 0%?  Even your example of Berkshire strikes me as unreasonable, you can guard a warehouse full of money (a lot of money) a lot cheaper than lending it out at -0.05% interest, especially if it is in the tens or hundreds of $Bs.  And for lower amounts of money simple vaults would work just fine.  You could diversify into metals or low/no expected return, but safe, investments.  I can't see anyone choosing lending over hoarding (or other options) at negative interest.  Why would you buy a negative interest bond?  Only if you thought there would be a bigger fool who would pay you more for it later, which doesn't seem very likely to me if rates are already negative to start with.

 

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This is where I disagree with your perspective. I feel I am repeating myself. You say human capital is cheap due to slack. US unemployment is below 5%. Workers are more educated and mobile than at any other time in history. These are good things and are relatively sustainable.

 

In terms of inflation, I mean, CPI is not a great measure. So what are we looking at here?

Also how's this argument: are we not seeing inflation in certain assets? Stocks bonds etc.? It's late and I need sleep so I'll try and flesh this argument out tmrw. I don't buy the "but there's no inflation" argument. I think it's more nuanced.

 

So there's also the "exported inflation" argument.

 

Regardless, I'll consider it a win-win that we both agree rates should be low, regardless of our different justifications.

Sorry maybe I didn't pharse things well. By inflation I don't mean just the existence of inflation. I mean inflation pressure as in the inflation rate moving higher. When the economy is approaching full employment you would see inflation start to move up in a sustained fashion - prices, wages, etc.

 

As for measures, you're always looking at what prices are doing. Leave assets alone cause that won't tell you much about the labor market and such. When I look at the whole economy I like to use CPI. But you can use PCE is you like. It'll more or less the same story. You also want to look at core vs headline to make it less noisy. Here's core PCE inflation:

 

https://fred.stlouisfed.org/series/BPCCRO1Q156NBEA

 

You can see that it's not really accelerating upward. If you see that number steadily moving upwards towards 2.5 or 3 that's a very good indication of low that we're getting close to full employment and tight labor markets.

 

Now you say that unemployment is low cause it's 4.9%. That's U3 by the way. Historically that would be pretty close to full employment and we should see inflation pressure yet we don't. The could be for a couple of reasons.

 

1. For some reason NAIRU has moved lower. This is a complicated topic. I'll just say that it possible but unlikely.

2. We're not close to full employment and there's slack in the labor market. (Btw if NAIRU moved lower that also implies slack at 4.9 U3). I'd say that this is where we are. U6 unemployment is 9.7%. At full employment that rate should be about 7.5-8%. So there you have it the labor market slack come from underemployment. I'd say that as the economy continues to improve u'll see U3 hang around the 5% mark maybe tick a bit lower, u'll see U6 come down and as that does inflation start to pick up.

 

But yes, for now rates are deservedly low. The economy still needs stimulus to pick up the slack in the labor market. But we're on the right track.

 

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I understand the technology argument for lowish interest rates, also people are living longer than ever before which should lengthen time preferences and lower prevailing rates.  But I still can't wrap my head around rates <= to 0%.  Why would anyone lend rather than hoard at 0%, never mind below 0%?  Even your example of Berkshire strikes me as unreasonable, you can guard a warehouse full of money (a lot of money) a lot cheaper than lending it out at -0.05% interest, especially if it is in the tens or hundreds of $Bs.  And for lower amounts of money simple vaults would work just fine.  You could diversify into metals or low/no expected return, but safe, investments.  I can't see anyone choosing lending over hoarding (or other options) at negative interest.  Why would you buy a negative interest bond?  Only if you thought there would be a bigger fool who would pay you more for it later, which doesn't seem very likely to me if rates are already negative to start with.

I know it's hard to wrap your head around this stuff cause things start to get really weird around the 0% mark.

 

Ok, I break this down in several bits and adress them individually so bare with me.

 

First of all there a certain quantity of money out there for which there are 3 options: spend, lend, or hoard. Spending solves the low/negative rates problem so let's put that to the side and say there are 2 options: lend or hoard. In aggregate you can't diversify into other assets. For example you see the negative rate and say screw this I'm getting a bar of gold for $x. You buy that bar from me now i have $x that I must lend or hoard. So individually actors can diversify, but collectively we cannot and must lend or hoard.

 

For small economic actors hoarding probably works just fine. You and I could probably do just fine with a safe in the basement - though that is a frictional cost as well. For larger economic like Berkshire it gets more tricky. I'll use BRK again as an example because we're all familiar with it but you can extrapolate the same reasons to other enterprises.

 

Firstly you have institutional/regulatory issues. A lot of that cash represents reserves for the insurance cos. I'm not sure how it would all work, but Buffett's warehouse may not qualify as reserves for the insurance cos.

 

Secondly we get back to cost.

1. There is a cost to storing this cash. I don't know exactly what it would be cause I have a life. But I think it's a significantly higher than the 0.05% you mentioned. Delaware depository non-commercial rate for gold is 0.5%. BRK's size would probably lower that rate quite a bit. But the fact gold is denser than currency would raise the rate.

2. There will be a fee to get that currency. It probably won't be low and BRK won't be able to negotiate it.

3. BRK does a lot of transactionsc. It'll cost money to transport that money back and forth

4. BRK counter-parties don't really accept payment in Brinks truks. So there will be another fee to redeposit the cash.

5. The headache that comes from managing all of this stuff has to be worth something and it may be the highest cost.

 

Add all these together and theoretically you can get rates that are 0- sum(1-5). We just don't really know what sum (1-5) is yet. I don't think we can get -5% but I think -1% is possible. Hell the 2 year Bund already yields -0.7%.

 

I hope this helps

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I think it is pretty simple actually.  If interest rates are zero and one could get higher returns in other assets they would buy it.  Berkshire is keeping money in short term treasuries, not long term.  They just take their time to buy. But buffett never advocated keeping in cash.

 

But interest rates cannot be this low for long term.  If they are at zero for a prolonged period, even a 0.0001% returns is better than putting it in bank.  This leads to weird things like having to value the stock market at infinite levels, which Buffett is getting at in below link:

 

"If the government absolutely said interest rates are going to be zero for 50 years, the Dow would be at 100,000," Buffett told " Squawk Box ," stressing he was speaking hypothetically.

"If you had zero interest rates and you knew you were going to have them forever, stocks should sell at, you know, 100 times earnings or 200 times earnings," he said.

http://finance.yahoo.com/news/buffett-says-government-did-dow-124652732.html

 

It also leads to weird things like business models that return only 1% become justifiable because the cost of capital is so low. The hurdle becomes too low for business people to select a business model.  The business models then are to take lot of debt on a low ROIC business, still high returns because capital is free.

 

"Interest rates have created "irrational competition," mogul Warren Buffett reportedly concurred in a meeting with a top venture capitalist."

http://www.cnbc.com/2016/07/14/warren-buffett-weighs-in-on-interest-rates-and-irrational-competition.html

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