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Naturally negative


rogermunibond
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"One likely factor behind the savings glut and negative interest rates is negative “time preference.” Once upon a time, economic theory maintained that people always value today’s consumption more than tomorrow’s consumption – and thus display positive time preference. People would therefore always demand compensation in the form of a positive interest rate in order to forgo current consumption and save for the future instead. People were viewed as impatient, and the more impatient people are, the higher the interest rate has to be to make them save.

 

This made sense in a world where people usually died before they retired and struggled to satisfy basic needs. However, it can be argued that in affluent societies where people can expect to live ever longer and thus spend a significant amount of their lifetimes in retirement, more and more people demonstrate negative time preference, meaning they value future consumption during their retirement more than today’s consumption. To transfer purchasing power to the future via saving today, they are thus willing to accept a negative interest rate and bring it about through their saving behavior."

 

This is total BS.  Out of the blue, humankind is now universally patient and no longer impulsive.  They are so patient they are willing to accept negative interest rates. Seriously?

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It's the 70s Jimmy Carter mindset of conservation.

 

There are a growing segment of populations that try to recycle, reuse, and actively consume less.

 

This plays out demographically as well as among younger set.

 

But I think the onus is on the writer to prove that investors in general and institutional investors in particular can accept negative rates - or that that's a natural outcome of demographics.

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Yea, I also tend to disagree. There's nothing natural about long-term negative rates.

 

I think it's a combination of demographics and the slowing of the economy. Demographics will work itself out in the U.S. in the next 3-5 years.

 

The slowing economy though might take longer. At some point, the inflationary impulse of additional debt is drowned out by the deflationary impulse of debt service and debt repayment. I think it's possible we might be there.

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One day the economics and finance textbooks will look back at today's environment as one of pure folly and idiocy; yet another example of thoughtless, lemming-like behaviour. Glad to see this kind of commentary out of Pimco because the more it becomes commonly accepted, the closer we are to the end of this stupidity.

 

If he truly believes what he's writing, I'd be overjoyed to borrow unlimited amounts of money from him at negative rates.

 

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There is long term trend to lower real rates and if there is deflation, then negative nominal rates makes sense.  Here are some references for LT trends in interest rates:

 

700 Years of Falling Interest Rates, 1310-2018

https://www.bogleheads.org/forum/viewtopic.php?t=278700

 

Packer

 

True deflation is impossible as central banks never shrink the monetary base.

 

Deflation as Keynsians tried to peddle the term for the last decades (increase of purchasing power relative to goods) is possible in the short term through market folly. When that happens negative interest rates still are unnatural as you could (or at least should be able to) just hold cash without lending it away.

 

In my opinion this is just signs of the current system crumbling. They'll just replace it with a new system though (just like they did with Bretton Woods) and before too long most will have all but forgotten about it.

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"This made sense in a world where people usually died before they retired and struggled to satisfy basic needs. However, it can be argued that in affluent societies where people can expect to live ever longer and thus spend a significant amount of their lifetimes in retirement, more and more people demonstrate negative time preference, meaning they value future consumption during their retirement more than today’s consumption"

 

Is it me or does this justification sound ridiculous? It's like what Buffett said about saving sex for your old age. Bodies get creaky, not better. Who in the world would prefer money in retirement to a life of slavery today?

As for basic needs being met, these so called 'affluent' societies are nothing of the sort. I have seen they are quite miserly in the benefits they give, taxes are high, and service quality and wait times are poor. If anything it is the non-affluent societies that are actually doing better with low taxes and a virulently capitalist pay for whatever you want type markets. If anything, the argument of this article is to have much higher rates as people need more money now.

 

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