A Black Hole Engulfing the World's Bond Markets

https://www.bloomberg.com/news/articles/2019-07-13/the-black-hole-engulfing-the-world-s-bond-markets-quicktake

by igravious • 7 years ago

316 349 7 years ago

viburnum• 7 years ago

Kind of weird that people expected to get paid simply for having money in the first place.

When you loan money you risk it. Unless you are under the FDIC insurance limit, the bank is allowed to lose your money by lending it out wrong. FDIC insurance is actually a progressive redistribution program because people with more money pay into the system without receiving proportional protection.

dbancajas• 7 years ago

is FDIC per person or per account? Can I claim 4 FDIC insurance claims for 1M total net worth for example?

gchokov• 7 years ago

Not weird at all. You lend your money to the bank, the bank operates with them and you get paid for that. Can you give me your money so that I invest with them and I will give you less what you gave me in 10 years? Thanks!

ambicapter• 7 years ago

Is it weirder that this was essentially the case for decades upon decades?

_v7gu• 7 years ago

Philosophically yes, but realistically not. If I can borrow 10$ to earn an extra dollar, why would I object to paying a 0.5$ interest?

lyttlerock• 7 years ago

I think philosophically this has merit (see Riba[0]). Economically, I feel like it makes perfect sense to get paid for providing a service (i.e. loaning money).

[0] https://en.wikipedia.org/wiki/Riba

simplicio• 7 years ago

Makes more sense if you think about it as being paid to forgo consumption. Your being paid not for having money, but for not using it right away and letting someone else use it instead.

Of course, if no one else has anything better to do with it, the value of this "service" drops to zero, as seems to be happening now.

dymk• 7 years ago

You're getting paid by the bank because you're effectively loaning the bank money

atemerev• 7 years ago

Not “having”, but lending it for some time to other people.

rhizome• 7 years ago

So a passbook savings account.

andrenth• 7 years ago

Well not simply for having money, but for not spending it immediately. By saving you sacrifice immediate benefits for future ones, and you get money for it because you lend your money to people who are willing to pay to spend it now.

This is the essence of all investing, including entrepreneurship.

jstewartmobile• 7 years ago

Our system prints money for complex and highly debatable reasons, so what a bank pays in interest to its depositors is rarely ever enough to offset all the inflation they create.

It's not "getting paid" so much as loss mitigation.

The modern racket of fiat money and lending at interest (which all of the Abrahamic faiths prohibit or restrict) is an assault on the plebes.

People like the game too much to care.

Youcandothis• 7 years ago

I don't think they are paid for having money. When saving money in a bank, you don't have the money. The bank has it, and you are being paid for letting them have your money.

mruts4• 7 years ago

Why is that weird? Having money allows you to loan the money to people that don't have it, and they're gonna pay you for the privileged. Or, in another words, money you get today is worth more than money you get tomorrow. Both of these are very intuitive concepts.

walshemj3• 7 years ago

No your being paid for the use of your money - the banks lend this out, this is how fractional reserve banking works.

carapace• 7 years ago

The word is "usury".

Originally, usury meant the charging of interest of any kind and, in some Christian societies and even today in many Islamic societies, charging any interest at all was considered usury. Some of the earliest known condemnations of usury come from the Vedic texts of India. Similar condemnations are found in religious texts from Buddhism, Judaism, Christianity, and Islam

https://en.wikipedia.org/wiki/Usury

whatshisface2• 7 years ago

Banks see their margins squeezed. They’re earning next to nothing from lending but still need to offer depositors a rate above zero to keep their business.

I disagree. If every bank offers negative interest then savers will have no choice: and if that's what the market says has to happen, it will happen. Negative interest has happened before in history.

Uehreka• 7 years ago

What if consumers decide at that point to withdraw their money and keep it in a safe at home?

gruez2• 7 years ago

https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-nega...

tl;dr: by unlinking the value of cash vs electronic money, and manipulating the exchange rate.

skybrian9• 7 years ago

Seems like it comes down to some investors preferring safety so much that they will pay for the privilege?

One possible arbitrage here might be for the governments themselves to issue more debt and invest it? (Essentially, this is a government bank.)

But, the market seems to be saying that there are too few good investment opportunities. Maybe consumption should be higher? A UBI scheme might do it.

roenxi2• 7 years ago

Possible but highly unlikely; they could literally keep money in a sack under their bed and get better returns. Not much difference between a sack under the bed and a bank account if you don't tell anyone about the sack.

I'm guessing it probably either speculators buying bonds assuming that they can be onsold to a central bank, or people who are forced to buy for whatever reason (eg, maybe some savings schemes are forced to put x% into government bonds). I've bought bonds exactly once on the assumption that I could on-sell them for a profit when government lowered interest rates. People like me don't have any impact on the market, but if the incentives make sense at the small level maybe it works out the same on the large.

your-nanny2• 7 years ago

Actually, large amount of cash instruments are pretty unweildy things. And you still have to pay to secure it in the meanwhile.

adventured3• 7 years ago

Not much difference between a sack under the bed and a bank account if you don't tell anyone about the sack.

They could hardly be any more different. If one person beyond yourself knows about it, then you're in trouble. One fire or disaster and it's all gone. If it's a smaller sum, you're FDIC insured against loss in a bank account, which again makes the point about just how different the scenarios are. If I feel like it I can safely protect $1 million via four distinct accounts under the FDIC at no cost. The Fed will go back to zero rates at some point to stimulate the US economy. Even when that happens, I'm essentially paying a small insurance fee (inflation vs zero rates) per year to guarantee the safety of the $1 million. That is ultimately far safer than managing it under my mattress. And cheaper, if I need any guaranteed security for the mattress. It's also easier to move at low concern (whether that's to shift it into an investment account or move it to another bank). If it's under your mattress, every move is a high risk for exposure; every person you let deep into your life creates some risk of theft (eg non-malicious gossip).

Finnucane• 7 years ago

Literal cash under a mattress is not a good option for a pension fund.

jogjayr• 7 years ago

Not much difference between a sack under the bed and a bank account if you don't tell anyone about the sack.

Burglary isn't the only danger. Paper money can be eaten by moths, so you probably want to vacuum seal it. That still won't keep out rats. You could lose it all in a flood, landslide, tornado, fire, or earthquake.

The individual probabilities of all these events are quite low but multiplied with your all your liquid cash, the cost is unacceptably high for most people.

Inthenameofmine2• 7 years ago

This assumes that cash or bank money has the same counyerparty risk as a government bond. That is not the case. Negative interest rates essentially signal that everybody is short on the future overall.

UncleEntity2• 7 years ago

But, the market seems to be saying that there are too few good investment opportunities. Maybe consumption should be higher?

The market has very little say in the matter when the central banks force interest rates to near (or equal to) zero -- somewhat ironically to increase consumption by de-incentivising saving.

skybrian9• 7 years ago

Central banks control the supply of some very safe investments and usually that determines the price. But, someone still needs to own government debt and that depends on demand.

There are plenty of other choices for investors, like the stock market or real estate. So, you could either spend the money or choose a riskier investment.

igravious3• 7 years ago

Do you blame a certain class of investor for being extremely risk-averse?

Imagine if you're managing people's retirement money. How would you invest it? People's nest eggs.

To put it into computer-nerd context; remember the saying, "nobody ever got fired for buying IBM".

Isn't this the same kind of thinking?

By the way, what do you think about the idea some are proposing that crypto-currencies are more solid than a gold standard?

Instead of transitioning from this central bank backed fiat currency malarkey (which in theory ought to work just fine but doesn't because of greed, collusion, corruption, hubris – i.e., human weakness) back to the gold standard, some say we should move to crypto-currrency standards. I'm not at all versed enough in the tech and theory to know if this is a good idea or not.

skybrian9• 7 years ago

I'm not blaming anyone for wanting very safe, secure investments. What I'm saying is that, if people want safety, maybe the government should provide it?

Cryptocurrency is high risk, with both dramatic changes in price and insecure exchanges, so I'm not sure why you bring that up in this context?

rolltiide3• 7 years ago

Central banks are trying to tell investors to go throw their money at random unproven CEOs

Investors are saying they’ll pay for the privilege not to, and some also started buying tiny amounts of bitcoin.

Economics consistently fails to predict actual human behavior.

seibelj2• 7 years ago

With negative interest rates, it truly will make financial sense to put all of your money under the mattress, so to speak.

In reality, keeping liquid cash will no longer make any sense whatsoever, and further push all other assets up in value, property and equities for example.

solotronics• 7 years ago

I still don't fully understand negative interest rates. So banks then have a negative penalty for holding cash?

beamatronic2• 7 years ago

Supply and demand, and fear. Imagine a customer who needs safety more than a return. They are willing to put down $1 now in exchange for a GUARANTEE they will get 0.99 in 10 years.

quaquaqua12• 7 years ago

When sums of money are sufficiently large (millions or billions of USD), it sometimes makes sense to secure a very small loss (0.5% per year) than to park it in an account or fund or etc which could have a positive or negative yield (maybe you win maybe you lose).

Also, to the original commenter, I will never put all my cash under the mattress. One break in and it's all gone.

I currently have all my cash parked in a 1% interest checking account with strong protections and fringe perks.

I am content with taking an extremely small loss on inflation while I wait for the market to eventually tank. It's been longer than I expected (2 years already), but I do not ever shed a tear over the what, $16,000 in pretax capital gains I theoretically could have made?

adventured3• 7 years ago

It might help to think of it as going beyond zero interest rates to the point of intentionally punishing traditional savings to try to force consumer spending (if you hold onto it, we'll devalue it), entice borrowing (we'll essentially pay you to buy a house [1]), etc. There are various approaches to pushing rates below zero. Japan and the ECB have done a lot of experimenting, the US will probably take some notes from them when it comes time to push US rates below zero persistently.

[1] https://www.wsj.com/articles/the-upside-down-world-of-negati...

tomp2• 7 years ago

Some institutions are bound (legally and/or contractually) to hold (a certain percentage of) their assets in government bonds. So they don't really have a choice. Also, their performance isn't measured in absolute percentage terms, but only as relative to the benchmark - so if the benchmark goes just as negative as the fund, they didn't actually "underperform".

nostromo3• 7 years ago

Keep in mind Modern Portfolio Theory, in which we measure the total return of a portfolio, not just the individual components.

A huge number of retirement plans and endowments and pension programs will still hold negative yielding bonds, because they need to diversify their assets.

In theory those safe government bonds will shoot up in price just as equities crash. Because these assets aren’t correlated, your long term return will actually be higher. So, yes, that is probably worth paying a bit of money for.

SilasX9• 7 years ago

Is that really true when the yield is negative though? Wont investors just, like, go into checking accounts or safe deposit boxes when they need to flee to safety?

jnordwick6• 7 years ago

Interest rates are always positive. You are referring to yields which are part interest rate and part trading issues. Yields can and do go negtaive from time to time from the trading issues around the products. The interest rate (as shown on the coupon payment on the bond) will always be positive.

edit: let me add, I mean the consumer space. There can be some oddity in the bank-to-bank market because of various technical reasons, but it is extremely rare.

beefield2• 7 years ago

There are mortgages in Europe which are indexed to Euribors, which have been negative for a while, and you have been able to end up having a mortgage where index + margin is below zero. Obviously banks argue that actually mathematics is wrong and negative numbers do not exist, so customer needs to pay more than what was originally agreed, and I am not sure if that issue has been sorted out in courts.

What comes to interbank markets, it is far from rare and far from only technicalities, it is nowadays pretty normal that the floating leg of the swap pays negative interest rate. (In Euro, that is, USD has higher rates)

kgwgk11• 7 years ago

The interest rate (as shown on the coupon payment on the bond) will always be positive.

Negative coupons would be quite difficult to implement but having a positive coupon doesn't really mean anything: bonds are not necessarily sold at the nominal price even when they are initially issued.

"Henkel and Sanofi sell first negative yielding euro corporate bonds"

https://www.ft.com/content/6fdfeee8-2045-3452-a55d-3744a9091...

amiga_5007• 7 years ago

What if you cannot withdraw it because we move to digital only "cash"?

eyeball• 7 years ago

Time to gamble on bitcoin.

jotto• 7 years ago

Can someone explain the basics? Why buy a bond if it loses money? Why not hold cash?

technobum• 7 years ago

Imagine Venezuela before the hyperinflation.

your-nanny2• 7 years ago

why

dawhizkid2• 7 years ago

Bank accounts are only FDIC insured (or equivalent) up to some limit. If you have hundreds of millions and would otherwise stuff that in a bank account buying bonds are a safe alternative to get around that limit.

why_only_15• 7 years ago

That doesn't really make sense, because if you have hundreds of millions of dollars you can just hold the money yourself.

BurningFrog2• 7 years ago

OK, but is that really who is buying all these bonds?

mars4rp• 7 years ago

Because holding cash costs money, you need to have a big place to stash it and keep it secure. Some banks are trying to do that though, but it is not easy to do in scale of billions.

UncleEntity2• 7 years ago

Banks hold their excess reserves at the Federal Reserve[0] and receive interest on top, currently 2.35%. Scales up to at least a couple trillion give or take a few hundred billion.

[0] https://fred.stlouisfed.org/series/WRESBAL

anonuser123456• 7 years ago

Cash holdings still have risk for large amounts of capital. For example, if you had 1,000,000 in cash at a bank, it's only guaranteed up to 250,000. The other 750,000 is as risky as the institution. Compare this to a US treasury, which is substantially safer than any individual institution.

Banks can and do fail, particularly during crisis... and during a crisis safe bonds (e.g. US Treasuries) will gain in value.

I think there are a lot of people (like myself) that think it's only a matter of time before another major crisis... and are waiting to buy stocks at a steep discount.

beamatronic2• 7 years ago

This last part just has the effect of increasing the large amount of cash that ultimately someone is responsible for safe keeping in the meantime.

ksherlock• 7 years ago

some banks also have negative interest rates on large deposits.

luminaobscura• 7 years ago

Hold cash how?

If you mean holding in a bank. Some European banks are already charging negative rates for large deposits. They have to, because ECB is charging them. You see, all money is either physical or credit or excess reserves deposited at ECB. There is no electronic money outside of ECB system.

If you mean physical, it's also costly. Vaults, protection etc. And to make this option harder, they cancelled the 500 Euro. If people starts piling up 200s, they will cancel that too.

mmwelt• 7 years ago

How about in 1000 Swiss franc[1] notes? Perhaps this is also a reason why the Swiss franc rises so much in times of uncertainty?

[1] https://www.reuters.com/article/uk-snb-banknote/cash-crazy-s...

raintrees5• 7 years ago

I think they are coming to the wrong conclusions. They lost the plot at 7, so 8 is based on bad data.

If the Time Value of Money has disappeared, then I suggest it is the money that is not worth the time. We have many historical case studies that show what happens on a broader time scale when a society's money is debauched.

Time is the one true scarcity we all face. I am working at using it wisely... What have I got to lose? :)

benj1113• 7 years ago

"We have many historical case studies that show what happens on a broader time scale when a society's money is debauched"

All those are examples of high inflation, this isn't what we are seeing, and seemingly not what bond buyers are expecting to see.

raintrees5• 7 years ago

Wouldn't that depend on which part of the cycle we are in? I repeatedly read that prognosticators are expecting both deflation and rapid inflation, but they are arguing over the order.

And I am referring to large time cycles, the ones that play out over societal reformation periods, so I would not expect the bond market to reflect that scale of timing.

Dylan168072• 7 years ago

If the Time Value of Money has disappeared, then I suggest it is the money that is not worth the time.

What a baffling statement. "If my money can't spontaneously create new money, then why should I try to earn any?" If anything, lowered time-value increases the importance of trading time for cash. And value being too stable is the opposite of being debauched.

raintrees5• 7 years ago

Money is a tool we use to facilitate trade. Price assignation has been distorted by "corrective action." Traditionally, bonds would be purchased as a hedge/guarantee of future value, and not to be charged a loss of that value instead.

Anecdotally, I am slowly raising my service prices as my costs rise. To me, this is evidence that my dollar (I'm in the US) is not going as far as it used to. And yet costs in a healthy financial system should normally be driven down, by typical Austrian Economic thinking.

As I posted elsewhere, my observations are for a different time scale than bonds are usually measured against. Sorry for the confusion. :)

I have been spending too much time thinking macro...

nostromo3• 7 years ago

It’s insane to me that you could buy a 10 year treasury around 1980 that paid 17%.

That’s more than double the long term stock market return, and it’s (basically) risk free.

bkohlmann• 7 years ago

Inflation was nearly that high, so while the nominal rate was high, in real terms it was more in line with historical returns. Mortgage rates were often in double digits too.

gruez2• 7 years ago

But during that time inflation was in the double digits, and peaked at 14.8%. There was a real risk that inflation would go to 20%, which would wipe you out.

AnimalMuppet2• 7 years ago

Worse: You got 17%, but inflation was 14%, and you had to pay taxes on the 17%. So even at 17%, you were still losing money.

chiph3• 7 years ago

The 1973 oil crisis (and paying for the Vietnam War, etc) had kicked off a cycle of inflation that didn't really end until after the early 1980's when Paul Volcker (Federal Reserve Chairman) shrunk the money supply and raised interest rates. The prime rate hit 21% in 1982.

Dad was getting phone calls just begging him to refinance his 3.5% mortgage to current rates. "We have a low-low 18.5%!" Nope.

SilasX9• 7 years ago

Oh, man, he must have been kissing the ground to have locked in that mortgage rate before the inflation and high rates kicked in!

b_tterc_p2• 7 years ago

I’m curious what they said in the phone calls? I’m not sure what they could possibly do to sound compelling apart from perhaps just hoping your dad was aggressively financially illiterate?

beefman• 7 years ago

If a precipitous rise in oil prices caused inflation, why did Paul Volcker cure it, and not the equally-precipitous fall in oil prices that occurred simultaneously with his attempt?

That is, second attempt -- his first attempt, when oil prices were still high, didn't work.

chrisseaton2• 7 years ago

It's only 'risk free' in hindsight. Nobody knew what inflation would be and people risked losing value.

b_tterc_p2• 7 years ago

I may be wrong but I think when you say risk free you just mean there’s no risk of it not paying out. Inflation is a separate potential threat, for which there are inflation protected treasury assets?

egdod• 7 years ago

“Risk free” refers to default risk, not the risk that you could have gotten a better return elsewhere.

astura2• 7 years ago

The inflation rate in 1980 was 12.5%.

kgwgk11• 7 years ago

As other have mentioned, it's not "risk free" in a way that makes it "insane".

You could buy a 10-year bond paying 8% in 1970. That's a high yield by 21st-century standards but it performed quite poorly [1]: when you got your principal back ten years later it was worth less than half as much due to inflation (and not even by reinvesting the interests received would you break even).

[1] not worse than stocks, though

wutbrodo3• 7 years ago

That’s more than double the long term stock market return, and it’s (basically) risk free.

You're comparing nominal and real numbers here. The nominal rate was more than double the long term _real_ stock market return, but the corresponding real rate was 4.5%, as the inflation rate was 13.5% in 1980. That's a more accurate and much less eye-popping number.

rolltiide3• 7 years ago

It didn't seem risk free at the time.

e402• 7 years ago

My parents had a mortgage in the 80's at 18%. Yes, those were crazy times.

parsimo20103• 7 years ago

I didn't read the whole article (out of free articles on bloomberg and I'm not going to jump through hoops to get around the paywall), but it seems like the premise of the article doesn't match the title here.

It's not that TVM has disappeared, it's that people's evaluation of market risk has changed. It has always been the case that people are willing to accept a lower return for lower risk, and that will always continue to be true for rational people. Government bonds used to be the second lowest risk option- the absolute lowest risk used to be cash in a mattress (or a safe/bank vault), which returned zero percent (or just slightly below zero if you have to pay for storage). If a bond yield is negative it's not that TVM is suddenly wrong, it's that enough people seem to think that bonds are lower risk than holding cash.

Another option is that enough people think that the only alternative to stocks is bonds, and they forgot all about cash, causing bond yields to dip below cash yields. I doubt that enough people are dumb enough to forget about the cash option, so I don't really think this is the case.

I personally think it's silly to think a government bond would be lower risk than keeping my money in a safe, but think about the market movers (investment funds). You can't keep a billion dollars at your house, so you probably have to keep it at the bank. A negative bond yield indicates that you think the government is less likely to disappear than a bank, which at least makes some sense.

igravious3• 7 years ago

A number of points here.

Cash in a safe appreciates or depreciates relative to the current deflationary or inflationary environment. Imagine if you had $5,000 right about when Nixon ended convertibility of US dollars to gold† and announced wage/price controls. Back then that could have bought you a decent piece of land or a good chunk of a house depending on where we're talking about. How far does $5,000 go now? Wouldn't get you in the door of a university for a year.

A follow on point is. Who says what that CPI is? Looks like it is near enough the same people who control the money supply. That's an actual problem.

The quote that I lifted from the article refers to an actual thing: https://www.investopedia.com/terms/t/timevalueofmoney.asp The whole thinking behind TVM is that you have _positive_ interest rates. If you enter a negative interest rate environment you break TVM, which is about as fundamental a law/rule you can get in monetary theory. “The world now has $13 trillion of negative yielding bonds”: https://www.axios.com/negative-yielding-bonds-europe-japan-4...

So yes, it _is_ that the TVM is disappearing.

† an event which is correlated with what is happening now, some would even say it caused it: https://www.federalreservehistory.org/essays/gold_convertibi...

lottin• 7 years ago

For money to have a positive time-value it means that people prefer having any amount of money now over having the same amount of money later, all else equal. It is very hard to argue that this is not the case, because if you have the money now, you can have it later (by not spending it), but also you can spend it now, whereas if you don't have it now and only have it later, you have it later but you can't spend it now. Therefore having it now is always a better alternative, again, all else equal. Negative interest rates can be explained by other reasons that do not imply money having no time-value.

parsimo20103• 7 years ago

No, it isn't that TVM is disappearing. I will always prefer to have a good thing now rather than wait until the future. I will also always prefer to have more of a good thing rather than less. Those two reasons together are why we expect positive interest rates, because I am trading having a good thing now for having more of a good thing later. However, assuming that the interest rate must be positive assumes that you can make decisions with certainty. This leads to another common thing we need to talk about- risk preferences. Being risk averse means someone will forgo some amount of good things to have a better chance of not losing even more. Overall, the market is risk averse, risk seeking behavior doesn't survive in a significant amount (for every successful YOLO investor there are dozens of bankrupted investors).

If I have money, I have to do something with it (not doing anything with it means saving it, which is still doing something). I can stick it in a bank account or mattress, give it away, buy things now (food, stocks, gold)- I may sell in the future- or buy bonds (which are also things, but we're considering them separately than for this). I am trying to figure out how to get the most happiness now, but I might forgo some happiness now to ensure that I have more happiness in the future. The future presents risk. A stock or gold might go down, a bank or government might default. My mattress might get stolen. All of these things could happen regardless of inflation. We assume that inflation rises, and we assume that a government bond is pretty safe for most countries. You might buy an inflation protected bond, but the basic treasury bond just gives you a fixed percentage each period and then your money back at maturity. Negative yields can happen on T-bonds or TIPS- this discussion about TVM isn't about inflation or how CPI is calculated. This discussion really isn't about inflation.

If a person is paying more than the total value of the bond (the bond value plus all payouts), this isn't an indicator that TVM is broken or no longer true. What it does say is that your evaluation of the risk has changed. I am willing to accept a negative yield because I've calculated that all the options that have a better yield are too risky. I'd rather take a guaranteed loss of a little money instead of risking more, even if the higher risk might come with a better average return. Buying negative yield is saying that it's not worth trying to keep up with inflation, because trying to keep up with inflation is too risky. It's saying that holding cash with zero yield (and negative inflation-adjusted yield) is more risky, because I don't think I can store that cash safely, or that I would need to pay the amount of the negative yield to store the cash safely.

Again, TVM isn't broken. You will always need to compensate me more in the future to forgo something in the present, assuming that risk is equal for the payout in each time period. You will also always need to offer me a higher average return to take on risk. The perceived risk of the deal is what changed, not the logic behind decision making.

A follow on point is this: Bloomberg authors get paid more if their articles move markets (they have a funky way of deciding this bonus). Don't go thinking that Adam Smith is wrong just because a guy with a journalism degree interviewed a few investors.

andrewflnr• 7 years ago

I'm sure this is a hugely ignorant question, so I'm asking honestly...

Some funds track government bond indexes, meaning they must buy the bonds regardless of the yield.

Well, that looks like the problem, to me. How about don't do that? Just choose to invest in literally anything else that doesn't have a known negative ROI.

parsimo20103• 7 years ago

No. The investment vehicle should (strive to) attain it's stated goal. If I invest in a fund that tracks bonds, then I expect it to track bonds. I didn't invest in a fund that said it would give me zero percent yield, I invested in a fund that said it would track bonds.

If you want a fund that invests in literally anything that doesn't have a known negative ROI then you need a different fund.

If funds try to do what they think investors want rather than what they said they'd do, then they can get in serious trouble.

SilasX9• 7 years ago

1) The funds themselves are specifically designed for people who want their money in government bonds. If that doesn't make sense for you as an investor now, then yes, you should get out of the fund, but the fund is still chartered to cater to whichever (insane) people still wish to be in government bonds in a negative rate era.

2) It's not necessarily bad to have bought into the fund. To the extent that interest rates go down, that means the value of the bonds, and therefore of your shares in the fund, goes up. So you could at least pocket that (one-time) return and move your money into a 0-yielding savings account.

usefulcat• 7 years ago

Investors are free to not invest in such funds..

maxerickson• 7 years ago

If you agree to sell me a fish, I'm gonna be frustrated when you fulfill the order with a hotdog.

The whole point of the funds is that they manage the buying and management of government bonds, that's the service they provide.

You can buy bond funds that only partially invest in government bonds.

nknealk• 7 years ago

There are often regulations or other structures that govern what kind of assets a pension fund must buy. For example, California's pension fund has a 20 percent fixed income investment target (note CA pension is has somewhat more flexibility than others in what they can do)

https://www.calpers.ca.gov/page/investments/asset-classes/tr...

There's some moral hazard here. The same people who regulate the fund also have the benefit of borrowing money cheaply.

_croz• 7 years ago

People invest in bonds because they are safer than stocks. Government, municipal, and corporate bonds pay interest relative to interest rates set by the central bank and how risky they are perceived. Across the bond categories, there will always be funds (ETFs & Mutual funds) backed by these categories of bonds for investors to purchase and their value proposition is that they behave like the underlying asset. It's much more convenient for people to buy shares of a mutual fund or an ETF than to buy individual bonds at an auction, so it's an attractive product for them to offer and take a small management fee on top of.

Just choose to invest in literally anything else that doesn't have a known negative ROI.

A fund manager who is responsible for creating a product that matches government bonds can't buy something else because it would no longer be what it is intended to be: a product which behaves according to how the underlying asset behaves.

Investors however, will buy other (riskier) products because it doesn't make sense to buy something with zero or negative interest, which puts more money into less safe hands, hence the talk about bubbles. If the only thing that is offering any return is a ponzi scheme and everyone is invested in it because nothing else is offering return, then it's going to end badly for a lot of people.

BenoitEssiambre• 7 years ago

Because the private markets aren't offering many assets that compare well against these bonds if you take into account returns, risk and liquidity.

BTW this is normal. Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.

Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.

The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.

While people are used to get negative returns on short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for humans just out of the 20th century.

More here "The World Deserves a Pay Raise" (https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...)

selestify• 7 years ago

This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy.

"Decay" is very subjective. The laws of thermodynamics only tell us that entropy (an objective quantity) must increase over time, but it does not tell us how it increases or whether this increase is desirable or not. Life itself exists only because the combination of life + the environment creates more entropy than just a lifeless environment. Yet few would describe life as a "decay" of physical elements into self-replicating structures.

This is not to say that the phenomena you describe doesn't exist, it's just to say that the laws of physics at the scale of statistical mechanics are far removed from high-level processes at the scale of human society.

SilasX9• 7 years ago

BTW this is normal. Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them

Citation needed? Government bonds historically paid something like 4%; here's the German government's from the 19th century, over a a time of low inflation and income taxes:

https://qz.com/241890/the-complete-history-of-german-bond-yi...

Italian Renaissance bonds never went below 5%, similar for the Dutch golden age:

http://globalfinancialdata.com/7-centuries-of-government-bon...

pcprincipal• 7 years ago

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

nostromo3• 7 years ago

Yes, but... isn’t this basically a bunch or rich folks saying “I was forced to take risks with my money because treasury bonds barely pay anything!”

My gut response is that, yes, if you’re buying risk-free treasuries, why should you get a return above inflation at all? Rewards and risks should be commensurate.

SilasX9• 7 years ago

But the nominal yield (to maturity) has to be higher than inflation to keep up because of taxes.

ArturSoler• 7 years ago

Because the return on a bond is not just based on the expected risk, but also on the time value of money (generally we prefer consumption now rather than in the future).

gniv• 7 years ago

Some of the rich folks are pension fund managers. Therein lies the problem.

ekianjo• 7 years ago

with negative yields you are not even making inflation, you are way below it

klenwell2• 7 years ago

According the Planet Money's Giant Pool of Money, which I've come to realize is a superb postmortem on the 2008 financial crisis, this is exactly what happened:

Adam Davidson: All right. Here's one of his speeches that really drove that army of investment managers crazy.

Alan Greenspan: The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance.

Adam Davidson: You might not believe me, but that little statement, that is central banker's speak for, hey, global pool of money, screw you.

Alex Blumberg: Come on, that's not what he said.

Adam Davidson: It is. I speak central banker. Believe me, that's what he said. What he is technically saying is he's going to keep the fed funds rate-- that's when you hear, the fed interest rate-- at the absurdly low level of 1%.

And that sends a message to every investor in the world, you are not going to make any money at all on US Treasury bonds for a very long time. Go somewhere else. We can't help you.

https://www.thisamericanlife.org/355/transcript

To the question: why should you get a return above inflation at all?

I guess one way of looking at it is: do you want to treat low-risk returns for conservative investors as a sort of public utility guaranteed by the government? Or do you want to put it in the hands of private industry?

nonbel7• 7 years ago

What does your "gut response" tell you about rates on 1 month vs 30 year treasuries? Should they have the same yield?

dnadler3• 7 years ago

US Treasuries may be the closest thing to 'risk-free' that there is, but isn't 100% risk-free. If the investor does not hold the bond to maturity, then he/she is open to interest rate risk (the risk that rates have changed, and so has the bond's value).

Even if the investor plans to hold the bond to maturity, then the investor is agreeing to lock up that money until maturity. This carries the risk that the investor won't be able to take advantage of an investment opportunity before then. Or, if he decides to sell at that moment, he must accept interest rate risk.

The investor should be compensated for these risks, however small they might be, and that - in my opinion - is why treasuries should yield more than inflation.

walshemj3• 7 years ago

Agreed a lot of well off people with money don't put in enough thought into this.

AJ007• 7 years ago

“Rich folks” include pension funds, insurance companies, and sovereign wealth funds.

The whole thing seems to me like central bankers confusing cause and effect and trying to squeeze a complex system in to linear regressions. Lots and lots of unpredicted consequences to artificially low interest rates, including effects that do the precise opposite of what was predicted.

tigershark• 7 years ago

Owning negative yield bonds not only you don’t make a return above inflation, but you have to pay for the privilege of owning them. Why do you think that it’s a good thing?

trappist• 7 years ago

Why is it that when we see the unintended yet predictable and easily understood consequences of a policy, in this case monetary policy, all the blame goes to those whose decisions were influenced by that ill-advised policy in that predictable and easily understood way? This doesn't strike me as a good way to avoid bad policy in the future.

celtain• 7 years ago

In general, it's assumed that it's better for society if you consume later rather than now. Risk-free investment returns are how we incentivize that.

perspective1• 7 years ago

The west's current monetary policy very much hurts retirees living on dwindling fixed incomes. There ought to be at least some reward associated with savings, even without taking a risk to the principal.

devnulloverflow• 7 years ago

“I was forced to take risks with my money because treasury bonds barely pay anything!”

... is the system working as intended, because the policy rationale behind issuing lots of government bonds is precisely to make investors seek higher risks.

When downturns (like 2008) happen, this is investors fleeing to safe, money-like assets and and so wonks recommend that governments flood the markets with bonds, printed money, whatever to make that unprofitable.

The problem is with trying to fix the economy with policy levers. You can force people towards riskier investments (especially if they can be disguised as safe ones). But investment that is actually productive on average requires conditions where people on the ground can actually build useful stuff at a profit.

But that's an anathema to macro-economists (who want to advise on how use those levers) and also to politicians (who want to be seen to be "doing something").

Lazare2• 7 years ago

It's not just rich folks. Via pensions funds, this is also about a lot of teachers, social workers, government employees and normal folk.

Pensions were funded (or not) based on assumptions about yields. If actual yields are not hitting those assumptions (and they're not), it's not the rich that'll be eating cat food in their retirement.

(Of course, fixing the funding shortfall by making risky bets on exotic high-yield investments is uh...what's the word? Oh yeah, terrible! But let's not pretend this is strictly a problem for the 1%.)

kgwgk11• 7 years ago

When the next crisis hits, people will talk about how negative rates forced people to reach for junk companies and questionable securitization paper.

There Is No Alternative!

JumpCrisscross• 7 years ago

negative rates forced people to reach for junk companies

Negative rates don’t force junky investment decisions. Inflation does.

Inflation is low. Investors choosing junk yielding 4% are not being forced to do so by negative yields (or, in America, low yields). They’re choosing to reach for yield.

dmckeon• 7 years ago

lower quality leases are being thrown into securitization pools

Shocked, shocked, do you hear me!

Not to snark at this poster, but in general, if we learn anything from experience in markets, we learn:

People want higher returns without higher risks, and other people can profit from convincing buyers that the returns are higher, or the risks are lower.

Also, money is more nimble than legislation. While Congress is trying to outlaw the most recently exposed scam or malfeasance, people are inventing the next several workarounds to existing or upcoming law.

qrbLPHiKpiux• 7 years ago

People want higher returns without higher risks

Not only this, but Better, Cheaper, Faster.

I'm in Healthcare and it doesn't work like this.

kurthr2• 7 years ago

Heck, I think they mostly write the laws for Congress...

Lazare2• 7 years ago

People want higher returns without higher risks, and other people can profit from convincing buyers that the returns are higher, or the risks are lower.

That does happen, but what may be even more common (and more important is a slightly different form:

People want high returns, and are willing to accept risks, but are required by law to invest in safe securities, and are happy to pay high fees for people who can find a way around this.

A huge driver of this isn't scams or outright fraud, but "regulatory arbitrage". Not saying it's fine, but if your mental model is "how can we protect unsophisticated mom and pop investors from these predators selling exotic asset backed securities", well, they're not the ones buying them. The bigger question is, how can we (or should we?) stop pension funds from knowingly seeking higher risk/higher return investments as part of their ongoing effort to try and reduce their massive unfunded liabilities.

jnordwick6• 7 years ago

You speak as if there is something that can done about it.

There is no way for the government to push rates, especially on exotic collateralized products like you describe. The Fed can play around at the low end and set an overnight rate, but not much else. Historically, the Fed has tried and failed over and over to affect the long end. And it certainly doesn't have the stock to dump long bonds to drive yields up.

Right now, the yield curve is inverted showing how little they actually effect rates. Long run rates are set in the global market.

NTDF92• 7 years ago

Why can't the Fed manipulate long term interest rates?

PeterisP• 7 years ago

Unilaterally pushing up nominal interest rates is trivially achieved by rising inflation by devaluing currency by printing lots of it and spending it on pretty much anything. It would pretty much instantly hike up the nominal yields on pretty much everything USD-denominated to match the (now) higher inflation.

It doesn't mean that it's a good thing to do as it has all kinds of other effects, but in general the governments have the ability to do this should they choose to, it's just that they keep pinky-swearing that they won't do it, making legislation that makes it tricky to do without consensus (but they can repeal that if both parties agree that it's the way to go) etc.

nonbel7• 7 years ago

Right now, the yield curve is inverted showing how little they actually effect rates. Long run rates are set in the global market.

The fed causes the inversions every time by pushing up the short term rates until they are near or above long term... It is ridiculously obvious if you just look at a plot of this.

amiga_5007• 7 years ago

It's called "Financial repression":

https://www.bbc.com/news/uk-21863295

Paul Mason, from 2013.

rolltiide3• 7 years ago

I 100% agree on all the comments here saying the big story is lower rates driving people into riskier investments.

Yeah but Central Banks that set the interest rates say that too, so this is the worst kept secret known to man

All the comments here and your observation should just be “hey its working”

peisistratos• 7 years ago

A famous economist predicted 130 years ago that this would happen.

https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit...

danmaz742• 7 years ago

Until now, technical innovation has been able to stave off that prediction...

nonbel7• 7 years ago

Interesting, thanks. Can you expand on the link between government-issued bond interest rates going negative and the tendency for profits to decrease over time in a capitalist system?

Also, the ratio of theoretical to empirical content on that page is ridiculous given the topic is supposedly an empirical phenomenon requiring explanation. What is there is extremely weak as well. Is there better evidence this phenomenon exists?

JamesBarney8• 7 years ago

This fundamental issue with the economy is driven by a couple of factors. Increases in inequality and wealth concentration means there is more money to loan, and an aging population means there are less young people to borrow the wealthy's money.

We have a couple of levers to increase the interest rate. We could reduce inequality to reduce the supply of loan-able funds, we could allow large amounts of immigration to drive up the demand for loan-able funds, or we could keep interest rates high enough that we have a permanently high unemployment.

However I do have a strong worry that natural interest rates are too low for our current inflation. This gives the fed very little room to deal with the next crises. They should probably be targeting an inflation rate closer to 3-4% so we don't run into zero lower bound problems.

state_less• 7 years ago

Wouldn't it be better to have interest rates match the natural interest rate? People paying for loans can't afford the rate payment, so these payments should be lowered to reflect the ability to pay back the loan (including into negative territory). If you're the U.S. Government, you're essentially telling capital surplus holders, "You can keep you large hordes of money here, but it'll cost you 1% a year."

And if you want to take out a loan, it'll still be a risk, since you'll need to make the principle payments, but you'd get a tailwind on the interest paid to you.

I'd be happy to learn where I'm wrong if you have any insight.

skybrian9• 7 years ago

Or, maybe come up with an alternative to making loans? Why is more debt the only answer? People seem not to want it.

The government could spend the money. Or it could give the money to the people (universal basic income) and they could spend it.

This also fixes the inflation problem. Just don't overshoot.

nonbel7• 7 years ago

Increases in inequality and wealth concentration means there is more money to loan

Confiscate $3 trillion from the "rich", and give everyone in the US $10k dollars. What percent would end up back in the banking system after 1 year?

walshemj3• 7 years ago

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

cryptica• 7 years ago

The whole world economy makes no sense. The finance and tech industries in particular are a mess; there seems to be no correlation between value creation and profit.

Whenever I hear successful entrepreneurs bash cryptocurrencies, I wonder how they can simultaneously hold the following 3 thoughts inside their heads:

- My company became successful in the last 10 years because it added value to the economy.

- Cryptocurrencies became successful in the last 10 years in spite of subtracting value from the economy; they are the exception to an otherwise efficient market.

- Capitalism works.

If cryptocurrencies were an exception to an otherwise highly efficient and meritocratic economy, could we say the same about bonds which have negative yields?

Maybe the following thoughts are more logically consistent:

- My company became successful in the last 10 years because I exploited a vulnerability in the economy.

- Cryptocurrencies became successful in the last 10 years because they exploited a vulnerability in the economy.

- Capitalism doesn't work because it's vulnerable to hacks.

Also, to explain the current bonds situation:

- Bonds can have positive value in spite of negative yields because some investors believe that the vulnerabilities in the economy can be patched (e.g. it's possible to increase interest rates) and that bonds will eventually return to positive yields.

anonymous51332• 7 years ago

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

roenxi2• 7 years ago

The interesting part of this story will be looking back on it in ten years. We are either looking at a situation that is surprising but healthy, or a situation that is verging on being a crisis a very long time coming. So far so good, but I don't like it.

HNisCurated3• 7 years ago

There are lots of smart people worried about a sub 0 percent interest rate, or worry about stagnation. Not to mention my peers in every Industry talking about slowdowns or unprofitable years due to tariffs.

The only people who seem to be enjoying it are exploiting the bubble with high wages and investing companies.

And if you didn't take the investment, your competitors destroyed you.

Fiat currency is a weird thing.

refurb• 7 years ago

The biggest risk with TARP was inflation. You throw that much money into the economy and normally inflation goes up. Some assets have gone up, but generally inflation is low.

So one of two things will likely happen:

1. Economy will go into recession, feds can’t drop interest rates much more (they are already low), so recession hits hard.

2. Inflation skyrockets and the fed starts cranking up interest rates in an effort to control it. Economy stops growing but inflation continues (hi 1970’s!). People bitch because their paycheck stays the same but he price of milk doubles.

amiga_5007• 7 years ago

Some assets have gone up,

Land prices are not included in inflation stats. The cost of carry is, as mortgage payments, however that is simply the cost of money. And rates are at all time lows.

The difference between 7% rates where your mortgage takes up most 50% of your wages and 2% rates where your mortgage takes up 50% of your wages is that it's far harder to pay off your mortgage in the latter case.

You cannot attain financial freedom. This means ultimately you cannot refuse to work, even if compensation is poor (low wages, stuck low).

There is inflation. It's being used to force us to work, and the precariat cannot bargain for more of their surplus value.

turbinerneiter• 7 years ago

Which of these are true:

* companies are seeing record profits * profits are paid out to shareholders * or used to buy back shares * but not reinvested * ROI on capital is high * ROI on work is low * governments are not investing * nations have high depts

Apple and the likes are stashing enough cash on island to fund Apollo over and over again.

Take Musk away, who is investing in expensive, risky stuff with actual potential to change things?

I firmly believe that the tax evasion schemes we are suffering from today are making capitalism less innovative. Usually, you would have to invest your profits in growth or the tax man would take it away (and spend it). Now you can just park it on an island and use it as security to lend money against, which you can use to buy back shares.

cannonedhamster• 7 years ago

Yup. This is happening because rich people broke capitalism when they gamed the system and destroyed oversight by buying governments. When less than 1% of the planet controls 80% of the financial resources there's not much left to move. We're essentially in a neo-fuedal state in the US. Essentially you can point the blame at Reagan for destroying collective bargaining and SCOTUS for continually rolling in favor of corporations since Robert Bork. The natural correction based on history is the blood of the wealthy and then spreading their resources. Some of the wealthy have realized this and started trying to sound the alarm but it's falling in deaf ears. It's things like Jeff Bezos thinking space is the only way to spend his considerable wealth instead of someone like Bill Gates trying to make massive societal changes and improvements. Leave it to a guy with the money to literally wipe out world hunger to think space ships are the only way he could spend his money.

adventured3• 7 years ago

Take Musk away, who is investing in expensive, risky stuff with actual potential to change things?

Your point is mostly valid, however there are others.

Gates & Buffett will ultimately pour a collective ~$300 billion into education and health. That includes attempting to wipe out various diseases entirely and eg inventing new ways to deliver vaccines cheaply - just about as important to humanity as most anything else we could be doing. Gates is also putting billions into new high-risk energy technology over time, far more than Musk put into starting SpaceX and Tesla.

Jeff Bezos will probably put tens of billions into space over decades, ultimately far exceeding the investment scale of Musk in that arena (whether he'll have results worthy of that investment, is yet to be decided).

Paul Allen - his estate now - has and will put considerable resources into researching the brain over time. Beyond that he put hundreds of millions of dollars to work in other high- risk scentific endeavours that may yield large results over time.[1]

Eli Broad has poured immense resources into the Broad Institute (a billion dollars inflation adjusted), a partnership between Harvard and MIT that has already made a huge impact by blazing the path re CRISPR. The Broad Institute is one of the premiere scientific institutes on the planet.

Larry Page is putting resources into flying vehicles. Not a huge amount of money based on his $55b net worth; non the less an interesting technology pursuit that could make a dent in our transportation systems.

Sergey Brin - on a personal mission - is attempting to combat Parkinson's, which afflicts 10 million people around the world. If his funding makes a difference in curing Parkinson's, it'll be a big deal and it's certainly a high-risk pursuit.

Sean Parker has been funding some of the first attempts at getting into trials with CRISPR. The definition of high-risk with the potential to change everything, not to mention very expensive.

MacKenzie Bezos, in her declaration in relation to the Giving Pledge, has said she'll give until the $40 billion is gone. Who knows what good she may accomplish, probably in areas of education, health, equality. She seems to be a very smart woman, so I would suspect she'll do something meaningful. That type of investing is typically high-risk and with the potential to change things.

Gordon Moore has spent his retirement figuring out ways to give away his (formerly) $20 billion fortune.[2] Including pushing $1.4 billion into science grants and $1.5 billion into environmental conservation efforts (I consider that arena to be high-impact, even if it's not as sexy as a starship). He has put $200 million into the Thirty Meter Telescope.

[1] https://www.philanthropy.com/article/Paul-Allen-s-2-Billion-...

[2] https://www.moore.org/programs

CryptoBanker• 7 years ago

Even 10x this is still a drop in the bucket of the entire market...

drchewbacca• 7 years ago

Hypothesis:

1. Advances in fundamental science are what ultimately dictate the growth rate of an economy. For example when you discover quantum mechanics you can make lasers, circuit boards and therefore computers which boosts everything enormously.

2. The more science you have done the harder it is to do more. You can only discover a truth once. For example discovering new elements is extremely hard now compared to when Hennig Brand discovered phospherous in his urine.

Consequences:

1. When a society gets the scientific method right it goes through an S shape curve (logistic curve), where science accelerates for a while and then plateuas out.

2. When you hit the plateau of the curve the maximum growth rate of the economy becomes very limited, it's just not possible to have new ideas which are worth developing very fast.

3. Human labour still provides a surplus so what you get is more and more resources piling up with nowhere to invest them. Look at Apple's $245bn cash pile, if they had new ideas they would put that money to use.

This will cause bond yields to fall to almost nothing and loads of money to be pumped into any startup with a vague hope of accomplishing something.

If we are in this situation it would also mean that the 08 crisis is not needed to explain the slowing growth in the world, things are slowing because we don't have many new ideas.

Common objections:

1. But what about X invention that happened in the last few years? Invention still happens on the plateau, just slower, NN's, crispr, exoplanets, smartphones are cool, they're not relativity, quantum mechanics, electrification, aeroplanes etc.

2. Scientific progress is exponential! : Accurately fitting a curve to a logistic curve gives you an exponential up until it shifts on you and starts slowing.

3. China and India are still growing strong. : Essentially they are still deploying the previous discoveries. China's growth is slowing over time precisely as it has less and less discoveries to deploy.

More to read:

DOE finds it can't get supercomputers like it used to.

https://www.nextplatform.com/2019/05/06/doe-on-collision-cou...

https://www.theatlantic.com/science/archive/2018/11/diminish...

https://slatestarcodex.com/2018/11/26/is-science-slowing-dow...

HNisCurated3• 7 years ago

My one criticism is that 30 years ago how difficult was it to program? Half million humans knew this at Best.

Between accessibility to technology and resources to learn it, imagine the scale of new minds.

The only reason we'd see stagnation is if the human mind couldn't comprehend what is needed to build a system. Like CERN

NTDF92• 7 years ago

This is false. There is a LOT of work to be done. A lot of houses can be made out of better material. A lot more books can be produced. A lot of drainage and clean energy systems can be built.

But why aren't they? Surely not because the science of it doesn't exit.

It's because the printing of money has inflated the bare necessities of humans. Housing, food, education have become crazy expensive. Heck, even a simple iPhone cable is expensive.

All these expenses impede progress.

Vekz• 7 years ago

This is an optimistic invention driven growth curve hypothesis. There is an alternative pessimistic version. Where challenges like climate change, growing infertility rates, anti biotic resistant bacteria, require reactionary invention.

EGreg• 7 years ago

Does that mean more capital will enter non perishable commodities (like gold) and cryptocurrency?

dehrmann• 7 years ago

In other news, the S&P 500 and Nasdaq closed at record highs on Friday. The obvious explanation for both is there's a lot of money looking for somewhere to park, driving asset prices up and bond yields down.

There's either something not captured in inflation numbers, or most of the stimulus money just got invested and not spent.

amiga_5007• 7 years ago

There are two sides to every trade. When I buy into S&P, along with others, forcing the price up, someone else is selling and gets my money. What do they do with it? I can't know.

It's not going into a bank account called "S&P", where it's parked, it's a transitory snapshot of a transaction.

keeganpoppen• 7 years ago

yes. I still find myself looking around from time to time wondering how it's all gonna end... feels like something should pop eventually, but what? or why?

dgudkov• 7 years ago

There's either something not captured in inflation numbers

My pet theory is that real inflation is higher than the official one, and is around 4-5%. The cause of the inflation is a gradual loss of quality basically everywhere except high-tech.

When the official inflation rate is calculated the basic assumption is that each item (which price is compared YoY) is exactly the same as it was last year. In another words, it assumes that its quality remains constant.

However, it's not always true (I believe it rarely is). Sometimes quality goes up (e.g. due to the Moore's Law in high tech). Sometimes quality goes down (e.g. due to cheaper food ingredients). When quality goes down but price stays the same, the official inflation would be 0%, but the real inflation would be greater than 0%.

I'm not aware if there is any way to account the change of quality in the inflation calculations. I suspect it's just not possible and therefore any published price-based inflation rates are bogus.

MrRadar2• 7 years ago

This story somewhat reminds me of The Giant Pool of Money[1], a landmark This American Life story on the origins of the 2008 financial crisis (remarkably) reported in the early-middle stages of the crisis (May 2008). One of the things it points to as fueling the sub-prime mortgage crisis was an impossible-to-meet demand for mortgages to be bundled in to CDOs which lead to mortgage lenders lowering their standards to increase supply to try to meet the demand. Why was the demand so high? During the early-to-mid 2000s the global money supply had basically doubled (the titular Giant Pool of Money) and that new cash needed somewhere "safe" to be parked and CDOs were the highest-yielding "safe" investments.

That pool of money hasn't gone away and the lesson investors seem to have learned from the financial crisis is that the only truly safe investments are government bonds issued by major governments. The demand that drove mortgage lenders to make (in hindsight) irrational decisions to increase supply seems to have shifted over to those government bonds. Because the supply of bonds is fixed by politicians the market is responding as it needs to match demand with supply: lowering rates (effectively increasing the "price" of the bond), even below 0, to lower demand to meet the available supply.

[1] https://www.thisamericanlife.org/355/the-giant-pool-of-money

dnadler3• 7 years ago

Government rates are set by the market at auction. The government does not set the rate of their own bonds, they just offer to sell a certain amount, and the auction determines the rate.

In the US, the Federal Reserve sets the Federal Funds rate, which is (supposed to be) determined independent of the federal government.

The reason rates are low is because there is a lot of demand, and participants are bidding down the price as they compete to acquire the bonds.

MrRadar2• 7 years ago

Thanks for the correction, fixed.

diminoten2• 7 years ago

So can someone explain to me how these high-yield savings accounts are playing into this?

I read somewhere that these savings accounts are basically loss leaders and don't actually matter much cost wise to the banks offering them, but if I can park my cash in a 2.4% APR savings account, why would I ever buy a 6 month treasure note that's at ~2%?

lh7777• 7 years ago

I don't if/how the banks make money with high-yield accounts, but you might be better off with treasury bills if:

1. You're in a high income tax state -- interest is taxed as income but t-bill yields are exempt from state taxes.

2. You have more than the $250k FDIC limit (although that limit is per bank, so you can safely exceed it by opening accounts with multiple institutions).

3. You expect interest rates will decrease in the future and want to lock in your rate for a certain amount of time (of course, a high-yield CD would do the same thing, potentially at a better rate).

aj73• 7 years ago

In other words, billionaires/oligarchs have sequestered so much cash that it has outrun investment opportunities. What does that tell you about the theory that tax reduction spurs investment?

Inthenameofmine2• 7 years ago

It's more like a heart attack. There's plenty of blood, but the circulation to the heart itself (the people, ie demand side) has stopped. The doctor is pumping ever more blood into the patient without fixing the clogging to the heart itself.

Helicopter money which deletes loans (meaning it would not punish people who did not borrow) would be a far better strategy in this case, and lead to both inflation and deleveraging at the same time, something which is impossible with other methods.

killjoywashere3• 7 years ago

Wait, for those of us who aren't borrowing, how the hell is inflation not a net penalty?

anonymous51332• 7 years ago

The overall statement is a fallacy, correlation does not imply causation. There are plenty of good investment opportunities out there, the truth is that you need to find them yourself. The next big companies in the world are purely in their "unfunded idea" stage.

Also the whole tax reduction statement is mostly an opinion. From what I've seen, most companies are almost purely motivated by the risk-adjusted post-tax profit that can be obtained from the investment. Every idea on the drawing board is effectively evaluated meticulously on this basis. If that number isn't to their liking then the research/project simply never gets funded. The company might opt to simply do share buybacks or pay a higher than normal dividend. Plus the overall argument is mostly junk because the United States heavily reduces taxes for companies that perform R&D through the R&D tax credit.

aj73• 7 years ago

1. “Plenty of good investment opportunities” does not treat their aggregate value compared to cash removed from the economy. I reiterate, in plain English. There is more of that cash, way more, than realistic investment opportunities. Don’t believe me? Look at the crazy vanity projects, either started or under consideration. Settlements on Mars. $500B Saudi cities. 2. “From what I've seen, most companies are almost purely motivated by the risk-adjusted post-tax profit that can be obtained from the investment. Every idea on the drawing board is effectively evaluated meticulously on this basis.” I couldn’t agree with you more, at least when it is done rationally. And precisely because taxation is MULTIPLICATIVE, tax rates have little effect on investment decisions. Look at the 1950’s. Indeed, I suspect, (paradoxically?) that high tax rates encourage investment. The investment cost is effectively discounted by the tax rate.

nshepperd2• 7 years ago

More than a decade on from the credit crisis, inflation is still scarce, with wages increasing only modestly despite large drops in unemployment. The ECB, for example, isn’t expected to get to its close-to-2% inflation target over the next decade, according to a market-derived measure.

I find it baffling how everyone talks as if inflation is some incomprehensible force of nature out of anyone's control, even though it's actually trivial to cause inflation by printing money and buying assets.

Then the article links to https://www.bloomberg.com/news/articles/2019-07-05/germany-s... which states that Germany is being paid to borrow money but refuses (against the advice of economists) to actually do this and invest in anything? What?

Why does it seem like nobody (with the relevant authority) is willing to do anything but stand around in paralysis worrying?

e402• 7 years ago

Why does it seem like nobody (with the relevant authority) is willing to do anything but stand around in paralysis worrying?

Maybe because those relevant authorities are more and more not very good at their jobs. It happened a bunch under Bush and his happening way more under our current POTUS. Unqualified people are being put in charge of large portions of our government, and there has to be some consequence. This might just be it.

efficax• 7 years ago

I find it baffling how everyone talks as if inflation is some incomprehensible force of nature out of anyone's control, even though it's actually trivial to cause inflation by printing money and buying assets.

But that is literally the mystery about the contemporary economy. The Fed has been printing money like mad with "quantitative easing", with extremely low interest rates, and Congress helping them along with massive tax cuts, but this is having basically 0 impact on inflation rates. We're printing money like mad and it's seemingly having no effect on prices.

marvin• 7 years ago

I'm no economist, but shouldn't it work nicely to just print money and pay it out equally to all citizens? Why hasn't anyone tried this yet?

rsync• 7 years ago

"But that is literally the mystery about the contemporary economy. The Fed has been printing money like mad with "quantitative easing", with extremely low interest rates, and Congress helping them along with massive tax cuts, but this is having basically 0 impact on inflation rates."

One conclusion that you might draw is that we are in a massively deflationary environment. So much so that all of the inflation tools running at full-tilt only keep us in place.

Among other things, birth rates in rich, developed countries have been dropping for decades and are below replacement rate in many of them. Does that sound inflationary to you ?

photojosh• 7 years ago

Where's that money going though? It can only drive inflation if it's actually increasing demand, and I don't think that's happening. I think there's a fallacy of aggregation required to call it a mystery, if we disaggregate even slightly I think that argument falls apart.

eg, my anecdotal view is that:

1. the rich just put extra money into investment

2. the upper middle-class are just putting any extra money into paying down their debts: housing and student loans.

3. the lower-middle and lower classes are increasingly precarious; and they're not actually seeing any extra money.

4. big business are just doing stock-buybacks, and any profits are just going back into 1

5. small business are struggling because of 2 and 3

What is there in all that to drive inflation?

(edit to fix list)

nshepperd2• 7 years ago

Yeah, except that the Fed has decided to undo all of that by selling off the assets it bought, effectively burning the money it spent so much effort printing. https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

tedsanders• 7 years ago

Contention: The cultural assumption that saving ought to be rewarded is misguided.

Reasoning: When a bank lets you transform production today into future consumption, it's performing a valuable service for you. Storing your value takes work and the bank deserves to be paid for that service. However, historically, they charged a negative price for this service (positive interest rates), because this service allowed them to make even more money letting other people transform their future production into present consumption. But as fewer people need to borrow and as more people want to save, the market clearing price of savings is approaching and in and cases overshooting 0%.

Extrapolation: There's a fair chance this will be a big deal in the history books we write a century from now. Today's bond prices are telling us that the world is changing. We are going from a world of relative growth, where we needed to delay consumption to juice investment, to a world of a relative stasis, where consumption and investment are in equilibrium. Everyone who said interest rates would bounce back to "normal" after the Great Recession has been wrong. This may be the new normal.

nautilus12• 7 years ago

Could this actually just be a biproduct of large generations that don't prioritize investment yet?

buboard• 7 years ago

Implying that they will in the future?

nickjj2• 7 years ago

I don't pay too much attention to this type of thing but I think it might be related to wages not going up but the cost of living skyrocketing.

For example people in their late 50s and early 60s might have been making let's say $30,000 back in the 1980s and 1990s and now today the same exact type of job pays the same 30k salary except the cost of living is crazy high now compared to back then.

Back then they had money to spare for investments but that same salary today means you're probably in debt.

gwern• 7 years ago

If that were the case, the people who do take out loans etc should be realizing supernormal returns as they exploit the low-hanging fruit being ignored. Do they?

0x8BADF00D• 7 years ago

The average person is so levered up they cannot afford to invest.

skybrian9• 7 years ago

You have it backwards. There are investors (such as banks and pension funds) who want certain very safe investments (government bonds) but governments are unwilling to supply it. So, if anything, this would be too much savings rather than not enough.

But really, it's not about consumers, but about banks not making as many loans as governments want them to. That suggests a lack of safe investment opportunities.

Maybe, instead of pressuring banks to make investments that they don't want to make, governments could stimulate demand in some other way? There are certainly people who, if you give them money, they will spend it.

kgwgk11• 7 years ago

But as fewer people need to borrow

The problem with this theory is that debt is quite high globally and in all sectors (households, corporate, government).

ethbro• 7 years ago

Debt normalized to cash flow or equity is probably the more relevant measure.

If there's cheap government money on the table, everyone would be crazy not to avail themselves, as long as the potential use expands one's business.

JamesBarney8• 7 years ago

I think he means fewer people need to borrow relative to giant pool of global money sloshing around.

vajrabum• 7 years ago

Uhh, there's a practical human problem with that notion and it is that when you're younger if you don't save for when you're older then you'll be destitute. Social Security alone is pretty hard to live on. As for what the bond market is telling us an alternate thesis (supported by the public statements of Trump and the Fed Chairman) is pretty much they don't want a recession in an election year and have eased interest rates not because it's good for the economy but because it's good for the incumbent. In short it's interest rate policy not the market which is setting the price.

excalibur• 7 years ago

Not sure who you mean by younger. I'm pushing 40, and I've been aware my entire working life that social security would not be there for our generation when we reach retirement age, but we would still be expected to pay into the system to support our elders and/or their elected officials. The only way we're likely to get any kind of return on that investment is if we become disabled.

jayd162• 7 years ago

I agree with you BUT social security can also be seen as a pay as you go system where the young care for the old. The notion that saving must take place is somewhat tied to American individualism.

If we didn't treat things like wellfare as disdainful and something you could actually rely on, we wouldn't need to worry about personal savings as much.

isoskeles3• 7 years ago

Contention: The cultural assumption that saving ought to be rewarded is misguided.

This is an odd contention that I don't agree with entirely based on the usage of "rewarded." Interest isn't a reward, it's simply the price of money, and depending on your personal current values/needs/wants (spend now or save now), it can look either like a reward or a punishment.

So this ends up reading only as a topsy-turvy ex-post-facto justification for central bank policy that favors / provides cover for governments that spend more than they earn, which they all do afaik.

I do agree with some elements of your extrapolation though. It is possible that we are going from a world of relative growth to one of stasis. Or, at least, I don't think it's necessarily a bad thing if economies do not "grow", especially not in cases where population growth is slowing or even reversing.

JamesBarney8• 7 years ago

One of the biggest risks with a natural interest rate of 0 is monetary policy loses all effectiveness. We need to either increase inflation or start playing with other forms of juicing the economy like helicopter drops.

brownbat• 7 years ago

Another factor - there are probably a few billion people in Asia in rapidly growing economies who need a hedge against all their savings suddenly becoming worthless due to local instability.

Suppose you are planning your future, and you think there's a small but real (1-5%) chance that sometime over the next decade your local currency will become devalued to zero. Suppose also that you're expecting significant future costs: elder care for your parents, rising costs of living, etc. In those situations, you're likely to have a very high savings rate, and will tolerate guaranteed returns that are near zero (because factoring in the risk of local returns might make them closer to negative double digits).

I'm not a global economist, so I don't know how much this is driving things. But China as a 45% personal savings rate, India is in the 30s, compared to the 6-7% of the US, and anecdotally people have noted significant amounts of foreign investment in "safe" assets. Some of these areas have banks that offer double digit returns for investments, but only on paper - people were talking up the returns from Mongolian savings accounts a few years ago, but then the currency has eroded so quickly that 15-20% returns are actually negative.

ilaksh• 7 years ago

Except we don't need banks to store money now. We can use math and computer networks aka cryptocurrency.

Personally I think what's missing is a way to holistically track real world resources and consumption and tie them to digital money that can then be regulated in a fine grained way.

I think that is what is needed to change economics from a society of witch doctors into a technical and practical profession.

chiefalchemist2• 7 years ago

"That means investors effectively pay the German government 0.2% for the privilege of buying its benchmark bonds;"

Is this statement accurate? I mean, if this is a traded bond then the German gov is out of the picture, sans the pay out at the end.

The beneficiary (?) of this under water situation is the seller, not the gov who floated the bond.

tamaharbor• 7 years ago

When I see a headline like this, I know it is time to sell bonds.

chiefalchemist2• 7 years ago

Gain via interest is a function of inflation. That is 4% interest in the context of 5% inflation is a 1% loss.

Long to short, in the context of deflation (and associated financial uncertainty) these bonds would be good to have. With the bond curve currently inverted and to many a recession eminent, if the "smart money" is holding these bonds then please sign me up.

kurthr2• 7 years ago

Exactly, just because rates/inflation are low doesn't mean you can't have a bubble burst and a recession. It is just that the policy response is more difficult, because there is no room to maneuver on bond rates... nominally the only response is more (unbacked) currency issuance... which will cause inflation even without growth or requiring new loans.

igravious3• 7 years ago

I want to give a shout out to Max Keiser and Stacy Herbert over at “The Keiser Report” on RT at https://www.youtube.com/watch?v=u3ojPk8CQns for pointing me towards this eye-opening Bloomberg article. Even though the Bloomberg article is titled “The Black Hole Engulfing the World's Bond Markets” I decided to editorially change the headline to the more meaningful and less metaphoric “The time value of money has essentially disappeared”. I know this is usually against the spirit of HN but I hope you understand why I did it.

This is what's in the episode.

“In this episode of the Keiser Report, Max and Stacy discuss the mainstream financial press turning to the metaphors and analogies the Keiser Report started using a decade ago about the obvious blackhole of debt that would put central bankers into a quicksand of negative rate policy trap. A full 25% of global sovereign debt is now negative yielding with a whopping 85% of German debt negative. This means that the time value of money has disappeared, hence a fundamental law of monetary physics has been broken. So, what is next? They look at the historical break from gold which had provided an anchor to time value, and how that hurtled us over the debt event horizon and into a negative yielding world. They also look at a recent exchange between a CNBC host and the treasury secretary on bitcoin and the dollar.”

bsaul• 7 years ago

Since we're on HN : does this mean good news for start up creators ? Is this the best time to actually raise a lot of investor money ?

a-dub• 7 years ago

So this still continues because it's seen as short run volatility where the cost of rebalancing and trading out is higher than the expected loss? Or is it seen as a stability measure that protects investments in other asset classes? Or are a lot of investors/managers just asleep at the switch (organizational lagress, internal politics, laziness). Or is it simply market inefficiency?

It is difficult to wrap my head around why price discovery is totally failing here...

1e-9• 7 years ago

I think many people don't understand how negative rates are possible because they are used to having FDIC insurance for their bank account. The issue is that an entity with billions of dollars to protect (such as a pension fund) cannot rely on the FDIC because of the $250K insurance limit. There are not enough banks in the US to spread billions of dollars across, $250K at a time, even if an entity was willing to manage 10's of thousands of bank accounts. A government bond is generally the safest alternative. When demand for the safest level of protection is high, an entity might be willing to pay for the protection because market conditions make them unwilling to accept greater risk. Personally, I believe this is the main reason for very low rates right now. The big fixed income entities expect an economic downturn. It's just a question of how many months away it is.

ncallaway• 7 years ago

This really helps me understand the institutional desire to purchase bonds even at a negative rate (especially when combined with legal requirements around holding safe asset classes).

It seems relatively obvious in hindsight, but I was still having a little trouble getting my head around it until I read this.

Thanks!

A Black Hole Engulfing the World's Bond Markets

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