Are zero interest rates the natural order of things?

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rgs92
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Are zero interest rates the natural order of things?

Post by rgs92 »

I've been reflecting on the shock of zero or negative interest rates from things like gov't bonds or gov't insured CDs, but maybe this is how things should be. Isn't all positive return on money ultimately sourced from profits under capitalism? Why should I expect earnings on investments to come from anywhere else but someone selling something for more than it costs to produce it?

So it is only right and feasible for investment returns to come from dividends, corporate bond interest, and stock price increases I guess.
Communism basically died around 1989, and now we have been inching towards pure capitalism ever since.
So I think safe gov't backed returns on money are gone for good.

This is also the reason pensions are quickly disappearing (along with secure employment, at least in the private sector).

Wasn't there a time several decades back when the yield from dividends were higher than from bonds, and this was considered what you were rightly rewarded for taking the risk of owning equity in a private enterprise? This is the risk premium. I think we have returned to that model permanently.

I don't even see exactly how inflation could change this scenario.
bberris
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Re: Are zero interest rates the natural order of things?

Post by bberris »

There is that school of thought. When you hear people complain about central bank oppression, they are really talking about activities that raise the rate from zero (where it would be) in the absence of central bank draining liquidity.
You can read about the theory here:

http://www.cfeps.org/pubs/wp-pdf/WP37-M ... stater.pdf
Topic Author
rgs92
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Re: Are zero interest rates the natural order of things?

Post by rgs92 »

Thanks for that link.
Tal-
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Re: Are zero interest rates the natural order of things?

Post by Tal- »

If you're so inclined, there is an awesome book by Charles Wheelan called "Naked Money." Even more relevant to me, it's available on audible! The book provides a good, comprehensive overview of money and interest rates. It's long and pretty deep, but always super interesting. By far, the best financial book I've ever read (er/listened to).

http://www.audible.com/pd/Nonfiction/Na ... 371&sr=1-1

Regarding the pension change, I have my own personal take on that. My view is that companies shifted away from pensions for three big reasons:

1- Pensions provide little value to employees who transition jobs on a regular basis, which is becoming the norm.
2- Funding a pension varies drastically by year, based primarily on the performance of the pension. This means that the amount that the company needs to put into the pension varies drastically by year. This is why we saw so many pensions discontinued in 2008-2010.
3- As fewer companies offer pension, fewer companies need to offer pensions to remain competitive.

I suppose bullet #2 is somewhat tied to interest rates, but not drastically.
Debt is to personal finance as a knife is to cooking.
Valuethinker
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Re: Are zero interest rates the natural order of things?

Post by Valuethinker »

rgs92 wrote:I've been reflecting on the shock of zero or negative interest rates from things like gov't bonds or gov't insured CDs, but maybe this is how things should be. Isn't all positive return on money ultimately sourced from profits under capitalism? Why should I expect earnings on investments to come from anywhere else but someone selling something for more than it costs to produce it?

So it is only right and feasible for investment returns to come from dividends, corporate bond interest, and stock price increases I guess.
Communism basically died around 1989, and now we have been inching towards pure capitalism ever since.
So I think safe gov't backed returns on money are gone for good.

This is also the reason pensions are quickly disappearing (along with secure employment, at least in the private sector).

Wasn't there a time several decades back when the yield from dividends were higher than from bonds, and this was considered what you were rightly rewarded for taking the risk of owning equity in a private enterprise? This is the risk premium. I think we have returned to that model permanently.

I don't even see exactly how inflation could change this scenario.
Economics in the long run if there is not a positive real return then society stops investing. There is no discounting for the future.
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Phineas J. Whoopee
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Re: Are zero interest rates the natural order of things?

Post by Phineas J. Whoopee »

bberris wrote:There is that school of thought. When you hear people complain about central bank oppression, they are really talking about activities that raise the rate from zero (where it would be) in the absence of central bank draining liquidity.
You can read about the theory here:

http://www.cfeps.org/pubs/wp-pdf/WP37-M ... stater.pdf
To embellish, without criticizing the paper it is chartalist in outlook. It's unorthodox economics. That doesn't mean it isn't true, but chartalism and its more recent variation, Modern Monetary Theory, definitely aren't orthodox. It would be best to keep in mind that though it is a school of thought, as bberris wrote, it isn't a mainstream one.
PJW
joebh
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Re: Are zero interest rates the natural order of things?

Post by joebh »

rgs92 wrote:Communism basically died around 1989, and now we have been inching towards pure capitalism ever since.
Huh?
What makes you think that?
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Epsilon Delta
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Re: Are zero interest rates the natural order of things?

Post by Epsilon Delta »

Valuethinker wrote:Economics in the long run if there is not a positive real return then society stops investing. There is no discounting for the future.
It depends on how long a term. In the very long term negative real returns means society stops. But that could be a very long time indeed. Meanwhile you could still get investment where the alternative is stockpiling perishable commodities for future use. It's a dismal future, but it's less dismal than not investing. Compare running a company that's insolvent. It's lost money and may continue to lose money, but if it will lose less money with a little investment that investment should be made, and sometimes it is.
avalpert
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Re: Are zero interest rates the natural order of things?

Post by avalpert »

Valuethinker wrote:
rgs92 wrote:I've been reflecting on the shock of zero or negative interest rates from things like gov't bonds or gov't insured CDs, but maybe this is how things should be. Isn't all positive return on money ultimately sourced from profits under capitalism? Why should I expect earnings on investments to come from anywhere else but someone selling something for more than it costs to produce it?

So it is only right and feasible for investment returns to come from dividends, corporate bond interest, and stock price increases I guess.
Communism basically died around 1989, and now we have been inching towards pure capitalism ever since.
So I think safe gov't backed returns on money are gone for good.

This is also the reason pensions are quickly disappearing (along with secure employment, at least in the private sector).

Wasn't there a time several decades back when the yield from dividends were higher than from bonds, and this was considered what you were rightly rewarded for taking the risk of owning equity in a private enterprise? This is the risk premium. I think we have returned to that model permanently.

I don't even see exactly how inflation could change this scenario.
Economics in the long run if there is not a positive real return then society stops investing. There is no discounting for the future.
This.

Zero interest rates is only the norm in a society that doesn't invest for the future - that doesn't seem sustainable over time in nature. So I would suggest that the natural order of things has some positive real interest rate for the risk-free rate plus expected premiums for riskier assets (you seem to suggest that the risk premium requires zero interest rate for the risk-free rate, I don't know what your rationale for that is).

As for pensions, the reason they are disappearing is because companies can shift the risk from themselves to the individuals in the current labor market - whether that is a sustainable equilibrium for society overall remains to be seen.
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saltycaper
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Re: Are zero interest rates the natural order of things?

Post by saltycaper »

rgs92 wrote:
I don't even see exactly how inflation could change this scenario.
Central banks often act aggressively to combat high inflation, at times even to the detriment of employment numbers, as price instability is problematic for the economy at all levels. Further, inflation expectations are priced into the rates on nominal fixed income products, including nominal Treasuries and CDs.
Quod vitae sectabor iter?
qwertyjazz
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Re: Are zero interest rates the natural order of things?

Post by qwertyjazz »

Valuethinker wrote:
rgs92 wrote:I've been reflecting on the shock of zero or negative interest rates from things like gov't bonds or gov't insured CDs, but maybe this is how things should be. Isn't all positive return on money ultimately sourced from profits under capitalism? Why should I expect earnings on investments to come from anywhere else but someone selling something for more than it costs to produce it?

So it is only right and feasible for investment returns to come from dividends, corporate bond interest, and stock price increases I guess.
Communism basically died around 1989, and now we have been inching towards pure capitalism ever since.
So I think safe gov't backed returns on money are gone for good.

This is also the reason pensions are quickly disappearing (along with secure employment, at least in the private sector).

Wasn't there a time several decades back when the yield from dividends were higher than from bonds, and this was considered what you were rightly rewarded for taking the risk of owning equity in a private enterprise? This is the risk premium. I think we have returned to that model permanently.

I don't even see exactly how inflation could change this scenario.
Economics in the long run if there is not a positive real return then society stops investing. There is no discounting for the future.
There is a point though in a utility curve where I would rather have 50 cents in the future than a dollar today. When I retire I would pay extra for the privilege of not starving. This just shifts our willingness to save dramatically IMO
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saltycaper
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Re: Are zero interest rates the natural order of things?

Post by saltycaper »

qwertyjazz wrote:
There is a point though in a utility curve where I would rather have 50 cents in the future than a dollar today.
Please PM me if you get there. :D
Quod vitae sectabor iter?
Whakamole
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Re: Are zero interest rates the natural order of things?

Post by Whakamole »

Tal- wrote:Regarding the pension change, I have my own personal take on that. My view is that companies shifted away from pensions for three big reasons:

1- Pensions provide little value to employees who transition jobs on a regular basis, which is becoming the norm.
2- Funding a pension varies drastically by year, based primarily on the performance of the pension. This means that the amount that the company needs to put into the pension varies drastically by year. This is why we saw so many pensions discontinued in 2008-2010.
3- As fewer companies offer pension, fewer companies need to offer pensions to remain competitive.

I suppose bullet #2 is somewhat tied to interest rates, but not drastically.
I think an understated reason is that ERISA (passed in 1974) did away with unfunded pension plans in the wake of the bankruptcy of Studebaker. As we're seeing with some state and local pension funds, it is expensive to save enough to have a 100% funded pension.
qwertyjazz
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Re: Are zero interest rates the natural order of things?

Post by qwertyjazz »

saltycaper wrote:
qwertyjazz wrote:
There is a point though in a utility curve where I would rather have 50 cents in the future than a dollar today.
Please PM me if you get there. :D
That would be the point of buried treasure, hoarding of real goods and negative interest rates. I do not think I will ever get there. But I may be saving even then. I just might need a treasure map to find my gold (although why gold is always valuable in the situation of electronic currency never made sense to me).
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saltycaper
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Re: Are zero interest rates the natural order of things?

Post by saltycaper »

qwertyjazz wrote:
saltycaper wrote:
qwertyjazz wrote:
There is a point though in a utility curve where I would rather have 50 cents in the future than a dollar today.
Please PM me if you get there. :D
That would be the point of buried treasure, hoarding of real goods and negative interest rates. I do not think I will ever get there. But I may be saving even then. I just might need a treasure map to find my gold (although why gold is always valuable in the situation of electronic currency never made sense to me).
Oh, so my guarantee isn't good enough, eh? Prefer to bury your treasure? Just because there's a chance I may be tortured and shot by a roaming horde of bandits doesn't mean we can't work this out.

Thanks, rgs92, for starting this thread. I learned a new word today. (Chartalism.)
Quod vitae sectabor iter?
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