Zero Interest Rates Forever...if true, is it actionable?

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Frank2012
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Zero Interest Rates Forever...if true, is it actionable?

Post by Frank2012 »

Fellow Bogler's,

Interesting article on Bloomberg suggesting that the U.S. is heading to a future of zero interest rates forever:

https://www.bloomberg.com/opinion/artic ... rest-rates

This got me to wondering...if this turns out to be true, and the U.S. is heading for zero interest rates forever.... is it actionable?

So if you know that U.S. interest rates would go to zero forever, how would this affect your investment mix?
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David Jay
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by David Jay »

Frank2012 wrote: Thu Jun 27, 2019 8:01 am Fellow Bogler's,

Interesting article on Bloomberg suggesting that the U.S. is heading to a future of zero interest rates forever:

https://www.bloomberg.com/opinion/artic ... rest-rates

This got me to wondering...if this turns out to be true, and the U.S. is heading for zero interest rates forever.... is it actionable?

So if you know that U.S. interest rates would go to zero forever, how would this affect your investment mix?
Key phrase is highlighted above.
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Tycoon
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by Tycoon »

Forever is a very long time. I find the premise to be silly.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by jebmke »

We don't know that interest rates are going to zero forever. It wasn't that long ago that "interest rates have nowhere to go but up" and people were wringing their hands about what to do about that.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by Mountain Doc »

Frank2012 wrote: Thu Jun 27, 2019 8:01 am So if you know that U.S. interest rates would go to zero forever, how would this affect your investment mix?
If I knew interest rates would go to zero forever, I would be shifting all of my bonds to 30-year treasuries to lock in today's 2.57% yield.

But I don't know that, so it's not actionable.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by columbia »

That article isn’t cogent. What rates is it referring to?
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by cheezit »

“There will be no coupon payments, nor present discounting of STRIPS. All competing interest-bearing securities will be destroyed. But always— do not forget this, Frank2012— always there will be the intoxication of inflated equity valuations, constantly increasing and constantly growing subtler. Always, at every moment, there will be the thrill of all-time highs, the sensation of trampling on a securities broker or a financial analyst who is helpless.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by HEDGEFUNDIE »

Leverage up everything. Free money.
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Frank2012
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by Frank2012 »

If interest rates go to zero forever, wouldn't TIPS be the worst investment?
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by nisiprius »

No, it's just blathering. It's explicitly described as "opinion." It isn't supported by much in the way of fact. It might have a political subtext.

There is no obvious consensus by economists as to how much debt is too much. One study, by respected economists Reinhart and Rogoff, that purported to give an answer, turned out to contain an actual spreadsheet error--the math was actually wrong.

The article itself says, in so many words, "Most macroeconomists think this isn’t much of a problem." So the author is acknowledging that he doesn't think the same thing as "most" macroeconomists. Of course he might be right, but in order for this to be actionable, you would need a specific reason to believe that Noah Smith is right and "most macroeconomists" are wrong.

The author does use the word "permanent," in the closing sentence: "But should these efforts turn out to be politically impossible, get ready for permanent zero interest rates." That is colorful, over-the-top rhetoric--not suitable for taking action on. Also, of course, the headline says "U.S. Is Heading to a Future of Zero Interest Rates Forever," while the closing sentence says nothing of the kind.
Last edited by nisiprius on Thu Jun 27, 2019 8:54 am, edited 2 times in total.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by AtlasShrugged? »

This got me to wondering...if this turns out to be true, and the U.S. is heading for zero interest rates forever.... is it actionable?
Frank2012...In a word, "Yes"

How so? Well for starters, if you know that interest rates are permanently lower, this would affect withdrawal rates. Namely, your safe withdrawal rate goes down. The trinity study, and follow on studies generally assume bonds have a higher yield and return than what we have seen in the last decade. This affects portfolio viability. Just remember one thing: Our crystal balls are cloudy, at best [quote of Larry Swedroe, whom I greatly admire].

What to do? For me, it came down to this 'Trinity' (pun intended).

LBYM; Increase savings; Work longer.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by Spirit Rider »

Frank2012 wrote: Thu Jun 27, 2019 8:41 am If interest rates go to zero forever, wouldn't TIPS be the worst investment?
Not if the coupon was zero, they would still receive the inflation component.

Even if as would be likely their effective yield was 0% to match nominals, they would still provide inflation protection.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by alex_686 »

Frank2012 wrote: Thu Jun 27, 2019 8:41 am If interest rates go to zero forever, wouldn't TIPS be the worst investment?
No. The article is suggesting that real rates (after inflation) will be zero, not nominal.

This is actionable. If risk free government bonds yield nothing, this suggests that orther asset class will have low or depressed returns. This suggests either a higher rate of savings or lower spending goals.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by nisiprius »

Frank2012 wrote: Thu Jun 27, 2019 8:41 am If interest rates go to zero forever, wouldn't TIPS be the worst investment?
No. The "coupon rate" on a TIPS is in addition to the CPI-U adjustment. If interest rates go to zero forever, then TIPS will exactly hold real value. Assuming positive inflation, they will be much better than a physical stack of currency, or a zero interest business checking account, or an 0.05% Crimson Octagon Totally Free Checking Account. They will be better than any fixed-rate Treasury whose interest rate that turns out to be higher than inflation, and worse than any fixed-rate Treasury whose interest rate turns out to be higher than inflation.

And, like all investments, alas, income tax is assessed on growth in the number of dollars, not real growth, so any investment that exactly keeps up with inflation before taxes (e.g. stocks 1966-1982) will lose to inflation after taxes.
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Frank2012
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by Frank2012 »

Great comments from my fellow Bogleheads! In particular, save more, live within your means, and work longer. Can't argue with that....
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by mbasherp »

Forever is ridiculous. But for decades, it's certainly possible.

It would change how I feel about carrying a sub 4% mortgage (not such a good idea after all). Otherwise, I'd probably wait much longer to add any bonds to my portfolio. Currently 95% equity/5% gold and I think I'd still feel good about that. Gold would become important insurance against the default risk of formerly "risk free" bonds. Clearly they wouldn't be risk free if it's structurally impossible to have a free market in bonds anymore.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by Sandtrap »

nisiprius wrote: Thu Jun 27, 2019 8:46 am No, it's just blathering. It's explicitly described as "opinion." It isn't supported by much in the way of fact. It might have a political subtext.

There is no obvious consensus by economists as to how much debt is too much. One study, by respected economists Reinhart and Rogoff, that purported to give an answer, turned out to contain an actual spreadsheet error--the math was actually wrong.

The article itself says, in so many words, "Most macroeconomists think this isn’t much of a problem." So the author is acknowledging that he doesn't think the same thing as "most" macroeconomists. Of course he might be right, but in order for this to be actionable, you would need a specific reason to believe that Noah Smith is right and "most macroeconomists" are wrong.

The author does use the word "permanent," in the closing sentence: "But should these efforts turn out to be politically impossible, get ready for permanent zero interest rates." That is colorful, over-the-top rhetoric--not suitable for taking action on. Also, of course, the headline says "U.S. Is Heading to a Future of Zero Interest Rates Forever," while the closing sentence says nothing of the kind.
+1
Good points: Well said.

I read it carefully, several times. Were it written in Morningstar with a detailed study and facts to support it, I might give it more credence. But, as written . . . it's noise.

Actionable as far as actions to take right now going forward such as changing allocation or IPS, etc?
No.

j
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by robertmcd »

mbasherp wrote: Thu Jun 27, 2019 9:01 am Forever is ridiculous. But for decades, it's certainly possible.

It would change how I feel about carrying a sub 4% mortgage (not such a good idea after all). Otherwise, I'd probably wait much longer to add any bonds to my portfolio. Currently 95% equity/5% gold and I think I'd still feel good about that. Gold would become important insurance against the default risk of formerly "risk free" bonds. Clearly they wouldn't be risk free if it's structurally impossible to have a free market in bonds anymore.
I believe we have another full cycle of all time lows in interest rates (sub 1% 10 yr, sub 2% 30 yr). It makes me wonder if going for the lowest APR ARM I can find will be the right choice when I look to get my first mortgage. Then again, I already take a lot of interest rate risk in my portfolio, and a fixed 30 yr would offer a hedge if my portfolio was to get hit with rising real yields or inflation.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by dodecahedron »

On an after-tax, after-inflation basis, it seems to me that real rates on nominal Treasury instruments have already been zero for decades.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by randomguy »

AtlasShrugged? wrote: Thu Jun 27, 2019 8:47 am
This got me to wondering...if this turns out to be true, and the U.S. is heading for zero interest rates forever.... is it actionable?
Frank2012...In a word, "Yes"

How so? Well for starters, if you know that interest rates are permanently lower, this would affect withdrawal rates. Namely, your safe withdrawal rate goes down. The trinity study, and follow on studies generally assume bonds have a higher yield and return than what we have seen in the last decade. This affects portfolio viability. Just remember one thing: Our crystal balls are cloudy, at best [quote of Larry Swedroe, whom I greatly admire].

What to do? For me, it came down to this 'Trinity' (pun intended).

LBYM; Increase savings; Work longer.
It MIGHT affect withdrawal rates. The trinity study didn't make assumptions about interest rates. The used real data. The rates we have had for the last 10 years are similiar to what we have from the early 30s to late 50s when the 10 year traded in a 2-3% range. The 4% rule had no problems during that 20+ year period. And the higher rates of the 60s/70s sure didn't help withdrawal rates.

Low rates might make the penalty for choosing bond heavy portfolios higher. We had the mother of all bond bull market for the past 38 years. That might have given people unrealistic expectations on what to expect from buying bonds.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by adamthesmythe »

Frank2012 wrote: Thu Jun 27, 2019 8:01 am
This got me to wondering...if this turns out to be true, and the U.S. is heading for zero interest rates forever.... is it actionable?
It would only be actionable if we knew that it was going to happen. And we don't know. And even if you define "forever" as, say, 50 years...not happening is a great deal more likely than happening.

So no, not actionable, close thread.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by JBTX »

Forever was meant to be hyperbole. But it may well be that rates stay low for a long time, and rising federal debt will definitely provide extra incentive to keep them low. We are heading I to interesting times.

I actually thought the article was insightful.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by boglerdude »

0% means abundant capital, everyone's rich, like in Japan. Why should it cost a lot to borrow money to start a business?
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Frank2012
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by Frank2012 »

JBTX wrote: Thu Jun 27, 2019 9:18 pm Forever was meant to be hyperbole. But it may well be that rates stay low for a long time, and rising federal debt will definitely provide extra incentive to keep them low. We are heading I to interesting times.

I actually thought the article was insightful.
I agree, and I find the article an interesting contrast to the many experts that have been predicting high inflation and who have been completely wrong (Jim Grant comes to mind).

Also here is a great Boglehead thread from SimpleGift on the possibility of low interest rates for a very long time:

700 Years of Falling Interest Rates, 1310-2018

viewtopic.php?t=278700

I think the prudent steps for an investor in the event of low interest rates "forever" is to invest in low-cost index funds, broad diversification across asset classes (I favor the two-fund portfolio of VTWAX and VBTLX), live below your means, and work longer if you can.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by Trader Joe »

Frank2012 wrote: Thu Jun 27, 2019 8:01 am Fellow Bogler's,

Interesting article on Bloomberg suggesting that the U.S. is heading to a future of zero interest rates forever:

https://www.bloomberg.com/opinion/artic ... rest-rates

This got me to wondering...if this turns out to be true, and the U.S. is heading for zero interest rates forever.... is it actionable?

So if you know that U.S. interest rates would go to zero forever, how would this affect your investment mix?
No, this theoretical opinion from a fortune teller is not actionable.
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Re: Zero Interest Rates Forever...if true, is it actionable?

Post by oldcomputerguy »

The topic is not actionable, and has been locked. The discussion stems from an article that speculates on US economic policy. See Non-actionable (Trolling) Topics:
If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:

US or world economic, political, tax, health care and climate policies
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