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.
> 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.
> 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.
Reimbursement for work is on a slow decline, and has been for a while (in radiology at least). Hardware vendors and conference talks are often centred around a theme of ‘doing more with less’.
This link is an example and discusses revenue declining but the development of new tools might help to get more value out of imaging.
https://www.alliancehealthcareservices-us.com/12-imaging-mar...
The average multiple on a healthcare services business is 10x and HCIT assets are trading on revenue multiples. It works exactly like this everywhere. Livongo, Health Catalyst and Phreesia just went public at multiples that didn’t exist 5 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.
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.
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?
What I´ve never understood in all these arguments, is why do economists think that the laws of supply and demand supposedly (given that from this article it´s clear that they´re not), suspended for debt?
If for whatever reason (and having a moderately stable currency is the answer there) there is more demand for bonds than supply, then the price will fall. This has nothing to do with economic reality and everything to do with market pricing mechanisms. Whether it´s good in the long term for the government to increase its lending this way, is a completely separate question.
I can't possibly imagine where you have read/heard that any self respecting Economist thinks that yields (interests, cost of credit/capital) are somehow exempt from supply-and-demand.
If the US can sell treasuries at rates not much above inflation, then it is because they are not loaning enough -- is there really no bridges or other infrastructure that could benefit the economy if they are built?
Check out the price tags on most infrastructure projects these days. As badly needed as they are, the US government currently doesn’t have re ability to execute them for less than the mid-horizon returns, if that.
Much of the infrastructure we need is self-financing. Eg bike lanes, transit etc. increase tax base and keep money in the local economy, while increasing foot traffic and retail sales. There’s no reason curing the 20th century’s car hangover shouldn’t be profitable.
If this were true, they would be easier to get done. Borrowing money to finance is fine, but a lot of these projects have to borrow a vet long way in the future, and the longer the term of the loan, the more interest rates eat into the real return from the project.
Secondarily, many prospective borrowers of these projects are already in debt, and have cash flows which are not growing fast enough to borrow more.
why should a gov't project need to have any real returns? Social returns is enough. If the city is nicer to live in, if the businesses thrive because of increaed foot traffic, lower car accident rates, cleaner air etc.
The city has to pay the money back at some point. This either requires higher tax rates, reduced services, or a larger pool of money to tax. The first two are quite unpopular.
No good reason- but like I said, check out the price tag; a mile of subway development in the U.S. can cost billions (with a B!) of dollars. Additional foot traffic along that mile couldn't get you that much back.
I would say most of the solidly profitable infrastructure projects, in the US are gone, combined with pretty much all the state legislatures and Congress being taxation adverse.
We're running our governments like businesses and you're not going to find any nimble or disruptive startups in the mix.
And so we circle back around to, "All socialism is evil except the parts that benefit me."
Which isn't to say that I think the government should do what it do out of spite. Is there any chance of... I dunno, cutting off the public handout and then regulating the private vacuum-fillers sufficiently? Or does the implied drug analogy here reach its logical conclusion (on the black market)?
That "postmortem" explains nothing at all about how real estate factored in. I'd have to be in-the-know enough to understand that people overinvested in real estate partly because they could get loans easily from low interest rates. But even then, doesn't cover how financial markets were repackaging mortgages and hiding or miscalculating the risk.
If you listen to the episode, or even scan the transcript, you'll find that all of this covered. For a one hour show, it does an amazing job of putting everything together.
> “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").
Every state, city, country has a lot of favored sectors and grant opportunities, it's then up to investors to come up with projects that actually turn a profit.
VC/startup investors do this by simply doing a semi-blind search, funding everything they think is at least minimally sound.
If investors are still unable to turn a profit they are not taking on enough risk. (They are not thinking big enough.) And that might be okay. There's no moral imperative to keep every investment fund alive, every investor happy. And the only difference between business as usual periods and now is that the numbers are now scary (negative yields!).
But the fundamentals haven't changed.
Negative yields just mean that too many investors are risk averse, too many people (pension funds, passive funds, low-risk funds, inflation tracking funds, basic savings accounts) just want to park money. And that's okay. Eventually one of the following will happen: the fund managers will take on more risk, the people behind the funds will use the money for something else (eg spend it), or the people behind the funds will pester Congress to spend more and finance it all from debt.
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.
I was right there with you until the last three words. Investors ought to be compensated, but there’s no particular reason that compensation should be greater than the inflation rate.
that's not what risk means. no investment considers early exit because of difficulty as a risk. even legislation call that "investor profile" or something meaningless or another.
By selling a bond before maturity, you're open to price fluctuations of the bond. It's not that the investor is exiting early, it's that by exiting early he is no long guaranteed the yield of the bond when he purchased it. Thurs, the yield is not "risk-free", and the risk is that the price moved in the market.
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%.)
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).
The time value of money is the expected risk of inflation. For example, if a lender lends someone $100, then the interest rate is a combination of the risk of not being paid back, and the return that could have been had if the same $100 were invested elsewhere (with the same risk profile of the original investment).
> The time value of money is the expected risk of inflation.
I don't think that's the only source of time value of money.
For example, I'm fairly certain I can buy a car for the same price a year from now, but I am willing to pay a huge premium to have the car now so I don't have to ride the bus for two hours a day while I save up the cash to pay for it.
That is a preference for present consumption over future consumption that has nothing to do with inflation.
Consumption and investment are the same thing in a generalized model when comparing returns and figuring out how much interest to charge to keep up with inflation.
But those two possible uses of money have different profiles. You would have to price in how much it is worth to you to use the car vs the bus, subtract the amortization of the car - and together that's the target rate/yield that you should ask for your money plus risk of default.
Exactly, and the world is awash in goods. The only returns are in some real estate markets, where inflation is called appreciation and is underwritten by “greater fools.”
“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.
Not necessarily. With these things there is usually a big belief aggregation going on (some central bankers think this, some that), and we end up with a silly compromise. See Japan, see all the idiotic austerity programs.
So it is very possible that the central bank is not doing enough.
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.
Returns need to be associated with value creation. As the world has become more wealthy simply having assets and lending them out stopped creating significant value, thus lowering returns.
My completely unsecured credit card only charges 10%, and that’s before inflation.
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.
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?
This is the market signaling that it no longer perceives any value in the maturity value of these bonds. They aren't being purchased for their maturity value; they're liquid assets, traded like any other in a market awash with ultra wealthy institutional investors between whom these securities flow like any other asset.
Isn't inflation simply another cost? As long as the value of these bonds (their low risk, as opposed to their maturity value) is greater than whatever cost you care to consider (inflation, negative interest, opportunity cost, etc.) they will be valued instruments. There is no "what should happen" or what is "supposed" to happen; those are fictions in the minds of spectators and until you're prepared to anger some powerful people and institutions they will remain fictions.
> 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.
The parent has some sort of ad hoc economic theory ("gut response"), and I am asking them to expand on what the theory entails. "Supposed to happen" means it would be predicted by this theory of theirs.
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.
Living in Japan, I feel like they've naturally developed the culture of changing the color of the sky. I mean to say they always find ways of getting the people to blow cash to keep money circulating. Most companies here have like 3x more staff helping me or standing around than in Canada. Consumerism and state marketing is big too.
I'm not any kind of economist, but to me this seems like asking whether the sky really ought to be blue. Reducing the impact of debt (and by extension interest rates) on the economy is every bit as simple as undertaking a massive transforming project to change the color of the sky.
Yes, anything that requires government action is very hard in practice. But rhetorically, we discount that when talking about whether some government action would be a good idea or not.
Who's "we"? I think it's completely reasonable to consider how practical something of this magnitude is. You're not passing a single law; you're talking about fundamentally changing the entire nature of the (US? world?) economy in ways that I find difficult to even comprehend. I'm not even sure any amount of government action would be sufficient to bring it about.
Sorry, I must have given the wrong impression. To be clearer, I was hinting at either more government spending, universal basic income, or "helicopter money," as alternatives to attempting to stimulate the economy by encouraging more loans. These have precedents and it's not particularly difficult for a government to be efficient at giving people money.
This is why you have to do it every year. Which is exactly what a progressive taxation system does (or would do if it was a little more progressive than current systems)
I imagine you would have to "do it" every week to have the claimed effect...
With online banking, etc perhaps once a day.
EDIT:
Actually, if the funds are transferred electronically it would take as long as an ACH transfer takes to get to the new account. The funds are tied up during that but then immediately available to the banking system again.
Value lives outside, but the money represented by the value lives on accounts, in databases.
Even cash is just something tracked by central banks as liability (negative account value - because when someone deposits cash they increase one account, and if the bank then deposits that electronic money at the central bank the total money supply must not change, hence cash is tracked separately).
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.
Yeah it's always great to have the interest rates match the natural interest rate.
Btw the definition of the natural interest rate is "The natural rate of interest, sometimes called the neutral rate of interest[1], is the interest rate that supports the economy at full employment/maximum output while keeping inflation constant"
> When the next crisis hits, people will talk about how negative rates forced people to reach for junk companies and questionable securitization paper.
> 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.
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?
I once saw a graph of oil production/consumption over the last 100-150 years. Interestingly the curve is a smooth exponential right up until the late 1960's and then it gets ugly jaggy linear.
Say what you will but I think that's really significant.
And it possibly still can. There is mentioned in that link of the theory being controversial due to automation, where there ends up being less workers and more production.
napkin math. Say we start with economy size A and a year later we have A+P. The profit rate is P/A. Whole economy-wise the P comes from people doing/producing something. Next year same people doing the same would produce the same P. Thus profit rate fell - it is now P/(A+P). As a result we can see that the profit rate can be increased by increasing output - ie. P(next year) > P(this year) due to productivity increase (thus automation) and/or labor force growth (population growth).
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.
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.
They don't really have a mechanism, and rates are set in the global market - return on capital is mostly a global issue now and something the fed has no control over.
They can target the overnight rate and buy and sell short term funds because they are the majority player there, but even then the actual Fed Funds rate doesn't always equal the target they are trying to set (and not by a few points either).
On the long end they are more constrained. They can print a ton of money to cause inflation, but going the other way just isn't as easy. They aren't the major player there either. Long term treasuries compete with every other debt instrument out there government and private. Those rates are global for the most part
Just look at the late 90s when the Fed tried to push long term rates up and failed horribly. All they did is invert the curve. It is a repeating scenario.
This same conversation comes up about once a decade it seems.
They can, they just don't have a direct tool for doing it. Long term rates are just an aggregation of short term rates over a given time span. So they can adjust long term rates via promises and hints that they will keep short term rates low for a long time.
There is a ton of interesting monetary theory about how the Fed can do this and issues they run into.
long term rates are more than short term rates added together. while related, short term rates are much more driven by central bank reserve and regulatory policy, and long term rates much more driven bvy return and inflation expectations.
In a real dollar sense, the fed has zero ways to affect long term rates.
Sure there are other factors that affect long term rates. But if the Fed came out tomorrow and said "We promise to keep interest rates at 0 for the next 10 years" long term rates would drop considerably wouldn't you agree?
Not at all. Inflation expectations would soar. A few years ago and there talk was that keeping the overnight rate would lead to huge inflation issues. Now a strange narrative is appearing that nominal interest rates are simultaneously too and inflation going higher.
And there is no way they would be to keep that rate. They can say whatever they want, but that doesn't mean the overnight rate has to oblige them either. They only set a target, the actual rate is still determined in the bank to bank market and historically it does diverge, sometimes strongly.
I'm curious, why can't they manipulate it directly? It seems like if a central bank bought enough long-term bonds, supply would drop enough to raise the price?
The opposite. If they buy every long term bond that means that companies (and the Treasury too), can put them up for any price, let's say zero coupon payment, that's a zero yield bond.
No, to drive up rates would mean to restrict the buyers from buying (either via restricting the money supply - that means a combination of raising the overnight repo rate [FFR - Federal Funds Rate], raising reserve requirements, decreasing interest payment on reserves).
But such a move means slowing down regular lending, VISA/MasterCard and the banks would have to increase consumer facing prices of credit, etc. It would slow down wage growth.
And we are not seeing wage growth, we're not seeing inflation.
To stimulate spending/consumption all the Fed can do is absorb more and more risk (buy bonds/assets - quantitative easing, keepr rates low, encourage lending, encourage the starting of new projects).
Why people are not starting new projects?
Well, for example look at NIMBYs, look at how Congress doesn't want to force mandate better EPA regulations, look at how municipal fiber plans were stopped thanks to Comcast lobbying, etc.
Basically a lot of money goes into "rent" instead of innovation. (Asset bubbles.)
> 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.
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.
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.
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.
