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What if your entire worldview was just because of near-zero interest rates?

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Re: What if your entire worldview was just because of near-zero interest rates?

#291

Post by chrisjc »

antonomon wrote: post #208
jsmith99 wrote: post #184

Earlier quoted context omitted.

Are you the writer? In what way was the rise of Vanguard driven by cheap credit?

You can't say 1:1 directly that cheap credit = rise of Vanguard, but index funds have gotten really popular since 2008. The near-zero interest rate was the environment, and that environment was built on the Fed's policy goal of the Wealth Effect (belief of growth of assets boosts demand & spending). So, given that you could pretty much throw anything at the dart board among the giants and it would go up, indexes perf…

Hmm, I guess I missed the point you were trying to make and assumed you were suggesting the rise of Vanguard was a result of it managing all of the investments for many of these companies prospering from all of this cheap credit.

Re: What if your entire worldview was just because of near-zero interest rates?

#292

Post by boppo1 »

hef19898 wrote: post #227
boppo1 wrote: post #201

Can anyone explain to me why we don't have a policy of 'natural' or 'equilibrium' interest rate? As I studied finance in college in the 2010s I was aghast to realize that the US had basically turned into a centrally planned economy, and could not wrap my head around how any serious economist could advocate for the paradigm with a straight face. I'll never forget my freshman year investment analysis professor angrily…

What makes you think that the economy featuring the most un-chained capitalism is a centrally planned economy? I wasn't aware of any government dictated 5 year plans or similar thing anywhere in the western world.

The FOMC is a planning committee. Even if you keep your hands out of all the other parameters of industry, setting benchmark rates dictates what kinds of businesses succeed. It's like a string that all the other strings on the marionette connect to. You don't get granular control, but you're definitely exerting a huge amount of deliberate influence.

Re: What if your entire worldview was just because of near-zero interest rates?

#293

Post by boppo1 »

michaelt wrote: post #249
boppo1 wrote: post #201

Can anyone explain to me why we don't have a policy of 'natural' or 'equilibrium' interest rate? As I studied finance in college in the 2010s I was aghast to realize that the US had basically turned into a centrally planned economy, and could not wrap my head around how any serious economist could advocate for the paradigm with a straight face. I'll never forget my freshman year investment analysis professor angrily…

One serious economic theory states there is a 'business cycle' [1], where the economy varies between doing well and doing badly every, say, 5-10 years. Keynesian economists [2] think the government should dampen these cycles by saving up a war chest when the economy is doing well, and spending when the economy is doing badly. After all, if there's a Great Depression and you build the Hoover Dam, you get a big discoun…

Well that makes a lot of sense for fiscal policy, but what about monetary policy? A professor explained it "lower rates make it easier for businesses to get loans, so they can create jobs!" This seems wholly and obviously short-sighted to me. Where does the theory address whether those jobs create anything worthwhile? Inflated valuation of suboptimal or unprofitable business?

These are really elementary questions/conclusions to explore:

Iirc Keynes said you could jumpstart an economy in the short term by paying people to dig ditches and fill them in[0] and watch a local economy pop up to support that 'industry'. What if doing so doesn't help the other primary activities and you just wind up with a ditch-digger economy? You're wasting resources on useless work.

[0]The actual quote is about filling jars with money, burying them in a mine, filling it with garbage and paying people to dig them out. I'm no bitcoiner but I had a chuckle about the guy who hired people to recover his hard drive from a landfill.

Re: What if your entire worldview was just because of near-zero interest rates?

#294

Post by jsmith99 »

Jommi wrote: post #277
jsmith99 wrote: post #184

Earlier quoted context omitted.

Are you the writer? In what way was the rise of Vanguard driven by cheap credit?

"Index funds are a sure way to get stock-like returns with low volatility!" When cost of credit < index fund return, it just makes sense to borrow and invest in those until the gap is smaller

I don't think that's the issue - if you expect returns in a healthy economy to be below the cost of capital then we have bigger issues.

Re: What if your entire worldview was just because of near-zero interest rates?

#295

Post by jean_tta »

myshpa wrote: post #266

The whole system is so dysfunctional, it's no longer funny. - fiscal policies (money printing) - prevalence of bullshit jobs (70%+ of jobs are unnecessary/harmful)[0] - exploitation of nature / future for profit motives of individuals - systemic economic inequality - subsidizing the most harmful things (oil, animal agriculture, plastics) - agriculture based on degrading soils and spraying poisons - health/medicine fo…

Isn't "money printing" monetary policy, as opposed to fiscal policy?

Re: What if your entire worldview was just because of near-zero interest rates?

#296

Post by machiaweliczny »

spaceman_2020 wrote: post #234
hardware2win wrote: post #198

Earlier quoted context omitted.

Crazy. Salaries by prof. tell that SEs earn around 140k avg meanwhile meds. are around 300 easily I think youre just looking at tiny group of SEs

I’m based out of India. Doctors from top colleges after a decade of effort in their 20s start off at around Rs. 80,000-100,00 per month (many even lower in smaller towns) Starting salaries for 21-22 year old engineers from top colleges is approximately Rs 120,00-200,000 per month. By the time they hit their 30s, their salaries usually balloon to Rs 350,000-500,000 per month. Doctors don’t catch up until they’re well…

This is arbitrage of digital work, not unfair society. USA has big demand for software and simply imports work. The problem is that india is poor.

I agree though that it’s skewed because USA is at top of demand chain and could generate debt/demand in low interest rates environment.

Re: What if your entire worldview was just because of near-zero interest rates?

#297

Post by myshpa »

jean_tta wrote: post #295
myshpa wrote: post #266

The whole system is so dysfunctional, it's no longer funny. - fiscal policies (money printing) - prevalence of bullshit jobs (70%+ of jobs are unnecessary/harmful)[0] - exploitation of nature / future for profit motives of individuals - systemic economic inequality - subsidizing the most harmful things (oil, animal agriculture, plastics) - agriculture based on degrading soils and spraying poisons - health/medicine fo…

Isn't "money printing" monetary policy, as opposed to fiscal policy?

You're right, of course.

Re: What if your entire worldview was just because of near-zero interest rates?

#298

Post by baandang »

lamontcg wrote: post #151

What if you're just too young to remember a business cycle because you weren't an adult or were still in college so were insulated from 2008? Its funny to read all these takes from "kids" who think that all the fundamentals have totally changed at this point like the economy has turned some fundamental 180 degree turn and we're heading back towards >6% rates forever. It hasn't. The Fed is going to crash the economy i…

We are not slashing rates, that is not going to happen.

Those times are over. We can not slash rates without inflation becoming a larger issue. We had a nice run but this is back to the historic norm that inflation is always lurking in the background and highly constraining on central bank policy.

You are just repeating a standard narrative that is almost certainly wrong. 6-12 months out a mild recession happens and then the Fed slashes interest rates and the market takes off.

I personally suspect this is all a form of denial of how ugly the situation is economically. Once inflation catches a spark it doesn't just go out because basically everything economic in terms of a recovery is inflationary.

Re: What if your entire worldview was just because of near-zero interest rates?

#299

Post by michaelt »

boppo1 wrote: post #293
michaelt wrote: post #249

Earlier quoted context omitted.

One serious economic theory states there is a 'business cycle' [1], where the economy varies between doing well and doing badly every, say, 5-10 years. Keynesian economists [2] think the government should dampen these cycles by saving up a war chest when the economy is doing well, and spending when the economy is doing badly. After all, if there's a Great Depression and you build the Hoover Dam, you get a big discoun…

Well that makes a lot of sense for fiscal policy, but what about monetary policy? A professor explained it "lower rates make it easier for businesses to get loans, so they can create jobs!" This seems wholly and obviously short-sighted to me. Where does the theory address whether those jobs create anything worthwhile? Inflated valuation of suboptimal or unprofitable business? These are really elementary questions/con…

> A professor explained it "lower rates make it easier for businesses to get loans, so they can create jobs!" [...] Where does the theory address whether those jobs create anything worthwhile?

Economics 101 books assume every business is a medium-sized family-owned manufacturing company.

If you're a medium-sized family-owned manufacturing company, your growth might be constrained by access to capital - there might be several different investments in machines you could make, any of which would pay for itself within ~5 years, but you've only got the cash to get one machine. With more access to capital you can get a second machine, and hire the people to operate it - meaning more jobs and more profit.

And of course you'd steer clear of unproductive investments, short-term-ism and empire-building - you're planning to pass this business on to your children and grandchildren. You need a sustainable 10-to-20-year outlook, reliable, well-trained employees and an order book full of satisfied, profitable repeat customers.

On the other hand, if your business model is 1. Use cheap loans to provide subsidised taxi journeys, 2. ???? 3. Profit - the economic theory books don't really explain that.

Re: What if your entire worldview was just because of near-zero interest rates?

#300

Post by baandang »

forgingahead wrote: post #139

I'm old enough to remember in university economics class, the professor would joke about how financial media would closely watch press conferences that Alan Greenspan would give after FOMC meetings, down to watching the thickness of the briefcase to guess as to whether the fed funds rate (which determines interest rates) would increase or decrease. I am happy rates have risen, and I hope they stay at a sane level mor…

How many people under 35 know that Greenspan held an "emergency" Fed meeting in 1994 to RAISE rates 25 bps?

This idea the Fed exists to print money and keep rates low is just not reality. This is over extending the recent past as some kind of stable process.

This is going to be extraordinarily painful. So much of the economy, risk preferences, expectations have over aligned to an unsustainable zero interest rate environment that is gone for a generation. The biggest bubble ever popped last year if you look at Wilshire 5000 vs GDP but most people don't even realize we were in such a massive bubble yet.

We were not talking about the dot com bubble in summer 2000 either though. We were just talking about how do we get back to the bull market. We are still at the denial stage.

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