- In the U.S., Europe and Japan, markets are now expecting inflation that is below target even with full employment over the next 10 years. This is despite a 70 percent rise in the price of oil. Evidence from markets and some surveys suggests that inflation expectations are becoming unhinged to the downside. The policy challenge with respect to credibility is exactly the opposite of what it has been historically — it is to convince people that prices will rise at target rates in the future.
Look at the max timelines:
https://fred.stlouisfed.org/graph/?g=5f7L
https://fred.stlouisfed.org/series/DGS10
https://fred.stlouisfed.org/series/DGS30
It seems to me that inflation/deflation is not the motivating factor, but only the choice of risks. Where should one put gobs of money? Of course, the markets are an option, but the risks there seem terribly high. So, there is competition to put gobs of money in bonds, which drives rates down. People don't want low rate bonds, but those are the bonds that you get when they are in demand.
Even lower rates aren't going to drive cash into the markets and result in economic healing. They are only going to add more air to bubbles that already are making people wince in nervous expectation.
There's a famous piece of journalism on the causes of the ~2008 financial crisis, specifically the housing bubble, called The Giant Pool of Money. There's one part that always stuck out to me, and seems incredibly relevant here, so I'll highlight it [emphasis mine, at the end]: Adam Davidson Right, the global pool of money, that's where our story begins. Most people don't think about it, but there's this huge pool of money out there, which is basically all the money the world is saving now-- insurance companies saving for a catastrophe, pension funds saving money for retirement, the Central Bank of England saving for whatever central banks save for, all the world's savings. Ceyla Pazarbasioglu A lot of money, it's about 70 trillion. Adam Davidson That's the head of capital market research at the International Monetary Fund, the place to go if you want to figure out how much money is in the world. [...] Adam Davidson And by the way, before you finance enthusiasts start writing any letters, we do know that $70 trillion technically refers to that subset of global savings called fixed income securities. Everyone else can just ignore what I just said. Let's put $70 trillion in perspective. Do this. Think about all the money that people spend everywhere in the world, everything you bought in the last year, all of it. Then add everything Bill Gates bought, and all the rice sold in China, and that fleet of planes Boeing just sold to South Korea, all the money spent in every country on Earth in a year. That is less than $70 trillion, less than the global pool of money. Alex Blumberg Wow. Adam Davidson We're talking about a lot of money. Alex Blumberg That is a lot of money. Adam Davidson And that money comes along with armies of very nervous men and women watching over the pool of money. Investment managers, they don't want to lose a penny of that. They don't want to lose any of that money, and, even more so, they want to make it grow bigger. But to make it grow, they have to find something to invest in. So, most of modern history, what they did was they bought really safe and, frankly, really boring investments like treasuries and municipal bonds, boring things. But then, right before our story starts, something changed, something happened to that global pool of money. Ceyla Pazarbasioglu This number doubled since 2000. In 2000 this was about $36 trillion. Adam Davidson So it took several hundred years for the world to get to $36 trillion. And then it took six years to get another $36 trillion. Ceyla Pazarbasioglu Yeah, there has been a very sharp increase. Adam Davidson How does the world get twice as much money to invest? There are lots of things that happen. But the main headline is that all sorts of poor countries became kind of rich, making things like TVs and selling us oil. China, India, Abu Dhabi, Saudi Arabia made a lot of money and banked it. China, for example, has over a $1 trillion in its central bank. And there are office buildings in Beijing filled with math geniuses, real math geniuses, looking for a place to invest it. And the world was not ready for all this new money. There is twice as much money looking for investments, but there are not twice as many good investments.
You misunderstand: it is the economy. Retirement funds are invested in the stock market. Just look at Reddit and all the people bitching that they can't buy BTC with their IRAs and 401ks - if it's in a retirement account it's abstract money. If you have to pull it out of your pocket it's the dearest thing in the world.
Woah, wait. This is bending my mind. You're saying that, though the nominal value has doubled, the total capital has stayed roughly the same, over the last ten or so years? Also, there hasn't been any real inflation? (I feel like the answer to one of these questions is the answer to the other.)
I guess if you look at 2000 and assume 4.5% capital growth then then you would get right around a doubling. At 4% its 18 years 3% 24. The real question is 4.5% realistic or is it a blip of an accounting gimmick. I would argue the latter but maybe kleinbl00 can chime in with a better answer. I dont have my copy of https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century at my desk to reference but I remember historic growth being surprisingly small on the order 1-2% maybe 3% in the last century.
Well, the piece I linked to above claimed a doubling in 6-7 years in global fixed income securities. That's something like 10-12% growth a year. Which is.... insane. And a lot of that growth probably happened in the middle and latter years, reflecting the bonanza in the American residential mortgage market, so the growth in those years was probably even more. (I don't know what global fixed income securities is a subset of exactly.) Something's gotta be wrong here, but, assuming these numbers are true, the only explanation I can fathom for that level of annual growth is the fairy tale fiction that became the on-the-ground reality: that housing prices would never go down. And when you take something like that as a baseline fact, then I can imagine some ridiculous levels of economic activity. kleinbl00, am I getting something wrong here? I must be.
Derivatives are securities. So what's a derivative? Let's say you have a house. It's worth X. Let's say I decide to sell stock in the value of your house. It's worth X x Y, with Y being whatever the fuck I want it to be. The underlying fundamental value of your house and the stock combined is X. However, the securities value of your house is X plus X x Y. It's not as completely simple as that (you can't trade your house on the stock market... at least, if you're living in it) but options, futures contracts, derivatives, mortgage-backed securities, they're all securities. "Fixed income securities" are basically bonds, issued by bond issuers, backed by whatever the fuck they feel like backing it with. It's all just contracts.
So we reached a worldwide doubling in fixed income securities (in 6 years) because wealth and fund managers went hog wild with derivatives and other financial instruments? I forget who said it, but they said the last good financial instrument invented was the ATM. I know that's cheeky and simplistic, but derivatives seem to me to invite speculation. edit: I think it was Paul Volcker.
"Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist." - Ken Boulding, 1973
Well a minor correction is that doubling in 7 years is a14%/yr rate and 6 years is 16.5%.
Well, by the math of the "rule of 72" where Where'd you get 14% and 16.5%?
and I said dt (doubling time) = 6 or 7 and we're looking for the rate of doubling, our range for r is ~10.2%-12%. dt = 72/r
That's embarrassing. I did some trial and error in a spreadsheet and I have no idea what mistake I made to get those numbers. You're right
Are retirement accounts specifically tax-sheltered accounts? Or are any private investing funds considered retirement accounts?
Hmm, where to store your wealth in these uncertain times? Perhaps a promising, easily stage startup with amazing growth potential?
I follow probably nine brokers. They all know each other. They don't all agree. They definitely riff off each other, though, listen to each other, disagree with each other, link to each other, and fight about this shit. Ben Rich argues that passive income is dead and that anyone who wants to make money moving forward needs to find controlling interests in manufacturers. Charles Gave still seems to think that things will return to normal at some point because the central banks will eventually run out of money, and it's going to be fucking awful. Jared Dillian says buy gold, buy it now, and buy India. Tony Sagami is a fundamentalist who points out that it doesn't matter what the market is doing so long as you're making phat dividends. They've all been right. They've all been wrong. Nobody has a crystal ball. What I will point out is that every investment theory anybody has ever come up with hasn't had to deal with central banks with their thumbs on the scale. We're capitalizing gains and socializing losses and that's the kind of thing that leads to hedge fund managers comparing themselves to Jews under Nazi occupation and ordinary mom'n'pop savers hiding money in the mattress. I'll say this: I like owning crypto, but I'm also thinking of buying some shiny baubles for my kid.
I'm gonna go look at a house tomorrow that last sold in the early 2000s for 50% of what the current asking price is. I don't have high hopes for this particular one, but the price they're asking for it is still a great deal. Still, if the housing bubble could pop sometime this week, I'd be grateful. If the housing bubble could please pop and the bank still has those low lending rates for a 30 fixed mortgage, well, I'd be downright ecstatic.They are only going to add more air to bubbles that already are making people wince in nervous expectation.
The bubble will pop, and as the central bankers have no solutions to anything other than "quick print money" the rates will remain low. The most striking thing to me about the Brexit was how little time the Royal Bank waited before announcing, unasked, that they'd pump 250 billion pounds into the economy (hint: it was in the middle of the night, before Cameron resigned). Meanwhile, we've got the neo-wingers over at NakedCapitalism insisting that "bankers are now actively stoking fears so as to force officials to give bailouts." When all you have is a hammer, the whole world is a nail... and the central banks have convinced themselves that the only tool available to them is to throw money at the problem. Keep your powder dry. The housing market is stupid right now in no small part because investors are dumping their nickels everywhere that doesn't leak too much. You, with your scraped-together nest-egg and your dream of home ownership, are outmatched, outgunned and outclassed by some hedge fund snapping up nine hundred houses to flip into rentals. Students of history will observe that these sorts of situations tend to resolve themselves with stunning rapidity.
Well, Burbank, Glendale and Pasadena retrenched 50-60% between 2007 and 2009. Housing developments in the Inland Empire went vacant. We tried to spend our way out of the recession. The argument now is will we ever turn off the tap? Because if we do, we're back in recession. But if we don't, we're all on welfare. Monopoly is a tough game to win when the bank covers not only everyone's rental payments but also everyone's property purchases.
I think that is true if most policies. Every one believes their view is the most objective and everyone else is biased. It makes diagnosis more like whack-a-mole.There is much more to be said about policy going forward. But treatments without accurate diagnoses have little chance of success. We need to begin with a much clearer diagnosis of our current malaise than policymakers have today.
No doubt. Unfortunately, I'm not convinced there is much evidence that 'data' is the answer. Everyone seems to be able to take what the want from data. If anything, it seems that our 'policies' or 'solutions' should be subjected to more scrutiny, proportional with the size of their intended effects. We tend to focus upon the reasons for specific policies, but the policies themselves don't face as much skepticism.
What kind of scrutiny, though? We act as if economics is a science, rather than the entrail-scrivening it is. Certainly there are trends but there's no more probability or certainty in economics than there is in roulette. More than that we're dealing with a system of such complexity and unprecedented mechanics that the only thing modeling gives you is overconfidence. I just did a quick googling on "six sigma events" in finance and we've had four or five since 2008... and statistically, the odds of one are two in a billion. An economist would call these unprecedented times. A statistician would call them poorly modeled. So whose scrutiny shall we use? 'cuz all the "experts?" they're the ones calling the shots. And the proletariat? They're the ones who want to build a wall on the Mexican border and leave the EU.
Well every time you change the rules you have a "six sigma event" and we have had a lot of rule changes as of late to keep this bubble going. Logically you look at our economic hand and its really shit but its hard to apply logic when at any point the rules can change so drastically that you may not even be playing the same game anymore. Bailouts, Tarp, ZIRP, NIRP all these are changes in the way the financial game is scored. Investments and hedges that were winners under the old rules are total loosers under the new ones.
I agree somewhat... data is just a bunch of numbers, but context and underlying assumptions and expected effects are what make the data meaningful, but that is where the differences are: we may ask agree that X is X, but we don't agree about what it should be or whether it's significant. I think "more scrutiny" is no different politically than "just look at the data." It's all about how people interpret everything and what they believe is important. Are you getting at how a policy may have good arguments for it, but the implementations are hardly looked at before they are passed, tend to have a lot of pork, and plenty of unintended consequences? I agree that there is a problem there. But if everything can be stopped by someone saying "what about this effect you didn't consider? I know it will be terrible!" then nothing would get done at all.I'm not convinced there is much evidence that 'data' is the answer. Everyone seems to be able to take what the want from data.