J Thomas wrote:And the yield on treasury bonds is partly set by the Fed. and meanwhile the Fed manipulates the amount of private borrowing to influence the inflation rate. So the various parameters you are talking about are fundamentally arbitrary.
Yes, I know, I am not arguing that point. I am saying that the existence of treasuries allows one to usefully gauge the relative risk vs return of another investment. If the risk is greater but the return is the same or less than a treasury bond, it is a bad investment.
I must be missing your point. If you predict the ROI for two investments, you can compare them. So what?
One of the values for the models is that they let you say things more clearly. And they help you think more clearly. ....
I again must note that if I am not speaking of a mathematically defined statement or a basic observable property, I am very rarely speaking of something which I think is absolutely true.
At most I only go up to "useful to consider as though it were true in a particular situation", I don't like beliefs, my brain screams at me when I deal with them.
The properties of treasury yield curves and their influence on things like mortgage interest rates or the stock market are not particularly controversial, there are numerous models already in existence relating to them, I'm not particularly interested in reinventing this wheel.
You agree that one major effect is usually to make mortgage interest rates higher, and stock prices lower, right? Do you argue that this is a good thing? Who is it good for?
Maybe part of our miscommunication is that you are using a financial definition for investment, where I think an economic definition is more appropriate.
A financial definition will say that you are investing when you give money with a solid expectation you will get more money back. A solid expectation usually involves promises by people whose word is known to be good and who will probably have the money so they can keep their word. In that sense the US government is maybe the best investment in the world.
Well, I would say "when you give money with an intent to get more money back", not all investments are sound, but you are right that a well informed investment will have a solid expectation of positive returns.
Sure. So consider -- safe investments involve people who do not need the money. If you are sure they can pay you back with interest, they are already doing very well. Mostly financiers prefer to lend to people who have no need to borrow. It's safer that way.
By an economic definition, though, you invest when you buy stuff that will be used for future production rather than consumed. The intention is that there will be more and better stuff to buy because of the money you spent. It isn't an investment when Wimpy tells you "I will gladly pay you Tuesday for a hamburger today.". It isn't an investment when Wimpy tells you "I will gladly pay you extra Tuesday for a hamburger today.". It might be an investment if Wimpy tells you "Buy me a hamburger bun and a sack today, and I will catch pigeons in the park and sell them and pay you back more than your money by Tuesday.". You have to analyze how likely he will succeed.
In an economic sense, what do Treasury bonds pay for?
Medicare/Medicaid 24%. This may be worth doing, but it is not an investment.
Social Security 20%. Ditto.
Defense 19%. Ditto.
Non-defense discretionary 19%. Maybe.
Other. 12%. Maybe.
Interest. 6%. No.
This sort of thing is hard to split up accurately. Like, the interest is more like 18%, but much of it goes to pay interest on bonds bought with the Social Security money. That doesn't get counted as interest because the government is paying the interest to itself. It doesn't really count when the government just pays the money to itself, right? Except that when the SS crunch comes the government has promised it will pay off a lot of those bonds to give to SS recipients, and the money is already spent. Why doesn't that count as debt and interest on the debt?
And various government initiatives have paid off very well. Lots of military spending has been entirely wasted, but then there's the internet, and maybe nuclear power, and a variety of civilian technology was first developed for the military and then allowed to be useful when the military didn't want it. Hard to tell how much of it wouldn't have happened anyway. But it's hard for me to figure that more than say 30% of government debt was investment. And now the money is spent and we're still paying interest on it, except that no, we aren't paying the interest, we're borrowing the interest along with the other new non-investments we pay for.
Meanwhile, if you have some brilliant idea to create new products, you will pay more interest than you otherwise would because the absolutely safe federal debt provides an artificially good alternative. Except it isn't that simple. We have created a system that's so complicated it's almost impossible to understand. I consider that a fundamental design flaw, right there. When smart people like you make utterly bogus arguments because the system is incomprehensible, how likely is it that the system is working well?
I'm not making a bogus argument about treasuries being safe investments.
In an economic sense they are not investments at all. Your money is not being spent to create wealth. The difference between this and a Ponzi scheme is that Ponzi schemes depend on larger and larger numbers of people investing so that the previous investors can be paid off. While with this uh.... I was sure I'd found a difference but now I've forgotten it. Maybe you can think of the difference.
I'm not making a bogus argument about treasuries existing because of the debt financing situation we are in.
The debt financing situation we are in is there because we made it be that way. It was a choice. It did not have to be like this. We chose for the Federal government, the only institution that is legally allowed to create money, to instead borrow its money from bankers. I may have missed your point, but it sounds to me like you're claiming this was not utterly stupid.
You may disagree that treasuries existing is a positive thing, but if there are benefits from treasury bonds being a part of the economy, then those benefits can be connected to the existence of the debt.
Sure. And if there's a dead cow lying in your pasture, bloating up, and there are maggots feasting on it, you can point out what a great benefit the cow is to those maggots.
So what money value would you place on those services? And who benefits from them?
A whole lot of T-bonds are bought by banks. A long time ago banks were required to hold cash reserves to cover possible withdrawals -- as much as 20% or 25% of the money they owed. But with the Fed etc there is no danger of bank runs, and individuals are not allowed to withdraw large sums of money since they might use the money for drug deals or terrorism, so banks have less than 1% reserves. The law is still sort of there, but Federal Reserve members must instead have 10% reserves on deposit with the Fed, and they are allowed to hold the rest as interest-bearing T-bonds. Also, some rich people would pay more taxes on actual investments which would also be more risky. So they do better to keep part of their wealth in the form of T-bonds. On both cases, the ones who buy T-bonds do so because the laws are set up so they do better that way. If we passed a law that you had to buy T-bonds with 5% of your income each year as part of your retirement plan, then you would get the special benefits of T-bonds too.
I say that this debt provides an advantage to financial investors, at the expense of economic investors. If you want to lend money, you have a floor under your price that's set by the Fed. If you want to borrow money for actual investments, to make things and sell them, there's a floor under the price you must pay. Of course financial investors like to have a guaranteed profit. But the result is to make it harder for people who actually want to produce things, to get the capital together to do that.
Why do you want to help people who want a sure profit over people who want to actually improve the economy?
You're misrepresenting my argument here.
I don't think you made the argument this way. I'm saying that this is a consequence of your argument that you perhaps did not notice.
Would it be beneficial for someone who wanted a business loan to have an arbitrarily low interest rate on potential investments due to the lack of treasuries setting a functional floor? Sure, who wouldn't want to be able to use money and pay it back without having to pay interest on it?
Would it be beneficial to be able to take out a mortgage with an arbitrarily low interest rate and only have to pay the amount you were loaned? Sure, again, who wouldn't want to do this?
But interest rates won't get arbitrarily low. They could be regulated by supply and demand, if supply and demand worked to regulate things. Some people argue that free markets do not work, that the whole American belief in such things is rank superstition. I say that markets can work well if they are designed well.
On the other hand, what motivation is there for someone to give out a loan if there is no return?
If there are too many people trying to loan money and not enough good credit risks want to borrow, then lots of people will not lend. That's how it ought to be in that case. If you have money and no good prospects for lending it, you could start your own business and try to make money that way. Or have fun spending the money. Or leave it under your mattress waiting for a chance to do some good with it. Nobody gave you a guarantee that there would be good investments available. If too many people want to invest and too few want to consume, the economy won't work right.
Yes, altruism is wonderful, I'm a socialist, I think it would be the best if all men were angels, but that is not the case.
If I loan you money with nothing stabilizing interest rates in any way, while I hold debt I am unable to use that money, when the debt is repaid I am in the same state as I began, minus the potential opportunity cost of not having the cash available for things which may have come up while you had the money.
Yes. Supply and demand. If the competition is too stiff among lenders, some of them will drop out of that market.
If I want to set aside some money for the future, is there no way I can protect it against the risks of inflation?
The way we do it now, the Fed decides what their inflation target will be and they do various things to hit that rate. You can probably protect your savings from inflation because the Fed is run by and for bankers, and they want to protect their savings from inflation too. But there are no guarantees. If you think inflation will be too high, then you should spend your money now. Either buy consumables and have fun with your money (beyond the cushion you might need) because it will buy less later. Or invest in tools etc that you can make money with. Tools etc that you can expect will cost more later.
Why should a bank give me an interest rate above some arbitrarily small value? What benefit would there be for them to do so if I have no possible alternative methods to invest in?
I didn't catch that. Are you saying, why should a bank let you lend money to them at some high rate of interest? No reason. They don't.
Look at the bigger picture. Ideally we would have a system with workable feedback loops. We'd get some good level of investment versus consumption. We'd arrange a reasonable balance between consumption today and consumption in the future. We'd get a sense of how much to spend on R&D versus increased production of present products. Lots of variables to balance. Some people have a theory that free markets do the best possible job of that. So look back. When we got out of the Great Depression and the command economy of WWII, lots of people had money (because they worked hard but couldn't spend it during the war, they had to put their money into war bonds instead.) And a lot of consumer goods were in short supply because we hadn't made much during the depression or the war. The rest of the world economy was bombed. We had a lot of new technology that wasn't being used much. We had room for a lot of prosperity, more than ever before. By the late 1960's things were getting way unbalanced. Some people said it was because Johnson wanted his social programs and his war both, and he couldn't pay for both, so he lied about the spending. The feedback loops failed because he lied. Then there was Vietnam, tremendously expensive, more bombs than we dropped in WWII. Nixon couldn't figure out what to do and tried price controls. Kissinger wasn't paying attention and told the Shah of Iran it was OK to get OPEC working. That was a disaster. Pretty soon The Shah and the King of arabia were both dead, but that didn't seem to help much. It's been rocky ever since. People talk about the oil a lot, but I'm not sure how central that is. Definitely important but maybe not as much as the hype. If we believe we'll die without oil then we put up with middle east wars better. Then there's the technology -- a lot of the development happens other places, and a whole lot of the manufacturing. There's the industrial automation.
It isn't clear how to design a system with the right feedbacks, but probably we don't have it now. Or maybe we face such gigantic changes and such humongous uncertainty that any feedback system would be overwhelmed.
What we have is a system that's supposed to guarantee investors a profit even if they don't produce as much. Guarantee investors a profit even during recessions when the economy does worse. There's a theory that your money should be due a profit when you put it to work. Why should you get a guaranteed profit above inflation when your money is not in fact being used? What kind of feedback is that?
There is a theory that the government ought to spend extra money during recessions to help the economy out, and then spend less during the good times. That way the government could help even out the extremes. Possibly we ought to try that. But is what we have now just a bad time? If it's like old recessions then after it's over we'll have a boom and make enough money to make up for the slowdown. What if it just isn't going to go back to the old way? What if conditions have changed, and we have to adapt? The government gravy train is necessary to an extent to take care of people who can't meet their basic needs, but what if it interferes with adaptation and the good times that would pay for it aren't coming?
We might be heading toward third-world status. A few super-rich people, a lot of extremely poor people, and a fairly small middle class that works as hard as it can to stay middle class. Is that inevitable? Are there people working for some of the super-rich people who are trying to make it be that way? That would be good for the environment, if we lived in giant slums around the cities and not spread out in suburbia, if we mostly didn't have cars, if we stopped eating so much beef, etc. I could imagine super-rich environmentalists who would want it. Not to mention super-rich aspirants to aristocracy. How could we head in some other direction? Is there any way?
Not by doing things the way we've been doing them. The government which officially gave itself the monopoly right to create money, instead borrows its spending money at interest from fractional-reserve banks.
And you are talking as if you don't consider that a travesty.
The Law of Fives is true. I see it everywhere I look for it.