2007 Redux Part 2

[guncrasher]

There are two forms of interest rates:  nominal and real.

Nominal is what the number says, as in "this account yields 2% interest" or whatever.

Real is what that number is minus inflation.  So, if your account yields 2% interest per year, but inflation is 8% per year, your real rate of return is -6% per year (i.e., you are losing 6% of your purchasing power per year).

Today, some countries' bonds have negative nominal yield.  You can buy a bond for $100, say, and get $80 back at the end of 30 years.

And we have negative real rates in most countries currently, including the US.  (Official inflation is 7.5%.  But the official measure understates real inflation by substituting hamburger for steak if steak gets expensive (hedonics).  Using 1990 basket of goods, inflation is currently 11%.  See
http://www.shadowstats.com/alternate_data/inflation-charts )

In both cases, people are paying the borrower for the privilege of loaning it money.  A great gig while it lasts. 

Why would anyone buy bonds in that situation?  Three reasons.  First is that some places (pension funds, for example) have to put their money in government bonds according to to their own internal regulations.  Second is that large amounts of money are cumbersome to turn into paper currency and vault it -- takes time and reduces fluidity of using the funds.  And if it's not in paper currency, it's in a debt instrument of some sort (bond, CD, money-market account, etc.), not paper dollars in a vault.  Third is that, even though a negative-yielding bond is a rip off, if interest rates go even more negative, the bonds you have go up in value, and then you can sell them (i.e., speculation in bond prices).

Countries with paper currency can't go too negative on rates, or people withdraw their money as paper and vault it.  But, if you have only electronic funds and EBT-type cards, the government can go to whatever rates it wants, negative or not.  There is no paper money to take out and vault.  Also, you can give out stimulus and have conditions on it, like "this money goes away if you don't spend it by this date" or "this money can be used to buy only these things, but not those things".  And the government can track every purchase.  That is why many governments want to go cashless.  They will tell you the reason is to combat money laundering and illegal activity.

goverment doesnt set rates, banks do.


semp

[Eagler]

Its all heading to a currency reset...probably going to a gov crypto as it will be much easier to control

Dollars will be worthless..see 1930 Germany to see where it is headed

Some talk suggests it would be fed controlled so local banks would not be needed

Once they have that in place the show changes for sure..

Eagler

[Brooke]

goverment doesnt set rates, banks do.

semp

In common financial parlance, "government interest rates" mean rates on treasury notes and bonds (set through US Treasury's discretionary participation in auctions) and Fed rates (set by the Fed).  The US Treasury is of course part of the government.

As for the Fed:
https://www.stlouisfed.org/open-vault/2018/november/is-federal-reserve-part-government

"With authority derived from Congress via the Federal Reserve Act of 1913, the Fed serves as a politically independent and nonpartisan entity within government. . . ."

More specifically, the Fed consists of Federal Reserve Banks (which are private banks, but selected by and operating with special powers through the authority of the Federal government) and the Federal Reserve Board (who are selected by the President and who control the activities of the Federal Reserve).

It is specifically the government-appointed Federal Reserve Board that decides Fed rates.  And the banks do what the FRB says.

[guncrasher]

a couple of years ago I wanted to buy a car, applied at 2 credit unions and chase bank. had good credit so my fico was good.   so I had no problem getting loans.   rates were from 1.5 to 3 percent for a used car.

pretty sure the fed rate was the same as I applied on the same day.


semp

[Eagler]

When you really study monetary policy is all seems to be a scam ... like your little sister being the banker in a family game of monopoly...

If it isn't backed by anything how can it truly be worth anything?

Today the only thing providing support for the us dollar is its military might sadly

Eagler

[Brooke]

applied at 2 credit unions and chase bank

There are all kids of debt.  There are forms of government debt with rates set by the government.  There is non-government debt (credit cards, mortgages, auto loans, etc. -- personal loans from you cousin Vinny), with rates set by non-government entities.

Government rates have a large impact on that whole ecosystem of debt, but they don't determine everything about non-governmental debt.

In my previous post, I was specifically talking about government-controlled rates.

[CptTrips]

Next week could give the Ides of March a run for it's money.

[Eagler]

Well there's now a war to throw the blame on for the crumbling economy...nothing to do with decades of very poor economic decisions by our "leaders"

Eagler

[Eagler]

Cyber attacks will be the response to removing Russia from SWIFT..

Once those get going it could be the wild wild west instantly just about everywhere depending on what is hit and when..

But will not be for ransom but to destroy infrastructure

With the right amount of successful infections we would turn on ourselves in no time

..oh yeah it will negatively affect the market but I don't think that will be your 1st concern.

Eagler