The easiest way for most people to short long term rates is to have a mortgage. The second easiest is to shift your portfolio so that you hold less debt and more equities. In most cases, only after you have a portfolio nearly devoid of debt should you consider shorting debt.
Maybe the Fed is NOT promising low interest rates. It certainly SHOULD NOT be promising anything about its instruments. The Fed SHOULD be promising to hold average inflation of the PCE to 2% p.a.
Now this still does not explain why real interest rates are negative. Why are the public and private sectors not investing more? OK, politics explains why the pubic sector does not invest, but the private sector? Uncertainty? Regulation?
Nice post Professor Kling. I want to take the other side, and say that while it's true "It does not pay to leave your money in the bank.", that this is "merely" technically true. Keeping one's money in the bank, or in some other hopefully safe savings vehicle, still gives the holder option value. Most of us who are able, probably keep months worth of expenses in checking and savings accounts, so that we are guaranteed to have cash at the ready, for various contingencies. I'm not wild about bleeding a few hundred real dollars a year on my emergency fund, but I'm not about to invest it something risky.
It seems totally plausible to me that ultra-safe assets could be totally crowded, to the point that the return on those assets is negative. A big fat savings account is a potential lifeboat on the Titanic. This situation could persist for decades.
Back when the Euro Zone was looking extremely tenuous, circa 2010-2014 you saw the first emergence of negative real returns on Danish, Swiss, German bonds. Presumably investors wanted the safety of assets that would pay out in "New Deutsche Marks" or some other currency that would behave like a "New Deutsche Mark" in the event of a cascade of Euro Zone exits, which was a plausible risk at that point (still is).
In 2021, where you have this bizarre series of recent events: totalitarian mass house arrests in hitherto liberal, high-functioning Anglosphere countries, colossal returns in assorted computer/internet companies/crypto and a jarring collapse in the dominance of the US military, it makes sense to me we have negative real rates. You run the ol' barbell strategy, hold some Amazon, some Nvidia, some Bitcoin, and a whole bunch of cash, in case the Red Chinese take Taiwan and markets go crazy and you want to be on the other side of forced liquidations.
When Amazon is up 18-trillion %, does an investor really care if he gains or loses 1% real on his cash? I say the marginal investor is not troubled, and should not be troubled by these "custodial fees". If he wants a free-banking rate of return, he can buy and lend out his crypto easily, and get 2% real + crypto volatility. I just see interest rates as a market price, and that price can really go anywhere.
Arnold, like most economists that have written about inflation and nominal interest rates you are wrong. Yesterday, your mentor Tyler Cowen linked to an interview with an Argentine reporter and asserted that the U.S. may be following Argentina's way. Don't worry, Tyler knows nothing about Argentina and why the U.S. could never follow Argentina's way. Indeed, given Argentina's experience with inflation for the past 70 years, we should have learned something about my home country's experience with nominal interest rates during such a large period of inflation. Let me tell you what I learned: if today you have to make a decision for which you need to know the expected values of your relevant nominal prices and interest rates over the relevant period, in a country like Argentina you should form your expectations on a detailed analysis of what may happen with politics and government in that period, not based on the record of past inflation and nominal interest rates --a record that shows how erratic and chaotic politics and government were in the past 70 years.
Just compare with Chile. By 1981, Chile was no longer "like" Argentina, and since then it moved further away until October 2019 (the time of social outbreak against the "new" Chile and for a "new" Paradise). I know Chile well because I have lived in Santiago for at least 25 years of my last 50 years. Today, if you have to make that decision in Chile, the relevant period is critical: for the next 6 months, just think about how you are going to take capital out of Chile regardless of your expectation about nominal prices and interest rates (including the exchange rate) over the next 6 months. Why? Because in the next 6 months, a "new" Chile will emerge and become quite clear at the latest by March 2022.
Please, forget about the Fed and focus on the politics of the federal government's rapidly increasing spending and how will be financed. Think the Fed as a state bank which will continue borrowing to finance the federal government.
The easiest way for most people to short long term rates is to have a mortgage. The second easiest is to shift your portfolio so that you hold less debt and more equities. In most cases, only after you have a portfolio nearly devoid of debt should you consider shorting debt.
Maybe the Fed is NOT promising low interest rates. It certainly SHOULD NOT be promising anything about its instruments. The Fed SHOULD be promising to hold average inflation of the PCE to 2% p.a.
Now this still does not explain why real interest rates are negative. Why are the public and private sectors not investing more? OK, politics explains why the pubic sector does not invest, but the private sector? Uncertainty? Regulation?
Nice post Professor Kling. I want to take the other side, and say that while it's true "It does not pay to leave your money in the bank.", that this is "merely" technically true. Keeping one's money in the bank, or in some other hopefully safe savings vehicle, still gives the holder option value. Most of us who are able, probably keep months worth of expenses in checking and savings accounts, so that we are guaranteed to have cash at the ready, for various contingencies. I'm not wild about bleeding a few hundred real dollars a year on my emergency fund, but I'm not about to invest it something risky.
It seems totally plausible to me that ultra-safe assets could be totally crowded, to the point that the return on those assets is negative. A big fat savings account is a potential lifeboat on the Titanic. This situation could persist for decades.
Back when the Euro Zone was looking extremely tenuous, circa 2010-2014 you saw the first emergence of negative real returns on Danish, Swiss, German bonds. Presumably investors wanted the safety of assets that would pay out in "New Deutsche Marks" or some other currency that would behave like a "New Deutsche Mark" in the event of a cascade of Euro Zone exits, which was a plausible risk at that point (still is).
In 2021, where you have this bizarre series of recent events: totalitarian mass house arrests in hitherto liberal, high-functioning Anglosphere countries, colossal returns in assorted computer/internet companies/crypto and a jarring collapse in the dominance of the US military, it makes sense to me we have negative real rates. You run the ol' barbell strategy, hold some Amazon, some Nvidia, some Bitcoin, and a whole bunch of cash, in case the Red Chinese take Taiwan and markets go crazy and you want to be on the other side of forced liquidations.
When Amazon is up 18-trillion %, does an investor really care if he gains or loses 1% real on his cash? I say the marginal investor is not troubled, and should not be troubled by these "custodial fees". If he wants a free-banking rate of return, he can buy and lend out his crypto easily, and get 2% real + crypto volatility. I just see interest rates as a market price, and that price can really go anywhere.
The fundamental question one must ask is wages rise persistently of the next few years? Without that there will be no inflationary problems.
Arnold, like most economists that have written about inflation and nominal interest rates you are wrong. Yesterday, your mentor Tyler Cowen linked to an interview with an Argentine reporter and asserted that the U.S. may be following Argentina's way. Don't worry, Tyler knows nothing about Argentina and why the U.S. could never follow Argentina's way. Indeed, given Argentina's experience with inflation for the past 70 years, we should have learned something about my home country's experience with nominal interest rates during such a large period of inflation. Let me tell you what I learned: if today you have to make a decision for which you need to know the expected values of your relevant nominal prices and interest rates over the relevant period, in a country like Argentina you should form your expectations on a detailed analysis of what may happen with politics and government in that period, not based on the record of past inflation and nominal interest rates --a record that shows how erratic and chaotic politics and government were in the past 70 years.
Just compare with Chile. By 1981, Chile was no longer "like" Argentina, and since then it moved further away until October 2019 (the time of social outbreak against the "new" Chile and for a "new" Paradise). I know Chile well because I have lived in Santiago for at least 25 years of my last 50 years. Today, if you have to make that decision in Chile, the relevant period is critical: for the next 6 months, just think about how you are going to take capital out of Chile regardless of your expectation about nominal prices and interest rates (including the exchange rate) over the next 6 months. Why? Because in the next 6 months, a "new" Chile will emerge and become quite clear at the latest by March 2022.
Please, forget about the Fed and focus on the politics of the federal government's rapidly increasing spending and how will be financed. Think the Fed as a state bank which will continue borrowing to finance the federal government.