My gut response is that, yes, if you’re buying risk-free treasuries, why should you get a return above inflation at all? Rewards and risks should be commensurate.
Adam Davidson: All right. Here's one of his speeches that really drove that army of investment managers crazy.
Alan Greenspan: The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance.
Adam Davidson: You might not believe me, but that little statement, that is central banker's speak for, hey, global pool of money, screw you.
Alex Blumberg: Come on, that's not what he said.
Adam Davidson: It is. I speak central banker. Believe me, that's what he said. What he is technically saying is he's going to keep the fed funds rate-- that's when you hear, the fed interest rate-- at the absurdly low level of 1%.
And that sends a message to every investor in the world, you are not going to make any money at all on US Treasury bonds for a very long time. Go somewhere else. We can't help you.
https://www.thisamericanlife.org/355/transcript
To the question: why should you get a return above inflation at all?
I guess one way of looking at it is: do you want to treat low-risk returns for conservative investors as a sort of public utility guaranteed by the government? Or do you want to put it in the hands of private industry?
We're running our governments like businesses and you're not going to find any nimble or disruptive startups in the mix.
Secondarily, many prospective borrowers of these projects are already in debt, and have cash flows which are not growing fast enough to borrow more.
why should a gov't project need to have any real returns? Social returns is enough. If the city is nicer to live in, if the businesses thrive because of increaed foot traffic, lower car accident rates, cleaner air etc.
If for whatever reason (and having a moderately stable currency is the answer there) there is more demand for bonds than supply, then the price will fall. This has nothing to do with economic reality and everything to do with market pricing mechanisms. Whether it´s good in the long term for the government to increase its lending this way, is a completely separate question.
Which isn't to say that I think the government should do what it do out of spite. Is there any chance of... I dunno, cutting off the public handout and then regulating the private vacuum-fillers sufficiently? Or does the implied drug analogy here reach its logical conclusion (on the black market)?
... is the system working as intended, because the policy rationale behind issuing lots of government bonds is precisely to make investors seek higher risks.
When downturns (like 2008) happen, this is investors fleeing to safe, money-like assets and and so wonks recommend that governments flood the markets with bonds, printed money, whatever to make that unprofitable.
The problem is with trying to fix the economy with policy levers. You can force people towards riskier investments (especially if they can be disguised as safe ones). But investment that is actually productive on average requires conditions where people on the ground can actually build useful stuff at a profit.
But that's an anathema to macro-economists (who want to advise on how use those levers) and also to politicians (who want to be seen to be "doing something").
Every state, city, country has a lot of favored sectors and grant opportunities, it's then up to investors to come up with projects that actually turn a profit.
VC/startup investors do this by simply doing a semi-blind search, funding everything they think is at least minimally sound.
If investors are still unable to turn a profit they are not taking on enough risk. (They are not thinking big enough.) And that might be okay. There's no moral imperative to keep every investment fund alive, every investor happy. And the only difference between business as usual periods and now is that the numbers are now scary (negative yields!).
But the fundamentals haven't changed.
Negative yields just mean that too many investors are risk averse, too many people (pension funds, passive funds, low-risk funds, inflation tracking funds, basic savings accounts) just want to park money. And that's okay. Eventually one of the following will happen: the fund managers will take on more risk, the people behind the funds will use the money for something else (eg spend it), or the people behind the funds will pester Congress to spend more and finance it all from debt.
Even if the investor plans to hold the bond to maturity, then the investor is agreeing to lock up that money until maturity. This carries the risk that the investor won't be able to take advantage of an investment opportunity before then. Or, if he decides to sell at that moment, he must accept interest rate risk.
The investor should be compensated for these risks, however small they might be, and that - in my opinion - is why treasuries should yield more than inflation.
Pensions were funded (or not) based on assumptions about yields. If actual yields are not hitting those assumptions (and they're not), it's not the rich that'll be eating cat food in their retirement.
(Of course, fixing the funding shortfall by making risky bets on exotic high-yield investments is uh...what's the word? Oh yeah, terrible! But let's not pretend this is strictly a problem for the 1%.)
I don't think that's the only source of time value of money.
For example, I'm fairly certain I can buy a car for the same price a year from now, but I am willing to pay a huge premium to have the car now so I don't have to ride the bus for two hours a day while I save up the cash to pay for it.
That is a preference for present consumption over future consumption that has nothing to do with inflation.
The whole thing seems to me like central bankers confusing cause and effect and trying to squeeze a complex system in to linear regressions. Lots and lots of unpredicted consequences to artificially low interest rates, including effects that do the precise opposite of what was predicted.
So it is very possible that the central bank is not doing enough.
My completely unsecured credit card only charges 10%, and that’s before inflation.
Eg a pension fund has to put money somewhere, but it has to be low-risk. Hence the seemingly absurd demand for negative yields.
Obviously no one is buying negative yielding bonds for the yields except pension funds, etc who are required to by law or not paying attention.
> My gut response is that, yes, if you’re buying risk-free treasuries, why should you get a return above inflation at all? Rewards and risks should be commensurate.
The parent has some sort of ad hoc economic theory ("gut response"), and I am asking them to expand on what the theory entails. "Supposed to happen" means it would be predicted by this theory of theirs.