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Comment by Cthulhu_ | Hacker News Reader

I'm no expert but it seems the 'cause' of a lot of problems right now - the one mentioned in this article, but also climbing housing prices - are caused by low and negative bond interest rates. Who sets these interest rates? Why are they being kept low? They seem to have such a big influence on the economy right now, driving it towards riskier investments - I mean my bank's savings account, which IIRC is tied to government bond interest rates and (also historically low interest) mortgages, is pretty much zero so I've moved some of my funds into (riskier) investments.

I mean I don't really want to be doing that but right now, putting money in savings and keeping it is basically costing me 2-3% of its value a year due to inflation.

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While short term interest rates are strongly affected by the operation of the Federal Reserve, which can choose to buy or sell to achieve policy goals, long term interest rates are set by the market. If the government offered bonds with a coupon at 3 times the going rate, it would sell at auction at a price that would cause it to yield the going rate. Essentially, the market is not excited about the prospects for equities and has been bidding up the price (reducing yield) of bonds.

N.B., inflation (CPI-U) averaged 1.5% per year over the last 5 years, if my calculation is correct.

Nobody in their right mind would buy negative yielding debt. Those long term negative rates aren't set by the market. Some pension funds are forced to buy those bonds, as well as quantitative easing.

I was discussing low interest rates, not negative. But usually in the US when we talk about a negative yield we're talking about a negative real yield not a negative nominal yield. There is a "zero lower bound". Perhaps an algorithm would buy a bond at a negative yield but probably not a person. Or, a central bank may purchase back bonds at negative yields to get the cash out there.

Europe is a different story, I don't know entirely how they run their monetary system.

The Fed set interest rates low in 2008 in order to provide a stealth bailout to the banks that had lent too much and were sitting on collateral that was less than the money which was owed.

The low interest rates raised asset values to the point where they weren't sitting on heavy losses any more.

The Cassandra article is both right and wrong, the story is complicated, but the point about lowered interest rates goes like this:

* higher interest rates are disliked by private capital because they a) cause competition for capital b) require higher taxes to fund interest payments c) induce higher "erosion" of large collections of capital

* lower interest rates are liked by private capital for precisely the complementary reasons a) interest is not competition for capital b) require lower taxes c) induce less "erosion"

Higher interest rates in an idealized sense are perhaps better, but in our current environment, it is generally not feasible to raise them, absent a convincing story for growth to match.

Funding the future is hard, and the balance between entitlement and resource governance is hard, but in the US, in the game between individual capital-oriented private interests and generic public interests, public interests generally lose. This is by far the largest contributing factor to pension "decimation."

Finally, small point- for individuals, using macro-reported inflation is, to a first approximation, a mistake. What matters to an individual are changes in actual cost of living, which are historically extremely localized.

Ray Dalio* is a good source, his articles on these issues are always backed by data and historical trends.

One of his latest ones: https://www.linkedin.com/pulse/three-big-issues-1930s-analog...

* https://en.wikipedia.org/wiki/Ray_Dalio

> To understand the current period, I recommend that you understand the workings of the 1935-45 period closely, which is the last time similar forces were at work to produce a similar dynamic.

Christ nobody wants to live in 1935-1945. That period set the All-time record for violent death

https://www.vox.com/2015/6/23/8832311/war-casualties-600-yea...

They're keeping the rates low to prop up business borrowing and the stock market it seems.

> I mean I don't really want to be doing that but right now, putting money in savings and keeping it is basically costing me 2-3% of its value a year due to inflation.

I am not a financial planner, but investing in riskier bonds because safe ones pay little interest has burned many investors over the years. If you do that you need to be ready to move quickly (quicker than many pro houses with billions invested in tech) if those riskier companies start going belly up. Personally, in this climate I keep short term cash in checking and use TIPS or similar if I wanted bonds. Whatever is invested I view as potentially untouchable for 10+ years. Just my 2c.

Rising house prices is a demographic demand thing. Lower interest rates may let you buy more house but it doesn't create more buyers per se.

In germany we will enter soon zero interest for house credits... Where that will lead to...

It's happened in Denmark already - https://www.cnbc.com/2019/08/12/danish-bank-is-offering-10-y...

It feels very weird.

It will accelerate the housing price bubble even more. This doesn’t seem a very desirable outcome.

The question is: in industrialization, everyone and his dog moved to cities. In masses. This might happen again. This will increase demand by a... Ton. It might still be worth it, even if it is a housing bubblem I mean, partly it is happening like back then. Two, three people or even families living in one apartment...

A 1.000.000U$S home at 0% or a 500.000U$S at 4%?

500k at 4 percent. You can pay off faster with just even as little than once in a while 100 dollar extra in a month. Or with your tax returns etc.

Market is choosing the latter right now. Which is interestingly dangerous to me.

Houses can go down, but interest can't go down a lot at 0%. In a slump without credit houses can go up, and interests can go down.

No one "sets" bond yields. They are determined by supply and demand in the market. Buying pressure pushes up bond prices (which reduces their yield).

This isn't exactly correct. The Federal Reserve sets the fed funds rate which has all kinds of effects on the lending rates (aka: bonds) and pricing models throughout the financial system.

The days of 0% interest in savings accounts has been over for a while, but many banks are assuming most people won’t notice and have not changed their rates. You can get 2% on savings at many online banks, you just need to do some investigation. 2% is better than nothing.

The annual inflation rate for the US is around 1.8% right now. 2% is better than nothing, but not by much.

Sounds better than losing 1.8% every year.

Here's a list of high yield savings accounts, many options at or above 2%: https://www.doctorofcredit.com/high-interest-savings-to-get/

The latter part of your first paragraph is the answer to the first part.

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