Hacker News Reader

Comment by Robotbeat | Hacker News Reader

Either put the capital to use in the real economy, or moths and rust will destroy your hoard.

That's fair.

That sounds overly simplistic. There are many savers who currently rent, and through sacrifice/discipline scrape an extra thousand or two per month in an effort to save for a down payment on a house. That is not "hoarding", that is capital that will be deployed in the "real" economy, just not right this instant.

Nobody says you have to buy the house right now, but in the meantime you have the choice between keeping it as cash in a bank account or stock in a brokerage account. A disincentive to hoard currency in the midst of turmoil is not a bad thing.

So you would have the disciplined saver risk their capital in equities that are highly volatile and dropping precipitously?

Somebody has to if you want companies to be able to raise capital and carry on forming new businesses and employing people etc. It's your choice whether you prefer that or the moths and rust.

Hard times aren't as safe as good times, all around.

Sure, I think I understand the spirit of your point and agree that a healthy economy relies upon capital circulating through the system. That said, there is a wide spectrum of people with different financial situations and risk appetites. There are lots of institutional and individual investors who are in a better position to take on the risk of putting their low-yield savings into equities and accept significant volatility. The small-time saver who is desperately trying to break out of the rent cycle is probably not going to have the stomach for that, and I don't think that is the cohort that is going to impede the free flow of capital into and out of the stock market anyway.

Small time savers don't get higher interest rates on their savings accounts than institutional investors. If you give high guaranteed interest rates on savings accounts during turmoil, all the money goes there, which is problematic.

Investors get paid to take risks. The less risk you want, the less you get paid, and there is a point at which you're taking so little risk that you get paid less than you lose to moths and rust. During hard times, the level of risk required to get a positive return is higher.

I'm not sure I follow your argument. Don't most savers put their money in banks who then have to redeploy it to make a profit? In fact, isn't it more useful to have banks utilize this capital instead of a crowds of ordinary people moving small sums? Banks aggregating wealth to be redeployed seems more efficient.

The Fed just cut the banks' reserve requirements to zero, which means they don't require any deposits in order to make loans anymore. They have no use for your money. That's why you may have to pay them to hold it for you.

My understanding of the reserve requirements were that they set how much of the total amount deposited the banks had to hold on to at any given time. Setting the requirement to zero means that banks can deploy all of the capital they have in loans. If anything, shouldn't this be the other way around? They want more deposits because they can use the full amount instead of say 90%(holding on to a 10% reserve) or whatever the number was and make more money while paying savers the same amount. Or are you relating this to interest rates going to zero which seems like a better point for why banks wouldn't need deposits? Though the amount of interest savers get from banks is close to zero anyways right? So it still seems to me that banks want as many people deposited with them as possible since they can now use all of the money given to them.

Suppose you take your $5000 in cash into the bank and deposit it. They put the cash in their vault and credit your account with $5000. Now they have 100% reserves.

Alice, Bob and Carol come into the bank and each take out a $5000 loan. The bank credits each of their accounts with $5000, but there is still only $5000 in their vault, so now they have 25% reserves. As long as the reserve requirement is below 25%, this is fine. If the reserve requirement was 30%, they couldn't make that many loans.

With a 0% reserve requirement, they could loan your $5000 to a million different people and have 0.000001% reserves and still be allowed because 0.000001% is more than 0%. They could send you away and the bank manager could deposit a dollar and they could make unlimited loans from it. They have no use for your money.

Ah, so reading up on this, it really is unintuitive. I guess the only worry then is if this will bite tax payers. Thanks for the expanation

Do you think it's fair, that the government issues you a Dollar one year, and the next year, they devalue it by 2% or more? then they devalue it some more every year 2% or more?

If we can't even rely on a stable currency, what is the point of government? we might as well go back to bartering. In fact, this is what is happening. As people can't rely on money to hold it's value anymore, they're going back to hard assets like stocks, and real estate.

> Do you think it's fair, that the government issues you a Dollar one year, and the next year, they devalue it by 2% or more?

Inflation is at record lows. If anything, deflation is rearing its ugly head.

Rent doesn’t seem to have gotten cheaper. Food too. And education and health care. How exactly is inflation at record lows, because the BLS said so?

Those things cost more relative to other things. Inflation is everything costs more, specifically including wages, because dollars aren't worth as much.

The reason e.g. rents are high is that there is high demand for housing in cities and zoning restricts new construction. That's not inflation.

I disagree. Inflation is only low because we don't measure it right. https://www.cornerstonewm.com/downloads/measuring-inflation....

Inflation is much closer to whats listed here for many americans. https://chapwoodindex.com/

You're acting like the government invented inflation; it didn't. Before central banks, inflation fluctuated freely in the economy, sometimes very high, sometimes into significant deflation. This volatility exacerbated other economic or financial fluctuations, causing a lot of problems. The goal of central banking is not to introduce or create inflation, but to manage it for greater certainty in long-term investment. A steady 2%/year inflation is a stable currency.

If you think it's bad knowing that your dollar will devalue 2% every year, imagine trying to make plans not know whether it was going to drop or go up 7% next year--or anything in between.

Yes.

That’s only fair if the economy was run responsibly. Is the government going to bail out retail “savers” who invest in equities after the next disastrous credit bubble?

That’s stupid. People don’t save so they can die with lots of zeros in their bank account, they save because they want to inject that money into your so-called “real economy” but at a later date, perhaps when they’ve retired or when they’ve amassed sufficient savings to make that large purchase they’ve been eyeing.

You can’t punish people for saving on one hand and then charge them exorbitant rates or deny them loans altogether when they want to purchase a house without that down payment at hand.

"Either put the capital to use in the real economy, or moths and rust will destroy your hoard."

I'd like to explain this to my elderly parents, who have cash sitting around in savings accounts and don't invest, but don't think trying to scare them with "moths and rust" is going to be very convincing.

What's a more convincing way to explain this?

Also, are money market accounts also going to be hit hard by negative interest rates, or would that be considered investing?

With the caveats that I don't know more than the basics of investing and have a few years for funds to grow, I found the audiobook "The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life" by JL Collins to be very useful.

I don't think it'll touch strongly on saving your money being a bad idea, and I really don't remember anything about negative interest rates, but it does make investing seem much less scary.

A "few years for funds to grow" is probably the opposite of what his elderly parents have.

That's why I mentioned it as a caveat.

If your parents are elderly, maybe a savings account is the right place for their money.

If you can't get ahead, why even try? Easier to fall back to simpler ways of living - and in the end that certainly doesn't keep rich folks in private jets etc.

Reply on news.ycombinator.com