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Comment by AnotherGoodName | Hacker News Reader

One thing that i feel people really aren't getting right now is that rates are still extremely low and they are moving slowly too compared to previous financial shocks. The fed rate today is 5%. The historical average is 7.5%. They are moving by the smallest amount they can each meeting.

There was a post earlier today with comments of the form "why are Meta selling bonds right now when rates are so high shouldn't they sell bonds when it's cheap?"

But there's no reason to think rates are high right now except for a comparison to the weird run of near 0% that went on for too long.

So we have banks failing due to shock at the recent rate rises but the recent rate rises haven't actually been that extreme or fast. We seem to have got into a phase where there was an assumption that near 0% rates were here to stay. Banks even gambled on this assumption. If anything you should be leaning towards "wow rates are really cheap right now!" because they are historically.

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> they are moving slowly

I think maybe they were too slow to act, but once they did this has been among the fastest rate hikes in history except for the early 1980s. they have a chart here: https://fred.stlouisfed.org/series/FEDFUNDS You can just draw a red line matching the slope of the current hikes then move that red line to previous rate hike cycles

The federal funds rate hasn't been above 7% since 91. We're nearly at the highest rate in the last 30+ years.

It's important to put that in context. The 80s and early 90s where abnormal going back to the 1700s:

https://www.getloans.com/blog/220-year-history-of-interest-r...

Conversely, extremely low rates in the 2010s were also abnormal.

That graph basically makes me think there is no "normal" and no trend, it appears to just jump all over the place, widely, continuously. i don't know if that's right, but that's my reaction to that graph!

> graph basically makes me think there is no "normal" and no trend

You're right. The data shows "across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been 'stable', and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6-1.8bps p.a. has prevailed. A consistent increase in real negative-yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis. Against their long-term context, currently depressed sovereign real rates are in fact converging 'back to historical trend' – a trend that makes narratives about a “secular stagnation” environment entirely misleading, and suggests that – irrespective of particular monetary and fiscal responses – real rates could soon enter permanently negative territory" [1].

Basically, over the very long run, real rates go down 0.6 to 1.8 basis points (1/100th of a percentage point) each year, and tend to be low. We've witnessed a few centuries of extraordinary growth, which mandated resource prioritization, which kept rates high. TL; DR Anyone talking about where rates "should" be based on looking at charts is often talking tripe.

[1] https://economics.rutgers.edu/downloads-hidden-menu/news-and....

One pattern I noticed was that the low-to-low was about 40 years. We should probably expect rates to continue to rise over the next couple of decades before subsiding again, if that graph is any indication.

Interest rates have also been falling for 700 years: https://www.visualcapitalist.com/700-year-decline-of-interes...

Those are real interest rates. The real rate currently is still extremely low. There's still a huge difference between an economy where you get:

* 2% mortgage, 2% real growth and 2% inflation

* 7% mortgage, 0% real growth and 5% inflation

If we wind up in stagflation we may still have low real interest rates but everyone will be having a bad time.

I'm kind of curious what it means (and why) for real interest rates to be going down over time like that graph depicted (and assuming it's accurate).

Is it a lack of global economic growth because of natural resource depletion?

For example, you could probably get away with a loan for 18% real if you can sail to America and (leaving politics/historical atrocities aside for a moment) come back with a ship full of gold.

If I had to take a loan with a rate that high I don't think I could possibly pay it back (if it's enough money) without multiple jobs or somehow getting lucky. I don't know that my labor could produce enough.

Yeah, there are a lot of interesting theories regarding this (which were far more common in the halcyon days of 2021, when it seemed like ZIRP was the new normal).

I actually think an underrated piece of this is that investments have become far less capital intensive. Business in previous economic cycles required a huge amount of capital to begin and maintain: railroads, oil, manufacturing all require enormous sums of capital to continue. Conversely, the dominant businesses in this economic cycle are all Internet based. Google, Meta, etc could run for 1,000 years without substantial cash need, it's a far less capital intensive model. You can see this reflected statistically: the FCF yield of the S&P 500 is 2x what it was in 1990.

If businesses need far less cash than before yet remain highly productive, it stands to reason real interest rates would drop: the demand for capital by economic drivers has gone down, while the supply of capital has increased through FCF gains.

I wonder if something like space colonization/resource extraction would reverse or change the trend toward lower interest rates? I imagine (perhaps excluding some sort of sci-fi esque replicator robots) such endeavors would be very capital intensive.

On the other hand, you'd probably need a high interest rate to justify offering that loan in a time when a transatlantic journey was significantly less predictable and more dangerous.

Good point - much more risky.

These are the shockwaves of the Chinese economy slowing down. China has been a large source of new demand for years, particularly for resource extraction economies; zero-covid supply chain shocks were the first wave, China’s property shock was a second, and economics are not quite back to solid yet either. For decades it has been easy to invest in China; it is not really so easy or cheap to develop in other areas, because postwar East Asia really focused on efficient infrastructure rollout, and now private companies have to pick between countries with cheap labor and countries with good infrastructure.

"Global Savings Glut" is the term to search.

Do you have any particular articles or blog posts or anything you'd care to share? I could search of course but I'm not sure if there's a canonical article.

https://en.wikipedia.org/wiki/Global_saving_glut

The key insight is that savings and investment opportunities are two sides of a single market. Demand and supply. Savings grow reliably and opportunities do not, so demand for investment opportunities outstrips supply of investment opportunities. Therefore, the opportunities get more expensive = lower rate of return.

Yep, this is the answer

real Interest rate is really a function of supply/demand of money.

The world in increasingly having more supply of money (savings) than before.

It doesn't look like from a median household perspective, but we have a glut of overall money

> According to the report, another trend has coincided with falling interest rates: declining bond yields.

Huh? Those are two terms for the same thing.

> One thing that i feel people really aren't getting right now is that rates are still extremely low and they are moving slowly too compared to previous financial shocks.

Are you sure? This graph says otherwise:

https://ibb.co/hW9TP0x

It's true that this graph excludes the rate increases we saw in the 1970s and 1980s, but it's the fastest and highest raise of rates in the last ~30 years. See here for a full timeline: https://fred.stlouisfed.org/series/FEDFUNDS

I agree that the rate increases are fast. Or at least were, they slowed.

But overall, the last couple decades were the exception not the norm.

Look at the 50s and 60s. That low in the 60s took 40 years to get to again!

It will likely be another 40 years before we see those low low rates again.

That is not true (well we can argue how we get to likely I guess), markets expect the rate to be lower than today in 1-2 years: https://www.ustreasuryyieldcurve.com/

The absolute rate isn't a problem right now, it's the Fed bouncing between extremes. Keeping rates extremely low for many years, followed by a very fast series of increases. If they had been more moderate with either of those factors things would be a lot less painful right now.

None of this is all that surprising either, which makes it even more frustrating. A great many folks were critisizing the Fed for keeping rates so low when the economy was booming, and I don't think many are surprised that the rapid increases have created instability.

A graph of fed fund rate over the last 60 years:

https://www.macrotrends.net/2015/fed-funds-rate-historical-c...

The amount of malinvestments made in the economy during this run of nearly free (0%) money is something that will haunt returns (and retirements) for decades to come. Many of the excesses (and confusing financial incentives) in Wall Street and Silicon Valley have their upriver source in the free-money fountain which was pumped by the Fed. Similarly, we see downstream effects in housing bubbles and other asset bubbles.

People say this is obvious only in retrospect, but people were warning about it forever. And if you don't believe that, just listen to Congress, the President, and Real Estate agents talking about Fed pumping more today ... they are still all for it.

I'm not bullish about the US economy anymore. I think it has become politically untenable to run the economy without this free money pumping. There's too many parasitic sectors in the economy now. They require the economic body to continue to bleed to survive.

> If anything you should be leaning towards "wow rates are really cheap right now!" because they are historically.

This is likely extraordinarily bad advice to listen to.

The Fed is still following an inflation target of 2% and they are very willing to crash the economy in order to get it. They've been fondly invoking the name of Paul Volker.

The rates we're at today are probably sufficient to crash the economy. As the maturity dates of loans hits and their rates adjust upwards we're going to see a lot of bad economic bets and loans that were predicated on 0% interest rates fail and see the fallout into the broader economy.

Even if they're not sufficient to crash the economy, the Fed has announced that it will do whatever it takes. So if the economy heats up and inflation comes back then the Fed will just jack up rates even more.

We aren't going to get a 70s style decade of stagflation or hyperinflation or any of that nonsense. That happened during a period when the Fed "grew up" in the shadow of the Great Depression and WWII and was worried about crashing the economy so it ran hot and inflation was high and long term interest rates were high. Post-Volker we are not in that kind of policy regime.

The most likely outcome is that we will hit a serious recession and unemployment will spike again above 6%, and without much government support the recovery will be gradual like post-2008 and not like the crazy V-shaped post-2020. And the Fed will once again wind up cutting rates down to zero again. The CPI will fall like crazy due to the high unemployment, while asset bubbles will inflate again and the rich will once again use cheap money to buy up everything on a firesale.

If you showed me a Fed that was actually worried about tanking the economy, or a Fed that set a higher inflation target, then I'd agree that higher long term interest rates were on the horizon.

This time is different from what we've seen before because this is the first real inflation scare since maybe the early 90s, so it seems wildly different to most Millennials, but the game at the Fed fundamentally hasn't changed. We're heading back to ZIRP again a lot sooner than we're heading for 10% rates, but it might be a bumpy ride in the middle.

And I guarantee you that all the tough talk about ZIRP being bad is going to evaporate once the recession hits and rich people need to be able to borrow cheaply again.

> They are moving by the smallest amount they can each meeting.

Moving each meeting means going from 0.08 in Feb 2022 to 4.57 in Feb 2023. It may not be quick compared to previous financial shocks, but it is much faster than recent interest rate increases (2015-2018 was 3 years to go up half as much; 2004-2006 went up 4% in two years). Additionally, a decade of basically zero interest rate, followed by 3 years of slow increases and then another two years of zero, followed by a steep climb is kind of unexpected and shocking. You can hardly blame people for not expecting a rates to rise so quickly when there hasn't been anything similar in the past 30 years.

risk management is not based on expectation but exactly the opposite: managing the deviations from expectation. this is even in the ISO definition of risk.

some risks are hard to estimate and manage. interest rate risk is not one of them. actually it is supposed to be the most tractable risk of them all, being a single macro variable. a bank's books are readily repriced under different scenarios

the SnL crisis was the cataclysmic period that ushered a new era. there is a large contingent of actors that profit handsomely by helping banks manage interest rate risk. somehow all this machinery failed but there isn't yet a clear explanation why. lack of regulation would be more convincing if there was something more unusual (an unknown unknown)

not learning from disasters starts becoming the pattern. e.g. what has changed globally in response to the covid pandemic?

Agreed. But I think there is one thing that is not being considered here, that is that the markets are priced to the previous era with almost 0% rates.

This means that you now have to pay for the thing that is priced to be sort of affordable to you with 0% interest but the interest you can get is more like 5%.

Best example of this is the current housing market (regardless whether building or buying). If your previous monthly to a mil was 3k$ now it is over 5k$. This immediately prices you out and will probably lead to a lot of stagnation in 20-30 months.

NFA.

historical rates don't matter because a significant chunk of the people making decisions weren't around for that time period. And even those who were around were still incentivized to make risky decisions to try and find yield with 0% rates

we've got a lot of fake growth on paper fueled by 0% rates that never existed and has to be shaken out of the system. The fundamental problem is economists thinking they can twist dials on the financial system and play god to prevent recessions and depressions, which will just result in rarer but more extreme financial crises when reality hits them in the face

the economy is fundamentally less efficient and less productive due to the covid pandemic(people not working) and the economic decoupling from China and Russia. Printing money doesn't change those fundamentals, the end result in the short term will be lowered living standards for everybody. More money chasing fewer goods equals inflation, not complicated

>More money chasing fewer goods equals inflation, not complicated

It's not complicated, except those who missed out on the 0% rates are hit the hardest and want to catch a similar boom that isn't coming back.

Those looking to buy a house now feel cheated. The prices are similar to ~2020-2022 but the rates are much higher. The rates being lower than historical average is irelevant for those looking to buy know because the current housing prices are also much higher than historical averages.

Our entire economy is now addicted to cheap money so those who missed out on the cheap money will want it back.

I was listening to a local real estate talk show this weekend.

They said the largest generational group buying and selling houses pre-COVID were the Millennials.

Now?

Its the Baby Boomers. They can pay cash so they are immune to the interest rates and they tend to have more equity in their properties so they're in a very advantageous position to take advantage of really bad time for real estate.

I live in Minneapolis. The inventory here has been historically low since Covid hit. Normally we should have around 15K properties for sale in the seven country metro area here. Right now, its closer to about 4,200 which is crazy. A lot of people are not even putting their houses on the market. They find an agent and within days they have several buyers. We've had three families just POOF move out of our neighborhood. No "for sale" sign, no showings, just gone.

That’s going to hurt them over time. Current RE values assume abnormally low interest rates in their valuations. Over time, reversion to the mean in both interest rates and valuations will eat away their equity.

Further, not letting the property go to market is just bizarre. It’s saying they think they can’t get a better deal by letting more people bid on it. That’s categorically false unless the seller knows the value of their property is below current market conditions. Being that they’ve probably not transacted much in the current market this is erroneous. Let the property go to market and take in bids over at least a couple weeks.

Any bidder saying their bid evaporates if the property goes to market is not worth believing.

Of course, maybe I’m wrong and there are serious buyers who make true highest offer off market. But that probably signifies something truly and even bizarre - and possibly a tendency towards market failure.

Do you think we're gonna see another real estate crash?

The prices are not similar to 2022. I’ve seen prices drop by 15% already.

Where? Not where I live (Europe). Prices here have dropped max 5%. But if you take the increased rates in to consideration then the total price you'll be paying till the end, is actually higher than before the discount.

> So we have banks failing due to shock at the recent rate rises but the recent rate rises haven't actually been that extreme or fast.

This is just patently wrong. I guess "extreme" is an opinion, but the speed at which they've raised rates is the higher than (debatedly, depending on the metric you use) any time in history, certainly any time in many decades.

And the thing that makes these rate raises more impactful is the fact that we were starting from near 0. Take a look at this 5-year treasury rate graph: https://www.macrotrends.net/2522/5-year-treasury-bond-rate-y.... If you held a 5 year bond at the low of 0.26% in Sept 2020, the decrease in value that bond would incur between then and now due to the rise in rates is worse than practically any other ~30 month period shown on that graph.

There's also real yield to account for. If rates are 0% and inflation is 2%, real yield is -2%. If rates are 5% but inflation is 7%, real yield is still -2%. Buying power is being lost even if the numbers in your account are going up.

I am here for $12,000 new houses in good school districts: https://www.pinterest.ca/pin/232639136978161240/

With nearly 1000% inflation since 1958, that's $125k in today's money.

This is part of why I don't trust CPI data. Take Warren Buffett's house as another example from 1958: https://www.cnbc.com/2023/03/03/warren-buffett-lives-in-the-...

> The Berkshire Hathaway CEO still resides in the five-bedroom home in central Omaha, Nebraska, he purchased for $31,500 in 1958, which is about $329,505 in today’s dollars.

But the house clearly isn't worth only $329,505 in "today's dollars." Sure, it's more modest than a full-blown mansion, but it's still worth a lot more than that, closer to about a million dollars. And that's including if you were to try buying the house with zero knowledge or context that Warren Buffett once lived in it.

Of course, these things are all 'worth' what someone will actually pay for them, but unless we believe that that housing market is so screwed that Buffett's house would sell for ~$330k if the housing market crashed down to reality (which would actually imply potential deflation and a CPI that would result in the home being worth much lower, per "real" dollar figures), that house is never selling for less than $330k. Not even less than $660k, in my opinion. The only way these homes would come close to their price in CPI is if something catastrophic happened to the neighborhoods in which they exist.

Redfin has it at $818,954 https://www.redfin.com/NE/Omaha/5202-Underwood-Ave-68132/hom...

Not a million, but closer to that than to #329k.

Prices of articles can vary due to changes in the price level and due to other causes (such as obsolescence, changes in consumer preferences, and so on). CPI only informs us about changes in the price level, it doesn't tell us anything about anything else. So the fact that the price of a particular article hasn't changed exactly according to CPI is completely normal, and not a reason to believe that the CPI is "wrong".

Then the CPI should never be used to say, "This home worth ~$30k in 1958 is worth ~$300k today," when such a statement is so blatantly inaccurate.

You could say "in 1958 this home was worth ~$300k in today's dollars" which is less misleading.

But your car now has bluetooth, digital radio and tire pressure monitors, so it all balances out in the magic basket of goods.

All things I don't want, and can't really buy a car without.

But yeah, I think the fact that Americans, at all income levels, have more stuff than they did 40 years ago, is part of understanding the macro picture. More stuff does not always mean more quality of life.

My car from 2010 will forever have tire pressure alerts because I am not shelling out $1k to replace the broken tire pressure monitors. As an example, they're more of an annoyance to me. I don't use bluetooth or digital radio either, but yes, my car does have bluetooth. Don't see the point in it myself.

The only new feature I wish my car had is a nice display that is hooked up to a backup camera, or even better, the ability for the car to automatically park itself, especially parallel parking in tight spots.

I fear my sarcasm was a little too subtle ;)

Cries in Bay Area

LOL, it is mind boggling that my shitty Sunnyvale house is like 2x the price of the house Warren Buffett live in!

>We seem to have got into a phase where there was an assumption that near 0% rates were here to stay.

We have and that was caused by the Fed as well. After the 08 crisis the Fed kept the rate at 0% during what was basically the biggest 10 year bull run in history. It was insane and even many bankers I spoke with mentioned the causes of the original 08 scare/crash werent fixed, they were just band-aided heavily.

In the era when the TV show Good Times existed, interest rates on loans were more like 17%. That’s credit card and payday loan territory today.

> The fed rate today is 5%. The historical average is 7.5%.

Population growth and the natural birth rate was much higher, too.

7.5% isn't going to be normal somewhere like Japan with declining population.

It's not going to be normal in the US with barely any population growth.

How does a declining population within a country relate to interest rates?

When population is increasing you get bigger and bigger workforce and also more and more consumers.

When it is decreasing your workforce not only get smaller, but get smaller faster than the older population. And in total you get less consumers too.

So in a growing population situation, you can take loans with high interest rate and open business knowing you will have cheap labor, thanks to all new young people becoming adults, and over time lots of new consumers, so your business has guaranteed growth.

But if your population is declining, labor become expensive as each year there are less young people and less workers in total, while total demand also gets smaller but not fast enough. So taking a high interest loan is stupid idea, you have guaranteed high costs, and less sales long term, thus your business profits will never be bigger than the interest and you will eventually go bankrupt.

High interest rates incentivize people to save now to spend more in the future and low interest rates incentivize people to spend now and spend less in the future.

Young people tend to be in the spend now camp as they purchase homes, cars and other big ticket items that they will pay with based on increasing incomes. Older people tend to save now so they can purchase what they need in the future when they have declining incomes.

The ratio of going to old influence interest rate demand.

High interest rates incentivize people to save now to spend more in the future and low interest rates incentivize people to spend now and spend less in the future. Young people tend to be in the spend now camp as they purchase homes, cars and other big ticket items that they will pay with based on increasing incomes. Older people tend to save now so they can purchase what they need in the future when they have declining incomes. The ratio of young to old influence interest rate demand.

Growth = productivity growth + population growth

Interest rates are arguably a derivative of growth.

structurally lower growth and inflation (even if inflation is high right now). Can't use an average of whatever long-length time series you're using when that's just not how rates work.

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