This would maybe make sense in the 1990s or early 2000s but it's 2014!
ZIRP forever is the new normal, and judging by what happened in Japan post 1991, it's going to continue for at least two or three decades.
If you purchased shares of a s&p500 index fund at just about any point in history, your net gain will be well over 5% annual growth.
Even if you bought in at the peak of 2007 - the worst time you could have bought in recent history, before the ~35% decline in 2008, if you are still holding on to it today, it's about 6% annual growth.
> by what happened in Japan post 1991 1991 Japan and 2014 United States are no where near similar enough to draw that conclusion. I agree that ZIRP forever is not a good policy - and at some point in the next decade we will feel the results of it, but forecasting three decades of economic stagnation is just silly.
This is exactly what scares me about it. It's frothy as hell.
So is it a nice safe place to stash my retirements savings where it will yield 5% consistently until I retire? I don't think so.
>1991 Japan and 2014 United States are no where near similar enough to draw that conclusion
Let's see:
1) Huge crash in property prices caused by a debt bubble (us: 2008 / them: 1991).
2) Central bank responds by trying to reinflate asset values in order to make banks solvent again. They drop interest rates to zero and raise them as soon as growth returns which will be very very soon now, honest. (both countries did and said this; both promised it would be temporary)
3) Growth doesn't return. Banks still effectively insolvent and are propped up only by high asset values and extend & pretend. (both countries did this)
4) Central bank perpetually afraid of raising rates in case it causes a sharp economic contraction for which they will be blamed.
5) ZIRP thus becomes the new normal (it's been 6 years so far for us, and 23 years for them).
So far the path has been identical. Hell, we've even gotten plummeting birth rates too.
>forecasting three decades of economic stagnation is just silly.
I don't know how many decades it will be, but "the new normal" shows no signs of ending any time soon.
Forecasting safe 5% returns is bullshit, anyway.
If you have 1M$ and want to live on that, and you're good enough to live with 25k$/yr, you need to consistently "extract" 2.5% on that capital, that means you need to consistently get 4.2% every year. And this exposes another issue: even if you have a safe investment that can give you 4.2%/yr on average, that's not steady, so if some years are bad (or really bad) you need to eat into the capital. If these happens for too many years in a row, the capital could be reduced enough that you need to get higher earnings to counterbalance that.
I'm not a finance expert so feel free to show me the fallacies of my reasoning!
Your reasoning is sound. And it's actually worse than that - the reported inflation in the US (CPI) vastly underestimates realistic costs of living. I would assume that's true in Germany and the rest of the world as well.
Officially, it is 1.7%. However, that includes hedonistic adjustments (you can buy a TV now for $70 that is equivalent to a $2000 TV from 30 years ago; therefore, $70 today is worth $2000 of 30 years ago; weighted by the relative part of your expenses that go towards buying TVs), "owner equivalent rent", which is a speculation by a sampling of home owners about how much rent they would have paid to live in their own house (are they over estimating? underestimating?), some measures ignore food and energy costs (who needs either?) and other shenanigans that make the numbers easy to manipulate on one hand, and impossible to reproduce on the other.
Unless the majority of your expenses are technology related and unchanging (you still happy with your Apple ][ performance, right?), the CPI is probably closer to 5% per year for a while now. Health, Education, Energy, Food and housing, which are responsible for most of everyone's expenses have been appreciating at a much faster rate than the official "inflation".
Yes, that is true. But how is the bond price relevant, from the Fed's perspective, if they aren't selling the bonds?
And re 5% I have several IT (investment companies) with returns of over 10% pa for the last decade
1999 - 2009 negative real return. Imagine you're the happy dude who retired in 1999 with a family after working for 10 years and diligently saving. Now in 2009 you need to send your kids to school... We also were on the brink of real depression, if that scenario played out you'd be completely wiped.
So basically you need a large buffer than you think you do to account for volatility and rare "tail" events.