If:
and:
That means, in general, we should be happy in a low rates environment, right? Unless your “personal inflation” level is very low, maybe? What else am I missing?
It’s great for retail investors: for one, we don’t have to worry about bonds in our portfolios (cash has the same or better expected growth, but less volatility). But it can create the problems in the economy overall, because we may end up with lots of objectively bad businesses staying afloat only thanks to the low interest rates. I’d be happy to see a systematic study of that though.
Could you clarify how cash has better expected return over bonds in low interest rate environments?
Low interest rates are fine if inflation and employment is balanced.
However often low interest rates cause asset bubbles which eventually lead to higher interest rates to fix them
If if if.
I worry about low rates because:
I’m hedging as much as I can by taking long term fixed rate loans (mortgages) and holding assets (stocks, commodities, real estate).
Maybe I am missing something, interest rates are inversely correlated to inflation, right? Then that should mean we should like some interest rates >0 to keep spending borrowed money in check, while not big enough to choke out an economy where nobody is borrowing.
On a personal level I hate debt and avoid it like the plague, on a more macro level I think interest on debt should never be near zero because it encourages stupidity.
For all the petabytes of news about interest rates these last 2 years…stocks did fine.
Edit: the early 2000s saw insane levels of debt being taken up by more or less anyone walking through the door in Greece. A friend of mine worked for BN Paribas on a personal/consumer loans desk. He told me he almost felt sad for the saps taking out 50-100-200k euros as he knew full well they wouldn’t be able to repay it. The direction from his superiors was “give it out, they ask for 50k give 75k, if they can’t pay we’ll get their house and eventually turn a profit”. I said “almost” because any contract he closed meant another bonus check to him at the end of the month. He got fired of course when shit hit the fan, as were most of people on these jobs, but he didn’t care, he studied law after that and is a lawyer now.
I agree that for personal finance debt is a double edged sword (in most cases a cursed one) and “you should earn compounded interest, not pay it”. But globally it is necessary. People can’t buy property to live debt-free in the modern world. Needing a place to live is not only a financial, but mostly a social issue in all countries, I would say. That’s why there are programs supporting home owning and mortgages for it, like, in all countries.
Outside of the mortgage for the property to live, I think 95% to 99% of people should have no other debt. It’s too risky, they don’t have a knowledge and discipline to manage it.
Business is a different story, you need to take loans to develop and upscale. Only equity is not enough.
Google “balance sheet recession”. Tldr in that setup people and companies still pay down debt/delever despite (ultra) low rates. See China at the moment. Japan etc. Very hard to get out of. No asset bubbles etc.
Is it so ? I have read/seen somewhere that some economics question that correlation strongly.
As far as I know it is more about the (perceived) rarity/utility of a good which drives up its price.
I think you mix up the thing that is good with something that might be correlated with it.
So, let’s say low inflation is good. But that doesn’t mean low interest rates are good as they are not necessarily perfectly correlated with inflation.
To use an analogy, we can say car accidents are bad but ambulances go to these accidents, so that means ambulances are bad. This is faulty logical reasoning.
Also, if we move away from very vague ‘good’/‘bad’ we might say: low interest rates boost asset valuations (this might be good or bad depending on circumstances) however, if the rates are too low against inflation, this could lead to inflation getting out of control which could have further adverse consequences.
If I understand correctly, it is one of those plots where they take current interest rate and subtract the inflation realized in the previous 12 months. While being illustrative and applicable “in real time”, I think these data are still garbage. I think taking interest earned during the previous 12 months and subtracting the inflation realized in the previous 12 months should be the way to do it to analyze past data. In this aspect, my estimations is that between 2022 and 2023, the real purchasing power decline in US was more than 10%.
(Unless you’re IKEA 
)
I haven’t looked in much detail, but here is my take. If the bond rates are below zero, cash is obviously better. If they are above but low, what you typically have is an old issue. E.g., a 1.5% coupon trading at a premium yielding a “real” rate of 0.5%. What that means is that you pay taxes on 1.5%, even though you only earn 0.5%. So you end up with below zero again (depending on your marginal tax rate). You can, of course try to evade those taxes by selling at the the right time, but you end up paying trading costs, you need to track these things, and the taxmen are known to close those loopholes (see taxation on zero-coupon bonds).
I see. You meant that real yield could get impacted due to higher taxes. That’s true
But I also think if you simply hold the bond ETF, the actual yield is just theoretical. For example bond yields change all the time up and down. So the coupon payment is the key return for the given year. Rest will change as interest rates move up and down. Isn’t it?
I know it’s better if coupon rate is lower than theoretical yield to maturity but you can’t always have that situation in low rate environment.
I‘m not really sure on how to interpret these graphs.