Zero And Negative Interest Rates

Larry Summers has a post in the Washington Post about the incredibly low interest rate environment we are witnessing right now.When you consider the effects (slim as they are) of inflation, there are cases where the rates borrowers are paying are zero and even negative.

That means the lender is happy to get back less than they lent because they think that’s a better deal than they can get elsewhere. Think about what that says about the mindset of lenders (or holders of capital assets writ large) right now.

My partner Albert has written a book called World After Capital in which he argues that what has been scarce until now (capital) will no longer be scarce and that we will move on to other forms of scarcity. 

When capital is abundant and when you are getting paid to access it temporarily that leads to a very different set of decisions.

What we don’t know is whether this is a temporary situation (as Larry Summers hopes and policy makers are attempting to ensure) or a more permanent situation as Albert envisions. That is an important question.


Comments (Archived):

  1. LIAD

    UK base rate has been 0.5% since 2009, with murmerings from the Bank of England since Brexit that it may be cut further.Back in the day mortgage companies would offer introductory rates below base with no floor. As rates fell more and more people enjoyed 0% mortgages.Needless to say. Banks now have a floor.

  2. William Mougayar

    Although we have been in this low/zero interest rate situation for a while, how come credit card companies still charge 19-23% interest and haven’t lowered their rates?

    1. JimHirshfield

      Criminal. But I think the answer is that credit card debt is uncollateralized. IOW, nothing backing it other than your good name.

      1. William Mougayar

        But the new FinTech lending companies lend for 5-12%. Explain that.

        1. JimHirshfield

          Acquisition strategy

        2. iggyfanlo

          Theoretically credit cherry picking

          1. William Mougayar

            But some advertise they’ll give you a lower rate so you can pay off your credit card debt. It’s the same person that gets a better deal.

          2. ShanaC

            they are using cdo like structures and are in the credit grey market

      2. ShanaC

        some days I wish I could do a cdo against credit card debt so I can use the income stream of other people’s payments against my own credit cards.I’m odd

    2. JLM

      .You mean other than because they are predatory blood suckers?JLMwww.themusingsofthebigredca…

      1. TeddyBeingTeddy

        At near 0% rates, surely you mean “philanthropists”?

        1. Matt Zagaja

          Which credit card is the 0% one?

          1. JimHirshfield

            The Bank of Mom n Dad

          2. Matt Zagaja

            As a young adult at the start of my career I really have a newfound sense of appreciation for how successful my parents are.

          3. johnmccarthy

            Tell all your friends

          4. Salt Shaker

            Your parents didn’t have asset and income inequality. Their generation could afford to own a home.

          5. pointsnfigures

            It’s way more than that. Your comment is way to simple a generalization-income inequality is a symptom, not a problem.

          6. Salt Shaker

            Of course, but avg Americans are mired in symptoms, not policy.

          7. pointsnfigures

            Over the past 8 years, and probably over the past 16, we have had pretty bad policy. Americans are getting the “dividends” of that economic policy. I graduated from college in 1984. It was just the beginning of the end of the recession that had been off and on since 1973. My kids graduated in 2011 and 2013. The situation they inherited is similar to the grads from 1933-43. Statistics show this generation as a whole will make less money simply because of macroeconomic events they cannot control. But, really bad government policy is a major headwind for them too.

          8. sigmaalgebra

            > really bad government policyNot a chance! Not even close! Not even in the same galaxy cluster!Instead, those years, and I’d say at least the past 24, are so bad they provide grand new definitions of really bad, so grand that they make all prior views of “really bad” look like dream world fantasy land.Long ago I thought of a general explanation: Too often humans just mess up, totally, unless and until their backs are up against solid walls and they just can’t mess up anymore.

          9. TeddyBeingTeddy

            A credit card company is essentially taking equity-like risk for debt-like returns. Let’s say you got a $50k of capital from a venture capitalist (instead of a $50k credit card). They don’t charge you an “interest rate” but they get 20% of your nascent business, as well as a liquidation preference over your equity. Compared to a credit card that charges 24%. Which one do you think is sucking the most blood? Also, if you pay even $1 of interest on a credit card, you’re not using them correctly. They should be funding monthly working capital gaps, not annual. In other words, pay them off every month. If you cannot do that, you need to reduce your expenses…not increase your borrowings.

          10. JLM

            .The notion of income inequality, as it is used by the scandal mongering political class, is like the discovery of the law of gravity.It’s always been there but you just discovered it.The solution to income inequality is not to “adjust” — you know like a chiropractor’s adjustment of your spine resplendent with cracking and popping — the high income earners but to become one.Get up early. Go to work. Work hard. Stay late. Work through lunch twice per week. Read about your profession an hour every day. Get lucky.The earlier you come to work, the luckier you become because luck has more hours to find you.Income inequality ‘splained and cured.You’re welcome.JLMwww.themusingsofthebigredca…

          11. William Mougayar

            “The earlier you come to work, the luckier you become because luck has more hours to find you.”Good one. When is the JLM book of wisdoms coming out.

          12. sigmaalgebra

            Installments! Collect them with, say, a Google search. I can send you a zip file with a lot of them!

          13. LE

            Get up early. Go to work. Work hard. Stay late.Sure words of truth. But here’s the thing. Today people can’t do that because they are spending more time on their kids nourishment than at least my parents did when we were growing up. You know before they had SUV’s and a million activities for kids. Today Dad’s leave the office to be able to attend their kids after school activities. [1] I am glad my Dad never did that! Never going to hear me whine about that.[1] Note to Dads. This is a big farce. Your kids will turn out fine and still love you if you don’t do that. When they get older they will care more if you can help them out paying for an apartment in NYC when they can’t make the rent.

          14. JLM

            .”Perhaps a bit too simple minded,” said the simpleton (me).Do this well before you get married, have kids, have a mortgage, and the yoke is fitted around your scrawny neck?JLMwww.themusingsofthebigredca…

          15. sigmaalgebra

            Go to son’s soccer game? Likely depends. But there’s a LOT dad can teach child, e.g., so that the child doesn’t have to spend years in the school of hard knocks and experience paying “full tuition”. A LOT.

          16. Adam Sher

            Hopefully my kids education, which I’ll pay for, will enable them to get jobs that pay them enough to live in whatever city they want. I hope they care about being self sufficient.

          17. Info Sample

            For those who are working three jobs, reading about their profession everyday, have huge student loan bills, and live in an expensive city, what do you recommend?Pull themselves up by the bootstraps harder?Get luckier?Move to a cheaper city with even cheaper jobs?Get a time machine and undue past mistakes? Their parents too?Accept your law of gravity?Is it possible those born as the richest gender, richest race, in the richest country, in the richest time aren’t working as hard as they think? Is it possible there are others who are working extremely hard (maybe much harder than you), doing everything right, and can’t get ahead? And there is nothing we can do about it? We shouldn’t even try?I do think the middle-class was a historical anomaly and inaccurate considering world poverty. Income inequality in a vacuum isn’t a problem. The problem is hard work, education, and luck otherwise known as opportunity doesn’t work for everyone, everywhere. This can be greatly improved.

          18. JLM

            .When considering one’s plight in life, it does nothing constructive or productive to gaze with longing on another’s situation except to see if there is an exemplar to be followed.And, yes, unfortunately, regardless of how hard one thinks they have it, the answer is going to be to work harder, work smarter.I went through grad school on the GI Bill. Good trade for me because I didn’t get killed. Still available to anyone willing to serve.What is not possible is the Bernie solution — give me more free shit I don’t have to work for.Hard work, education, luck DOES work for everyone. Go do it.JLMwww.themusingsofthebigredca…

          19. Info Sample

            Others should work harder, sacrifice, and get an education while we chat on the internet on expensive devices in rich counties about how hard we work, sacrifice, and how educated we are in the middle of a work day.

          20. SubstrateUndertow

            “Bernie solution — give me more free shit”He is not on about “FREE SHIT” !He is on about distributively financing the collective infrastructure costs required for a more educated and healthier populous in order to boost the baseline social-capital infrastructure assets available to American businesses.His premiss is that collectively financing such foundational social infrastructure is the most cost effective way to increase overall social/economic prosperity.Whether you agree or disagree with his methodological assessment no one is pretending that in the aggregate we are talking about FREE-SHIT !

          21. JLM

            .”free shit” uses a lot fewer words than you use to say the same thing, no?Bernie is all about free shit.JLMwww.themusingsofthebigredca…

          22. SubstrateUndertow

            None so deaf as those that will not hear :-)Fewer words:Sure – ultimately here is no free lunch but some times other will sponsor your lunch for their own long term benefit.Bernies on about a sponsored lunch not a free lunch !

          23. JLM

            .Hahaha, Bernie is all about a free lunch for those who vote for him and wants to send me the bill, no?That is one of the funniest things I have ever read. Thank you.JLMwww.themusingsofthebigredca…

          24. SubstrateUndertow

            Oh ! I forgot we’ve been here before.You have previously had a good laugh when I mentioned the concept of “Social Capital”. This is just a corollary dismissal 🙂

          25. PhilipSugar

            I never jump in on political comments but after seeing Hillary Clinton say FREE TUITION!!!How can you not say free shit?Sure let’s have a realistic talk about that college tuition is too high.Limiting student debt to reduce tuition? Anybody remember what easy credit do to housing prices?Limiting the amount of grants and percentages to overhead so schools don’t get in a race to build more lavish buildings when the reality is buildings are becoming less important.Saying that state school administrators are for the plan??? That’s like asking employees if they want a 100% raise and only come to work 2 days a week.Making standards for that tuition aid??Making people do work to get the aid???There are tons of other points I don’t bring up.People think you just tax and no consequence. I was in Pittsburgh today, their airport is just a shell.Here is the money quote:After failed negotiations to lower landing fees, the airline announced in 2004 that it would be reducing operations at Pittsburgh, shifting operations to Charlotte and Philadelphia. By the end of 2005 the airline had eliminated 7,000 jobs while operating roughly 200 flights per day, mostly domestic. All service to Europe had ceased to operate. A year later, the airline had only about 170 flights per day to and from Pittsburgh, most being domestic flights. Unrelenting flight and job cuts continued through the decade, as well as closure of Concourse E on the Landside Terminal and Concourse A on the Airside Terminal. By the end of the decade US Airways was down to 68 flights per day, operating from ten gates on Concourse B, and one US Airways Club location. Numerous US Airways ticketing and customer service counters were abandoned, and 15 gates on Concourse A and B were sealed off from the rest of the airport

          26. PhilipSugar

            I won buzz word bingo on this comment!!!

          27. PhilipSugar

            Or you need to become a Clinton earning $25mm a year on speaking fees for pay to play.Here is how everybody got the 1% wrong:…What about we limit all former politician’s speaking fees to $500k a year. Boy you are rich!!!!Mmmmmmm.

          28. Nate

            Doesn’t negative interest rates support the providing of free shit by the government?

          29. sigmaalgebra

            One lesson: Even when there are terrific opportunities, have to look for them, see them, and take advantage of them.For this approach, we have to accept an axiom: The economy changes, and a lot of the opportunities are from such changes. So, have to watch for the changes and the resulting opportunities.Education? Likely it has to be quite general because it has to last for 40+ years likely through several large changes in the economy.The idea that an education when young can leave you set up in a good career for 40+ years is a serious fallacy. Don’t do that.Then when see an opportunity, with self-education build on the general education to learn about some detailed topics important for the opportunity.Back in college, Dad picked a career direction, got a good education for it, started on it, early on did well enough with it, saw some other opportunities that he had a great background for, but rejected them because they were not what he had had in mind back in college. For the new and much better opportunities, he had everything going for him except the realization that he had to expect the economy to change and create new opportunities and, then, take advantage of those opportunities.I can give more examples.I’ll give you an example from politics in current headlines. Look at the Republican primaries: There had lots of state Governors and US Senators with lots of experience in politics. In the first debate, had 17 people on the stage. But, already the leader in the polls and in the center spot was Trump. Then he blew away the other 16. He showed the other 16, their staffs, their donors, and the pundits that they were all very badly wrong. And this was Trump’s first attempt at elective office. So, first attempt, he goes for POTUS. He is now no farther away than one coin flip.How in the heck did he do that? My explanation: He is good at looking for opportunities and saw a great one: He saw a lot of citizens able to vote in the Republican primaries and eager for a new message, worked up the message, worked up some effective new ways to deliver it, practiced delivering it, and, in simple terms, hit the other candidates hard enough to knock their socks off and have them land in the nickel seats still wondering what the heck happened to them. He saw millions of citizens eager to vote for his somewhat different message, so many millions that, supposedly, he got the most primary votes of any Republican candidate ever.So, in part, the explanation is that he saw an opportunity and took it. And, really, it was a relatively recent opportunity, e.g., not really available in his formal education or early in his career.So, lesson: For one approach, gotta look for the new opportunites, see them, and take advantage of them.

          30. JLM

            .I agree more with you than you do with yourself.One has to seize opportunity.JLMwww.themusingsofthebigredca…

          31. Steve Lincoln

            Yes, Trump is certainly good at “taking advantage.” Not always in the most ethical way either.

          32. sigmaalgebra

            Since I’m for Trump, certainly against all the competition but, still, want to be fully informed, for> Not always in the most ethical way either.I’d like more details.So, you mean:(A) In Atlantic City, when casinos were hot, he went in big time. When due to the crash of 2008 or 2000 or the rise of the Internet or whatever it was, the casinos were sick businesses, he got out. Maybe he had the casinos in some wholly owned corporations and had those go bankrupt. Maybe some commercial bankers got hurt — but they were the ones who granted the loans, it was their decision.(B) Maybe you are thinking of Trump University. Okay, it was “for profit” education, and IMHO that field has commonly had a lot of hype and selling techniques out of, say, the famous scene in Glenn Gary, Glenn Ross. In, for profit education, what Bill and Hillary Clinton did with Laureate Education was much worse.In all of education, there has long been a need for some “Truth in Education Act”. E.g., so, maybe risk family finances to the tune of $60,000 a year, give up four years might be doing something else, and in a big ceremony get “With all the rights, privileges and honors appertaining thereunto.” I’m still trying to identify. Maybe they are the contents of the empty set.Vocational education has long used the, ah, call it what it is, scam of “Learn this material and will be fixed for life”.Anything else?

          33. Adam Sher

            the money section, “Education? Likely it has to be quite general because it has to last for 40+ years likely through several large changes in the economy.The idea that an education when young can leave you set up in a good career for 40+ years is a serious fallacy. Don’t do that.Then when see an opportunity, with self-education build on the general education to learn about some detailed topics important for the opportunity.”Does the focus on CompSci contribute to the general education or a hot field where there are jobs now? I believe it is a core competency that should be taught along with math and literacy.Your formal and continued education should allow you to recognize the new opportunities.

          34. sigmaalgebra

            > Does the focus on CompSci contribute to the general education or a hot field where there are jobs now? I believe it is a core competency that should be taught along with math and literacy.What to teach, who, when is a difficult question to answer.So, for computer science, maybe have some one hour lectures:”In computing, a language is a set of strings. Can use the Backus-Naur form (BNF) variation of just basic set theory to define such a language. Then can use a program that will read the BNF and write a program that will parse a program in that language into a parse tree. That handles the lexical scan and the parsing. Then can write a program to traverse the parse tree, use the corresponding semantics, and write out a version of the program in some intermediate language closer to being ready for a processor to execute. Then can do linkage editing and write out an executable program that can run. Interpretive execution is also possible. And can use software to define a software virtual machine and generate code for that.”Discuss the halting problem.Explain that proofs of correctness are mostly big applications of mathematical induction but tend to be difficult in practice because the needed, really careful description of what the program is to do is usually no easier to write or check than an actual program to do it.Here we are seeing some of what we can/can’t do in specifying work for a computer to do, how to specify automation, and that lesson might be somewhat good for 40+ years.That’s an hour.Next cover some famous algorithms, from Knuth’s TACP, Sorting and Searching. Discuss the good time and space complexity of those algorithms and the big-O notation. Then move on to discuss where computational complexity stands now, that is, P versus NP, and connect with some practical problems in automation. That’s a second hour.Ah, that’s enough computer science. But for more, do some with some practical computing. So, pick a programming language and write some code in it. See how to define some data structures as classes and allocate and free them. Cover if-then-else and do-while. Cover call-return. Cover try-catch. Then cover, say, Dijkstra semaphores or some other approaches to synchronization.Then cover how relational database handles deadlocks.That’s maybe two more hours.Then, say, show a movie that gives a view from 10,000 feet of current computing from desktops, mobile, the Internet, servers, the Internet of things, and various uses and challenges.For education intended to last 40+ years, anything else?

          35. SubstrateUndertow

            Living-systems are a negentropic colonizations against the winds of normal thermodynamic entropy.The higher the concentration of situational cognitive-introspection the more powerfully a colonizing life force can proactively cheat the normal flow of entropy to support its negentropic organizing dynamic. Us humans are at the tip of that intelligent-life colonizing spearhead.”the middle-class was a historical anomaly”As are all living systems but their anomalous negentropic colonizing dynamic is a universal organizing dynamic that equally applies to social evolution.Intelligence/consciousness are the mojo at the heart of all self extending negentropic living-systems. We humans have that colonizing cognitive-conspiracy power in great abundance so lets not give up on ourselves and our middle-class/democratic endeavours just yet !Intelligently distributive social/economic homeostasis are not anomalies in the world of negentropic living-systems but rather they are an evolutionary universal Strange-Attractor gravity well.

          36. SubstrateUndertow

            So if we just all just work harder we could all be 1%ERs ?The whole 8 billion of us – YES?In a world of distributively cyclical production and consumption dynamics there is no magic fudge factor capable of long term dynamic equilibrium between said production/consumption that can be mathematically sustainable while simultaneously supporting ever larger gradients of concentrated wealth.Let we repeat my broken record summary of economic thermal dynamics.The concentration of wealth is not so much immoral as it is mathematically/cyclicly unsustainable!Capital is no longer a scarcity because as it continues to concentrate into disconnected purely paper assets, reinvesting those concentrated paper assets becomes evermore difficult within a production/consumption cycle that has a reciprocally decreasing real-demand consumption curve.Real-Demand :demand with real/not-credit based purchasing power

          37. JLM

            .You assume facts not in evidence. No, of course, everybody is not going to be a 1%-er.JLMwww.themusingsofthebigredca…

          38. sigmaalgebra

            But, the 99% can be better off than they are now and can be better off than the 1%, say, 200 years ago.

          39. SubstrateUndertow

            From my point of view you fail to appreciate facts very much in evidence, abstract as they maybe :-)Look around even the most uneducated are no longer willing to be excluded from wealth distribution. It is the nature/power of human cognitive self interest, no matter how dumb, lazy or undeserving people will refuse to passively except their unworthiness to be included in the benefits of modern production.Translation:We don’t owe it to the masses to include them in wealth distribution but the sad reality is that they now have the power of social interdependencies by which to forcefully insist on their inclusion.We may not wish to be our brother’s keeper based on religious/secular moral virtue but simply because the alternatives are in the aggregate less cost effective regarding the accelerating social/economic turmoil now being enforced by virtue of contemporary interdependencies.From your point of view that may well be the downside of an emerging network-effect based social/economic reality ?

          40. JLM

            .Really, I have no idea what you are talking about. My fault, not yours. I am, admittedly, a bit dim.Pro tip: Wealth is not “distributed.” It is earned.JLMwww.themusingsofthebigredca…

          41. ShanaC


          42. Steve Lincoln

            Yes, In the JLM world, those who fail will do so because they are unworthy or didn’t try hard enough — not because of circumstances, or bad luck, or their employer failing, or structural problems in an economy, or any other possible reason beyond their control. Sorry, but this just sounds like more of the underlying right-wing Republican failed economic nonsense that basically boils down to “Everyone is on their own,” and “I’ve got mine.” America is better than that.

          43. JLM

            .Bit of victimhood, Steve, no?We all make our own luck. That doesn’t mean nobody suffers from bad luck. It just means we start with being responsible for ourselves.I went to undergrad and grad school on my willingness to serve in the military during the Viet Nam War era. I took a gamble. For me, it worked out.There is nothing particularly right-wing or Republican — or political — about a philosophy of living that says, “I am responsible for me.” It is a personal code of conduct.If that personal code of conduct worked for me, it should work for others. I am nobody special. If I could do it, a lot of others did and could.America is the land of great opportunity. It is not the land of equal outcomes. It is the land of opportunity. We are all still responsible for how we embrace and work those opportunities.If you are laying in bed when the rest of the world is up and striving, why do you deserve the same outcomes. Outcomes?And, yes, America has a social safety network. It should provide a hand up not a handout.JLMwww.themusingsofthebigredca…

          44. Steve Lincoln

            That may work at the individual level; but, why has income inequality grown to an extent not seen since the 1920’s? It can’t just be that people just aren’t trying hard enough. Productivity keeps going up. But, those at the top are taking a larger share of the rewards/income. Are you saying that we should ALL be at the top — that’s the solution??

          45. JLM

            .We live at the individual level.Income inequality is a strawman argument. It is meaningless.What is meaningful is opportunity.The opportunity — not the assurance — that if you get up early, go to work, work hard, stay late, work through lunch two days per week, spend an hour studying and reading about your profession, then you should be able to better yourself.It begins and ends with individual effort.It is a code of personal responsibility.Personal decisions have consequences. Decide to study English and become a poet v studying CS and becoming a software engineer?Different outcomes. Same effort. Different outcomes because one field is more lucrative than another. That is life.Nobody at the top is “taking” a larger share. They are leveraging their assets to earn more money through, sometimes, passive income.We should all arrive where our talents and our hard work put us. Some will end up in the top 1% and some will live lives of comfort, peace, substance and purpose.There are no guaranteed outcomes and because our neighbor has more means nothing as to where my talents and hard work will carry me.It is an individual kind of thing.JLMwww.themusingsofthebigredca…

          46. Nate

            It seems like you’re answering a different problem than others – you’re sharing your recommendation for an individual to approach any structure – others are arguing for a new dynamic (against which you’d presumably continue to apply your personal approach).Yes, it’d be great if every human started your hard-work attitude. But that’s unrealistic and ignorant of the privileged, lucky environment that fostered your can-do attitude. As you highlight yet conflate opportunity with individual decisions, how do we foster more opportunity for individual success and individual decisions you’d find positive? Others seem interested in changes we can make as a society that increase the probability of more individuals living happier and more peaceful lives with positive net societal contributions rather than lecturing those systematically subjected to a less lucky environment to figure it out as we have in our more fortunate environment. Your recommendation on how to behave as an individual might thrive within that societal shift.

          47. JLM

            .We are blessed with an entitlement to “…life, liberty, and the pursuit of happiness.”We are not entitled to the outcome of actually attaining happiness. There is a big difference between a spot at the starting gate v the finish line.We can, should, and do remove barriers for folks to get to the starting gate. We cannot run their race.Our individual actions are executed within a sea of opportunity. One man may see an opportunity and jump into the sea while another may perceive a storm and seek shelter.Neither is wrong though the outcomes may be very different.There is no environment in which everyone gets to be winners. Life is not T Ball. It is a scored exercise. Risk is real. We are responsible for our decisions.As to even our current society — when it is clear that certain people can maneuver, pursue happiness, obtain good outcomes, then it is also clear that individuals determine our own outcomes rather than the environment.This is not intended to suggest that enhancing opportunity is not a worthy endeavor. In the end, we cannot mandate or deliver outcomes. We can put people in a position to succeed and then let them exercise their free will, let them make decisions, and cheer from the sidelines.The guy who works harder gets his outcomes the old fashioned way — he earns them.JLMwww.themusingsofthebigredca…

          48. LE

            People can still afford to own a house. I bought a house in the 80’s when I was in my 20’s and when my mortgage interest rate was 15% iirc.Now, real estate and income tax in my state (NJ) is the real killer. But on the otoh it depresses the value of the real estate that you have to mortgage at lower interest rates (what 3.8%).What we have now is more things to spend money on. That is part of the problem with ‘younguns and FOMO. My much much younger brother in law lives in an overpriced house in North Jersey because with his career he needs to be close to “the city” (you know which one) and wants to be in a good school zone. That is a conscious choice that he made. He could easily have a nicer house somewhere else. Meanwhile all I ever hear about is how he takes trips here and there with his wife who has a masters but doesn’t work. (Shit I am glad they don’t read, eh?) My parents (and myself) didn’t piss money away when we got out of college in our 20’s, did you? The internet and social media has made all of this worse you see what other people have but don’t know what money they have (or parental backing) and you have to keep up with those joneses. So my point is it is possible to still “own a house” if you make a few lifestyle and location compromises.

          49. Info Sample

            Depending on where you live the house you bought in the 80’s might have been $100,000 and is $1,000,000 now.$100K at 15% is much less than $1M at 4%.Also, were you not able to refinance at 12%, 10%, 7%, 3%?Did your net worth not grow tremendously with the rise in real estate?I don’t think your comparison to the 80’s is fair. Interest rates aren’t why people can’t afford to own a house. It’s the price.And yes some people live consciously beyond their means, this will always be the case. Many live beyond their means because real estate and education costs have skyrocketed while wages have stagnated.

          50. LE

            Well in the suburban area where I bought the house a 100k house is roughly 350k to 400k now. Inflation has brought that 100k to 220k according to… So that house hasn’t risen that much, certainly rising values to 1mm is not in most areas or even close. And even in the area that I am in now, if I look back to the mid 80’s I see roughly the same things going on, actually less inflation in housing.Did your net worth not grow tremendously with the rise in real estate?Well actually no, and I think in some ways that’s a myth. Why? Because you do need a place to live so if you decide you want to be in an area where values are rising unless you decide to move to an area with lower values you haven’t gained anything (other than increased property tax amounts).That said sure someone who is house rich in NYC metro and decides to retire to South Carolina or Florida can tap into that net worth. But most people don’t live in NYC metro (or SF or the right parts of other states).

          51. JLM

            .Why have wages stagnated? [Beware, trick question.]JLMwww.themusingsofthebigredca…

          52. sigmaalgebra

            The real measure of cost of a house and of economic prosperity is family formation, i.e., the number of children in a good home and family per woman. With that measure, the US is currently going extinct, literally. Even take away the part about a good home, we are still going extinct. Why? On average, the number of children per woman is less than 2. Some really simple arithmetic and Darwin will win that one — they have no chance at all of losing.One reason is that the standard of living is just not there. Another reason is that the anxiety level is way, way, way too high.The big reason is, as a country, we have totally messed up, big time, no excuses. Viet Nam. Its resulting massive inflation. The year 2000 bubble and crash. Gulf War II. The year 2008 bubble and crash. The snail speed, slow recovery from 2008. Having Jane Fonda our US Secretary of Energy at Large taking her ignorant hysteria to shoot the US economy in the gut. Going off on sick-o, psych-o, wack-o guilt-trip nonsense to slash our wrists for some Greenie earth worship about CO2 being a sin. Essentially all just self-inflicted, brain-dead wounds. Dumb. Dumb de dumb dumb. Totally dumb.E.g., our big issue in Viet Nam? Ex Paris dishwasher Ho got some free lunches in Moscow and Peking. So, in response we killed a few million people in Viet Nam, wrecked their country, enabled OPEC, and wrecked our economy and country. Dumb. Totally dumb. Gulf War II? Did it again. Since Ike, all self-inflicted.

          53. JLM

            .That moment when your now full grown kids come to you and say, “Wow, Dad, how am I ever going to afford this lifestyle?”And, you tell them, “At your age, neither could I.”JLMwww.themusingsofthebigredca…

          54. Adam Sher

            I don’t know how to express how fully I agree with the importance of understanding this. It’s one of the most powerful lessons I learned from my dad (it took nearly a decade after he told me something similar).

          55. LE

            Jim, released from stir? Where ya been?

          56. JimHirshfield

            In Dublin… Time zone has my timing off

          57. Jeremy Robinson

            Bank of Mom n Dad- I never realized my wife and i are part of the Banking system. Not sure we can tolerate a stress test. But the breakfasts are always good because they’re served with love.

          58. ShanaC

            when you find one, tell me!

      2. Lawrence Brass

        The specialization of the apex predator.

        1. ShanaC


      3. LE

        That’s a bit unfair. Everybody has a right to earn a living. They provide a service to people who are living hand to mouth and don’t have a pot to piss in. [1]You could argue a bit about the source of the problem. Which is actually the result of predatory and blood sucking sellers of goods and services and marketing to get people to buy things they don’t need. Ever been in a Walmart and seen the toads carting off flat screen tv’s? (I don’t go in but I see pictures of it!) Not only that but social media has made it worse, with FOMO. Companies have a right to make money in any legal way they can, generally, with few exceptions.A bigger problem (and cost on our society) is the food industrial complex which gets fatties to eat food they shouldn’t be eating and results in (and I am not kidding) food addiction. To me that is “predatory”.[1] Also the money they collect gets distributed at the very least in a way that creates jobs for their employees as well as benefits.

        1. sigmaalgebra

          I do shop in Wal-Mart: Fancy Feast for my kitty cat, first aid medical supplies (I need to keep stocks of three, anti-biotic, anti-inflammatory, and anti-fungal along with vitamin-mineral pills and simple, cheap-o, house brand aspirin), cartons of gallon bottles of distilled water for drinking (my well water is saturated with calcium carbonate, and my water distiller quit, but using the distiller was a pain and per gallon Wal-Mart charges me less than my electric company), some good (opaque, white, simple I can twist into a rope and tie in a knot) plastic bags for paper and plastic trash, recently a wired, USB mouse for my computer (gave up on wireless battery powered), 150 W incandescent light bulbs (main light in my office plus ceiling light in the basement and garage), a lawn mower each time I overheat a Briggs and Stratton engine (used to do that because of mulching blades that overloaded the engine, but without such a blade the current mower is on about year five now), and that’s about it.But I also shop at Sam’s Club. There can actually see a lot of really spectacular flat screen TVs for sale. I don’t want one even for free. I have three quite good cathode ray tube TV sets. I want one to watch old movies on VCR or DVD. Otherwise I can cut you a good deal on the other two. Broadcast, cable TV? I hate them. Last time I tried to watch was last year for the first Republican debate. I upgraded my cable TV service to permit that. Then I lowered the service again. The debate was easier to watch at YouTube. And on the Internet I was able to get, and did, a transcript. Before that debate, I went for years without turning on the TV. In the news I see articles about the TV shows Game of Thrones with some actress with white hair, House of Cards, etc., but I’ve never seen even part of even a single episode and have no idea what they are about. Somehow I suspect I’m not missing much.Last time at Sam’s Club, I stocked up on the usual staples; my stocks were low, and I needed two shopping carts to carry out all the stuff. Had to do a little 3D spacial relations work to get all the stuff to fit into my SUV!Wal-Mart and Sam’s Club are okay for a lot of stuff.

          1. JLM

            .Sam’s Club is entertainment.JLMwww.themusingsofthebigredca…

        2. JLM

          .No sale. 18% is usurious and is not warranted by any standard of decency.JLMwww.themusingsofthebigredca…

          1. LE

            When has business been about decency? This is like me complaining about football or Nascar. The only entertainment purpose of Nascar is to have cars crash. Why else would anyone sit and watch cars go around a track for a day while drinking beer? But apparently serves a purpose in some parts. [1][1] Resolved I am talking out of my ass.

          2. JLM

            .We differ on this. Life is about decency. You are a decent person, no?JLMwww.themusingsofthebigredca…

          3. LE

            Decent? It varies on the situation. I am always decent with people to a fault. I probably have made less money as a result of that and in fact I know that I have.With corporations or companies which hide behind people who are clueless and annoying I have no decency. I will use any tool I can against them to get what I want out of them.Same Lawyer/firm for 15 years.Same Accountant/firm since the 80’sSame insurance agent/firm since 80’sSame Hair stylist since the 80’sI could go on and on.Very loyal and decent with people, to a fault. To companies MMMV (play on ymmv).

      4. LE

        By the way (god dammit) you come across like Bernie with that attitude. Or like Hillary criticizing Trump for making ties in China as a businessman to rile up the little people who don’t grok the way business works.

        1. JLM

          .Ooops, my GAS meter is still in the lost and found.As much as I think Bernie is a bad joke, there is a lot of what he says I agree with.I do think it would be good to have a free education — more trade school stuff and no English majors or poets.I think it should be paid for by universal service like the GI Bill. Get a degree and empty bed pans or work in national parks for the same period of time.I am pretty sure that Goldman Sachs was looking for some ROI on those Hillary speeches.Trump is a hypocrite for having his shit made in China. Trump is a bullshitter while Hillary is a liar. I can stand a bullshitter but not a liar.Huge difference.JLMwww.themusingsofthebigredca…

          1. LE

            Trump is a hypocrite for having his shit made in China.He is not a hypocrite as there is no reasonable expectation that someone who is a businessman would not act like a businessman. Now he is a politician and he is allowed to change what he thinks (even weekly). He also donated to both sides of the house but is running as a member of one side.Is Billary a hypocrite because they went to Trump’s wedding? Is she a hypocrite because she slammed Obama (and vice versa) and now they masturbate each other? Of course not. The way the game is played.Hillary is just so fucking “best and brightest” slick with her staff of 20 PR people and research team and 1k staff members (or whatever the numbers are) and literally IBM’s Watson behind her. But even with all that help (and the media in general fawning) she is not well liked enough to beat one guy who goes on instinct.

          2. JLM

            .The entire bunch of them are hypocrites. Why is that difficult to embrace?A guy who pontificates about American jobs and then has his products made in China is a hypocrite. That isn’t even a stretch.JLMwww.themusingsofthebigredca…

          3. sigmaalgebra

            Well, now, at least with his campaign hats, he “went forth and sinned no more”.

          4. JLM

            .Showing he is willing to follow his own mojo.JLMwww.themusingsofthebigredca…

          5. LE

            Count me in then! Do as I say, not as I do. I had my very best year ever last year selling to the Chinese yet I will bash them every time I can as well.Trump at least gets points for giving a truthful reason why he did what he had to do in business. As if to say “you idiot of course that is the way business works, would you expect a football player to ask nicely that the other guy give up the ball?”.

          6. sigmaalgebra

            > Trump is a hypocrite for having his shit made in China.Not at all. Quite the opposite. He is being a great patriot: He is spending 10s of millions of his own money to keep all of us, himself included, from continuing to do that.IIRC, for his campaign hats, he did have those made in the US.But, with those shirts and ties, for now, at least before he was a candidate, as a businessman, he did just what he should have done.

          7. JLM

            .You sound like Hillary. He is a hypocrite of the first order. That is not fatal. It just is.JLMwww.themusingsofthebigredca…

          8. sigmaalgebra

            > like HillaryWOW! Low blow. The unkindest possible cut of all. That’s like I didn’t just step in the sewage but sank in 20 feet deep and am going deeper.WOW. The H-word. I’ve gotta work on my communications skills!Gotta go way down the list of worst people of all time, way past Vito Corleone, Nixon on his worst days, …, to get to the H-word.E.g., the stuff was way above Top Secret, and she was so “extremely careless” (essentially the same as “gross negligence”) that by now likely every intel agency in the world has the stuff. Then count her contributions to Libya, Syria, ISIS, Iran, and more.Low blow.

    3. pointsnfigures

      Supply and demand. The people that need access to that capital don’t have it. The people that have access to capital can get scads of it and don’t need it. 0% interest rates are creating different sorts of imbalances-and we have had them for 9 years. Negative interest rates create even more imbalances.

    4. Richard

      Apple is the only company that earns more $ than Wells Fargo or Chase.

    5. Rob Larson

      Credit card rates depend primarily on credit risk of the borrower. The cost of capital is a very small portion of the overall rate. So you see the rates drop from 25% to 22%, doesn’t seem like much. Meanwhile if the US Treasury yields drop from 5% to 2%, it’s much more noticeable, yet the rate drop due to lower cost of capital is the same.

  3. Kenneth Luna

    I have trouble believing that “our problem today is insufficient inflation.” The percentage of disposable income being used to pay rent has increased exorbitantly this last decade. Their heuristics are likely outdated.A few months ago Larry Summers also argued for the end of the high note currencies because they facilitated illegal activity. Although somewhat true, I think it really was an argument to discourage people from taking out cash in a negative interest rate environment.Maybe I am just speculating.

    1. Matt Zagaja

      Healthcare, housing, and education are wrecking hell on the budgets of the American people.

      1. pointsnfigures

        What are the most regulated parts of the American economy?

        1. Jess Bachman

          Um.. energy and transportation?

          1. pointsnfigures

            Healthcare, finance, labor and housing are more regulated.

          2. Jess Bachman

            Then how do subprime mortgages come out of the highly regulated finance and housing industries?

          3. pointsnfigures

  … A lot of it has to do with a Bill Clinton policy to increase home ownership among people in the 90s, which the Republicans gladly signed onto. Politically, they thought it would be easier to turn homeowners into Republican voters. In 2000, Bush called for an “ownership society”. By the time some Republicans tried to put an end to it in 2005-6 it was too late. Fannie and Freddie got the political cover they needed to make subprime loans. Barney Frank, Chris Dodd deservedly get the blame since they lead the charge (Democrats ran the Senate from 2004-2012, and House from 2006-2010) but Republicans are not blameless.Instead of regs, we ought to let the market speak.

          4. Jess Bachman

            I’m not sure who this “market” is or what it has to say, but as a economic laymen, I’ve always viewed regulation as check on corporate power, which has a profit motive, not a people motive. Due to regulatory capture, and the general failability of human nature to tame complex systems, regulation clearly isn’t all that effective in many cases.Still, I don’t trust the “market” to have my best interests either, since power naturally pools at the top, where I don’t reside. So I see regulations as a necessary evil, like unions.

          5. pointsnfigures

            Regulation can be a check on corporate power, but if you read Prof George Stigler’s research you will see how corporations use regulation as a competitive advantage. You talk about reg capture, which is one feature of it.Having a profit motive isn’t evil. It’s sustainable. A free market is best for you with low/no cost of entry/exit, and low transaction costs. The price dictates what suppliers and demand will do. You decide individually what’s in your best interest-or if you can satisfy your best interest with a substitute good. For example, you can buy gas at $5 per gallon for your car to get point to point-thereby putting money in a corporate pocketbook or use a substitute. A cab/Uber is indirect, since they use corporate gas. Public transport is another, but they pay for power/fuel from corporates. You can use a bike, but a different corporation benefits. Or you can walk. All depends on how far you have to go, where you have to go and when you have to get there. It’s a free market for transportation.The elasticity of demand and supply help determine the price. The availability of substitutes also determine it.On the flip side, a $5 per gallon price for gas will encourage more production. That drives prices down over time.

          6. Jess Bachman

            Appreciate the free education. I too would prefer a free market but I don’t think such a thing could exist or be sustainable. The way people refer to economics as some hard science and the free market as if its Newtons 4th law of motion is just too dogmatic for me to bare. It’s as if economists don’t under stand that whatever economic theory that should be applied needs to be filtered through the infinite imperfections of the human race.

          7. Lawrence Brass

            I agree with you.A perfect market is a lab experiment, maybe statistically applicable to the center of the gauss bell. Cartels, collusion and price fixing, tax exemptions, bailouts. The foul player. These are real things. At both extremes the incentives are different. There is an economy of the poor and an economy of the rich, same underlying principles but working with totally different parameters.

          8. sigmaalgebra

            Politics. E.g., Fannie.So, poor people don’t live in nice neighborhoods. Soooooo, come up with flimsy finance schemes so that poor people can live in nice neighborhoods, and then we will break the cycle of poverty.That was the excuse.If you believe that one, then let me show you the great, new, so far secret opportunity, but have to act right away, on a bridge over the East River.

          9. Stephen Palmer

            For years, hospitals and insurance companies had free rein to do what they want and did a horrible job controlling costs.

          10. pointsnfigures

            This is not exactly true. The market for health insurance was heavily regulated by the federal govt and states. The interplay between Medicare/Medicaid and private insurance shouldn’t be ignored. It’s also impossible to separate the threat of legal action to the medical industry from the cost of insurance. Cost were going up prior to Obamacare, but post Obamacare they skyrocketed. The system we had in place prior to Obamacare was unsustainable, and post it is more unsustainable.

          11. Stephen Palmer

            I don’t disagree about Medicare or Obamacare. But what about non-govt insurance?

          12. pointsnfigures

            They are still subject to laws, rules, regs. It’s also variable state to state. I lose my insurance if I move from Illinois to Indiana. I have to get Indiana insurance. Health insurance isn’t portable like auto insurance, and Obamacare is also not portable

          13. Stephen Palmer

            All true, but insurance companies impose their own ridiculous reporting requirements on hospitals, and both groups have done a horrible job adopting technology.In comparison to another highly regulated industry, say what you want about Wall Street, but those banks are much more efficient at their jobs than insurers or hospitals.

          14. pointsnfigures

            A lot of those reporting requirements stem from two things, CYA and government tells them to get the data.

          15. Stephen Palmer

            I agree with you that the govt sucks at regulating business. I just don’t agree that the private sector always does great for people either. They focused too much on the short-term, and took advantage of the fact that they had so much more scale than their competition. Thankfully startups have an easier time now competing against big businesses as technology costs have come down so much, but that wasn’t the case up until recently.

          16. pointsnfigures

            you can usually choose not to use a particular company in the private sector. you cannot choose to ignore the government.

          17. Stephen Palmer

            Except when they have geographic monopolies as so many businesses did before the internet.

          18. pointsnfigures

            Please give an example. Usually, you could hack a substitute if you were determined-but certainly choosing to use the business that solved the problem for you would be easier.

          19. Stephen Palmer

            Cable companies that put you on hold for an hour, overpriced Gillette razors bc you’re Proctor & Gamble and have sway over retailers to get precious shelf space.

          20. pointsnfigures

            You could have gone without cable. The substitute for awhile was rabbit ears on your television. I would wholeheartedly agree that solution was less than optimal. Cable was (and is) a government regulated monopoly. On razors, you had Schick, and Bic in mass merchandisers. Or, old fashioned double edge razors, or straight, or grow a beard. Again, not optimal but there was choice.

          21. Stephen Palmer

            There wouldn’t be net neutrality if there was real competition outside of a limited number of markets.Not optimals add up over time. 🙂

          22. Stephen Palmer

            And some hospitals order needless tests not just to CYA, but also to maximize profit, studies have shown. The cost problems in the healthcare sector dwarf all other sectors that we can look at, including education or housing.

          23. ShanaC

            I actually never understood this. Like I can move between states. I can fly between states. I can be briefly in one state then another. So why isn’t health insurance portable/fully under interstate commerce?(Like, think about a private contractor at fermilab who lives in chicago. Fermilab is is Indiana, right over the chicago city limits lines. It is stupid to need effectively two different insurance plans, one for work, and one for home, in case of an emergency. But that guy might need to do that…)

          24. pointsnfigures

            Ha, Fermilab is in Batavia, IL. It has to do with regulated state monopolies and state tort laws. For example, in Illinois, health insurance has a lot of mandatory things it has to cover. In Indiana, there are less things they have to cover. It’s not dissimilar from Workman’s Comp. Illinois has some of the worst Workman’s Comp regulations in the US which is why the state is consistently losing manufacturing jobs year after year.

          25. ShanaC

            parts of it aren’t in IL (I learned this in college for some strange reason, one of the entrances and labs were over state lines)and isn’t Indiana also losing manufacturing jobs too

          26. eyesfrontmen

            So, You agree with Mr. Trump.

          27. ShanaC

            i can agree with one policy of his without agreeing with him overall. Though I wouldn’t be surprised if jared kushner generated it for donald after listening to his brother, who is also one of the founders of oscar…seems more likely

  4. TeddyBeingTeddy

    This too shall pass.

  5. Tom Labus

    Part of the 08 after shock especially in Europe where there were no bank “stress tests” There is also longer term trends in both growth and wage growth that have been left to languish for the last 40 years.Robert Gordon also points out that the world’s growth can and will go flat for longer periods. He means like a 100 years during transition periods. Who knows on this one but some intelligent fiscal policy could help (that requires a functioning congress)

  6. jason wright

    shift the decimal point to the left.”beware the dead fall”.

  7. pointsnfigures

    I think that our world central bankers have a case of groupthink. I also think a lot of governments also have groupthink.

  8. pointsnfigures

    http://johnhcochrane.blogsp… I would point people to this excellent post by John Cochrane on Economic Growth. He thinks differently than Larry Summers when he approaches economics. There is the salt water school (Summers) and the fresh water school (Cochrane). John Taylor of Stanford also has a great blog:

  9. Brandon Burns

    Can someone explain how you make money when you agree to receive back less than you lend?

    1. fredwilson

      you don’t. you lose money. but maybe less than you would otherwise. that’s the point.

    2. pointsnfigures

      the cost/opportunity cost. you lose less. it shows how risk averse those investors are. Some of it has to do with bank capital ratios mandated by regs.

    3. jason wright

      negative interest rates is a tactic of central banks to force commercial banks and others to put their capital to work and not to hoard it. it’s at times like this that the penny drops and people realise they have been sold an untruth.

    4. JLM

      .Credit based preservation of capital in a time in which that becomes your only objective.JLMwww.themusingsofthebigredca…

    5. Info Sample

      You don’t make money. The goal is to limit your losses.When you are really really rich the priority isn’t always to make more money but to keep as much as you can and hold on until the economy gets better.If it costs you a few percentage points (with ‘safe’ negative interest), that’s ok, you’ll still be rich. If the whole economy crashes (with ‘risky’ regular investments including cash), which almost happened, you might not still be rich.I think this logic applies to individuals, companies, governments, and the economy overall.

    6. JamesHRH

      You don’t make money, you just lose less than if you held it as cash.

  10. iggyfanlo

    Interestingly, another big idea from Albert is basic income (UBI). While I agree with Albert on all the reasons behind UBI, I think he misses another key positive, more stimulative fiscal policy. By giving everyone $XXX/month in US, you create a massive fiscal stimulus (even after netting things out). Additionally, since it will most likely be viewed as “permanent” by recipients, it will be spent at a higher rate than one-time gains. These actions should allow Fed officials and other institutions to raise rates

  11. JLM

    .When the economy — measured by the yardstick of GDP — is not growing there is no appetite for capital and it begins to pile up which drives interest rates down and creates a flight to quality/safety which further dampens interest rates.Low interest rates, in my view, are a good thing when the capital is allowed to circulate. Now, it is not just the low interest rates, it is the impossibility of actually borrowing money.Loans?Not happening.After all the US has endured, it is still the best economy in the world and the “paper” from the US Treasury is the gold standard against which all other such papyrus is measured.We are, essentially, in a doldrums and a period of uncertainty on just about every front in the world. Not just economic, mind you. We require old fashioned, tried & true stimulation at every level.Want to perk the US economy (dog whistle job creation)?Turn the US SBA (small business administration) loose. Now, all SBA allocations are consumed in Q1 of each FY. Remember, these are essentially loan guarantees and not real money to the US gov’t. The banks use their money.Turn it loose and let the ceiling float.You’ll have real job creation out the ying yang. Real wealth will be created. People will come off the bench and suit up. Morale will increase. Hillary will stop lying (not true — just threw it in there to see if you read this far).JLMwww.themusingsofthebigredca…

    1. Lawrence Brass

      So risk for the lenders will tend to 0%, excellent idea. First in the queue.Did read your post up to “Morale will Increase” 🙂

    2. sigmaalgebra

      We got afraid of a credit economy, fractional reserve banking, the banking multiplier effect, CMOs, real estate and other financial asset bubbles, etc. and are on the way back to a cash economy.And we have other problems with our economy.

  12. jason wright

    “hoarding it” means not lending it to the market. banks will ‘deploy’ their capital for the direct benefit of their shareholders…like buying up insurance companies (guaranteed profit machines). banks stopped being banks (agents of central banks distributing capital to the economy) and became private businesses instead. the system ceases to function as it is designed to. bad for everyone. better to think of a new system. blockchain anyone?

  13. David Semeria

    I don’t think Albert would describe his book as ‘finished’ just yet.He’s put a first draft online and is open to integrating any feedback he receives.I have begun reading it and think It’s super interesting.

    1. ShanaC

      must read this book then

  14. Danilo Rea

    Interesting, in Italy we had a crazy situation before BCE decided to make monetary operations to zero its rates: Swiss Banks -full of money- had zero/negative rates and were selling money just adding less than a 0,5% spread, while Italian Banks were offering loans at 3-4% interest rates (for long term). Swiss Banks cannot operate in the closed Italian Bank system. In this scenario, a company owner in Milan looking for money, didn’t know that at just one hour by car he could find banks selling money for 3% less than their bank. Some private financial operators started operating as bridge with clients, passing through some Italian Banks (these, just by the fact of being enabled to lend money, were charging about 2% as passthrough). So, somebody understood that driving customers directly on their car over the border was much more convenient. As startup, we have been funded through the bank system just understanding very well mechanisms under the Bank system.

  15. sigmaalgebra

    With anything like our current economic model and likely also with maybe some quite different models, as a permanent situation there will always be plenty of capital. The issue is at what price.Nearly no lender is willing to lend and expect to get paid back less than they lend if only because they have a better alternative — just stuff the cash in a packing box parked in the back of the closet.Sure, if the economy is growing rapidly, as it should be with all of us bright minds here at AVC doing our best to make that happen, uh, bright in making money if not necessarily in music, wines, or statistical hypothesis testing, :-), then, sure, as in the easiest descriptions about capitalism and the allocation of capital, the money should go to projects with pairs of expected return and variance of return that, say, a Markowitz or Sharpe model says are the best.But high variance investments can also be of interest: If making a lot of investments that are independent, then just drag out the weak law of large numbers, easy to derive, and see that for the whole collection of investments, the portfolio, can keep the expected return as high as that of the individual investments and with variance of return as low as we please. So, in that case, can f’get about variance and go ahead and make risky investments, that is, ones with high expected return.And, of course, with Markowitz and Sharpe, can say more and exploit correlations, etc. And more involved models can say still more.But, net, the capital should go to the high expected return investments. Then, if there are a lot of such investments that expect to return, say, 15% a year, we expect to find interest rates not far below 15% a year. To get such rates, without inflation, we just need to get a lot of projects with high expected return.Of course, independence, correlation, expected return, variance of return, etc. are all mathematical constructs about quantities that in theory and in principle have to exist and we would like to have but, really, don’t have. So, we have to try to estimate those quantities. That’s not always completely hopeless.Of course, the independence assumption is tough to confirm. Or go to the sad lands in Greenwich, CT at the rot and ruin of LTCM and see the results of assuming independence when it is false. Also, there can see the results of making poor estimates of variance and misusing the central limit theorem and the law of large numbers.For the economy now, to use appropriate terminology, it just sucks. Why? Because if all the economists were lined up end to end, it would be a good thing. Why? Because they didn’t see the crash of 2008 coming, and now, eight years later, still haven’t seen how to get us growing again. The eight years is two-thirds as long as we were in the Great Depression. How’d we come out of that? People started shooting at us, and we got serious and came out in 90 days flat.Why can’t we get the economy going now, e.g., get both return on investment and interest rates up and out of the cellar? Because the economists don’t understand enough about the economy to say in any credible way. And, I would count Larry Summers as one of those economists. Just because he said some things about some coeds that got him kicked out of being President at Harvard doesn’t mean that he understands a lot about the economy!Yes, I can believe that for a powerful man, a bit too wide in the waist, in a mid life crisis, who didn’t spend much time in high school, college, or grad school with pretty girls and missed out, some of the Harvard coeds, along with those at Boston University, Tufts, Radcliffe, …, can be super sweet eye candy distractions! Yup!E.g., while I never wanted to be a college prof, for some largely exogenous reasons for a while I was, and then it was easy enough to see that some of the coeds were interested most of all in their Mrs. degrees. Sure, when I was an ugrad math major, nearly also a physics major, the coeds wanted nothing to do with me. Once I was a college prof, a lot of coeds were quite obviously plenty interested.There is more, but the above is a first-cut.Sure, we should get the economy growing. Just why more people are not writing, shouting, screaming, demonstrating, voting to that end is a bit beyond me.E.g., let’s take this back to eighth, seventh, maybe at some schools, sixth grade arithmetic and notice1.03**8 = 1.266,770 = 126.677%Just think about that for a moment. Ready to start yelling and screaming now? Or, did I misspell that; maybe it should be Yellen and screaming?

  16. Sid

    Good caliber human resource, which would want to change the world for better, is going to be more valuable in such environment.

  17. Steven Kane

    it’s almost certainly a temporary (not permanent) situation… only because in the final analysis, there is no final analysis.nothing is forever.having said that, we seem to be stuck in this flood-of-liquidity, cheap money low interest rate worldthe worst thing, for me anyways, is that we have forgotten how long this has really been going on. when the markets melted down in 2000-2001, then Fed chief Greenspan opened the floodgates and lowered interest rates to what we then thought were impossibly silly low levels. rates basically stayed there as we crawled out of that mess… and right into the next mess in which time we unleashed a tsunami of liquidity across the globeso, in essence, we have crises caused by excesses of liquidity… which we try to remedy by flooding the market with even more liquidity.then we wonder why recoveries are so weak or based on wildly over-inflated asset valuationsnow, we seem to have reach a point where there are no further liquidity flood gates to openmy advice? be scared. be very scared.

  18. riemannzeta

    We could do a lot worse than we would by plowing that capital into capital infrastructure, especially energy. But where is the leadership that would make that happen?

    1. JamesHRH

      According to James Hansen, those leaders are in China. They are the only government that is actively preparing for massive nuclear power generation.

      1. riemannzeta

        More evidence that our way of life and/or form of government won’t scale to 1B population?Not only in China. I was told the Saudis were planning to build 10 years ago…

  19. ShanaC

    Why isn’t capital goods worth more then, since they are more physical? A cow is a cow, evn if money is negative

  20. Nate

    It costs money to store and protect cash. There’s a risk of loss that’s lower with bonds.

  21. Druce

    Build a hotel, invest in a restaurant, or a limo, get near zero real return on the capital portion… Meanwhile Airbnb, Seamless, Uber take 15+% off the top line and make huge return on equity.Negative interest rates are post-capitalism, or post-capital, or maybe de-capitalization.Possibly this is the world we live in, with lower GDP growth, lower population growth, more efficient capital utilization via e.g. Uber which direct capital utilization and control the commanding heights and mean we don’t need a car in every driveway.The problem is, the financial system is totally broken if that’s a long-term state of affairs, a lot of banking business models are borked, government may have to step up to invest in a lot of infrastructure that doesn’t pay.Which would make sense. If we’re paying Switzerland to take our money for 30 years, they might as well take it and tunnel the Alps til they’re Swiss cheese.But it won’t happen without another massive financial crisis, and restructuring of the financial system and even social contract. Hopefully not along the lines of Trump/Brexit/de-globalization and conflict.I thought this was pretty interesting:… (‘post-capital’ social contract, vs. post-war era social contract)

  22. Paul Rubillo

    It seems to me whenever we get the notion that this time is different is when we see history begin to remind us that this is not actually the case. The crowded trade is everyone chasing yield. At some point, taking the other side of this will make some players a fortune.

  23. kidmercury

    Temporary situation. There is a bubble in Govt debt, capital will exit, stocks will soar.

  24. Capitalistic

    Zero or negative interest rates reflects the lack of long term investment opportunities or lack of fiscal policy. Wars, public infrastructure, education and government-sponsored research and development are fairly guaranteed ways to increase rates of return (i.e. interest rates).

  25. ShanaC

    sounding very keynesian of you