pacalis

The Dogma of Low Interest Rates Is Wrong

First it was a rhetorical question. Second your examples are pure distraction.

If I were to argue with your points I would have to first clarify your messes like this where you argue that the rate of inflation doesn't matter but then discuss how it matters.

> The real interest rate matters, not the rate of inflation.
> 30 year bonds purchased in the 80's, as Volcker came in ended up paying a high real rate of interest. Inflation came down, but there
> was no deflation.

Then you would argue with me by introducing another nearly correct, but not quite, definitional point, and provide another goofy example. Lose lose.

But, back on point, here's your main thesis:

>Extremely low interest rates can vacuum liquidity out of nations. >Japan has been referred to as a nation where loose monetary >policy was like "pushing on a string....The tech boom was >supercharged by a massive Japan-funded >carry trade. We may >be funding such a boom in emerging >markets and commodities >right now to our detriment.

You've done nothing to support your argument that people are borrowing US dollars to support a global carry trade, nor that liquidity is being pulled out of the US. Moreover, USD aren't necessarily coming out of the US - US capital allocations be driven by shifts away from dollarization and foreign USD reserves (i.e. China buys aluminum rights in USD, or the Saudi's take some USD out of their vaults, literally, and buy Euros).

On Oct 07 05:50 PM Harry Long wrote:

> What a one-sided question. Many retirees with 401Ks place them in
> foreign stock and bond funds.
>
> Toyota is an example of how an appreciating currency does not affect
> the real economy long term, namely the price competitiveness of cars
> from Japan.
>
> Try to argue with my points, rather than mis-representing them.<br/>

The Dogma of Low Interest Rates Is Wrong

First, my original comment was that you confounded inflation and interest rates, more specifically LOW interest rates (see the title of your article). Now I certainly know what real interest rates are, and agree that's generally a good ball to follow, but that's not in anything you wrote prior to responding to my posts. Too bad, because that would have been a more interesting thesis.

But there's more than that. Do you think your American fixed-income pensioner's are engaging in large scale carry trades, or that Toyota represents a pure Japanese currency play? Of course not. These micro examples combined with a "pile on" and "move the target " approach to what was originally a discussion of drivers of global capital allocation isn't "alpha."

On Oct 07 04:07 PM Harry Long wrote:
> The real interest rate matters, not the rate of inflation.
> 30 year bonds purchased in the 80's, as Volcker came in ended up paying a high real rate of interest. Inflation came down, but there
> was no deflation. Holder of 30 year government bonds reaped a windfall.

The Dogma of Low Interest Rates Is Wrong

Given you're trolling your own article, maybe you can answer me this question. Do you recognize that most people posting here share your concerns regarding the underlying structure of the US economy, and the problems of inflation, yet disagree with your comparison to Japan as well as a number of other minor comments along the way?

On Oct 07 02:29 PM Harry Long wrote:

> Again, you have a fixed family budget constraint (income). Prices
> increase. You can afford less goods. Your standard of living goes
> down and the economy is hurt. It's dirt simple.
>
> You can't get something for nothing. Stop living in a fantasy world.
> There is a price to be paid for inflation, even if its makes debts
> less onerous.

The Dogma of Low Interest Rates Is Wrong

Apparently your too busy laughing to realize you make my point. So lets say you have a fixed income of 8%, say an annuity...

6% is lower than the 8% the person would have earned without inflation. So Fixed incomes are ALWAYS hurt but inflation!! AND they are oppositely rewarded by deflation.

Alternatively, holders of fixed debt are rewarded by inflation. We are debtors. We can either get out of debt three ways: (1) by being more productive, which is not likely, (2) inflating out, or (3) defaulting (see inflating out).



On Oct 07 02:39 PM Harry Long wrote:

> In addition, people on a fixed income are not, in your words, <br/>
>
> "at ANY interest rate, punished by inflation".
>
> What a laughable sentiment. If inflation is a 2% and interest rates
> are at 8%, the real interest rate after inflation is 6%.
>
> It would save us all time and it would save you money if you tried
> to make your opinions conform to Generally Accepted Principles of
> Reality.

The Dogma of Low Interest Rates Is Wrong

Virtuous Americans? How absurd!! :)

Seriously, while the argument you make below is certainly true for a small faction of Americans, it doesn't represent Americans as a whole. If you didn't jump between micro and macro levels of analysis, you would realize that Americans as a whole are debtors and that inflation helps us as a whole pay for all the crap that we bought, either as individually as consumers through collectively through expenditures made by our elected and non-elected masters.

I agree with chap08s original post regarding investment opportunities, and I would stress that you pay attention to his later comments regarding inflation and interests rates. You seem confound the two to suggest that there's something about LOW interest rates that punishes savers. However people on fixed income are at ANY interest rate, punished by inflation.


On Oct 07 09:38 AM Harry Long wrote:

> The effect of inflation is to penalize the virtue of savers, who
> are caught in the double-whammy of the debasement of the currency
> and ridiculously low interest rates, thereby earning highly negative
> returns on their savings. This is not just China. These savers are
> ordinary Americans who do not over leverage and did all the right
> things. They are often the elderly on fixed incomes. This inflation
> is a taking (theft) from savers and a gift to all those who have
> borrowed money. Their debts are fixed, but the money they must repay> in becomes steadily less valuable. It is yet another form of wealth
> transfer (theft) from those with virtue to those with vice.
>