Fed's Low Interest Rates Crack Retirees' Nest Eggs

[tangent4ronpaul]

http://online.wsj.com/article/SB10001424052748703410604576216830941163492.html

Forrest Yeager, a 91-year-old resident of this seaside community, had been counting on his retirement savings to last until he died. The odds are moving against him.

With short-term bank CDs paying less than 1%, the World War II veteran expects his remaining $45,000 stash to yield just a few hundred dollars this year. So, he's digging deeper into his principal to supplement his $1,500 monthly income from Social Security and a small pension.

"It hurts," says Mr. Yeager, who estimates his bank savings will be depleted in about six years at his current rate of withdrawal. "I don't even want to think about it."

Mr. Yeager is among the legion of retirees who find themselves on the wrong end of the Federal Reserve's epic attempt to rescue the economy with cheap money.

A long spell of low interest rates has created a windfall worth billions to banks, mortgage borrowers and others it was designed to benefit. But for many people who were counting on their nest eggs, those same low rates can spell trouble.

Mr. Yeager's struggle highlights a nagging dilemma facing Fed Chairman Ben Bernanke. The longer the central bank keeps interest rates low to stimulate the economy, the more money it pulls out of the pockets of millions of savers. Among the most vulnerable are retirees, who have few options to restore lost income on investments built up over entire lifetimes.

...

As of January, the average interest rate paid on relatively safe vehicles such as short-term savings accounts, time deposits and money-market funds stood at only 0.24%. That's one-tenth the level of late 2007 and the lowest on records dating back to 1959. Such depressed rates don't come close to compensating for inflation, which was running at an annualized rate of 5.6% in the three months ended February.

...

The pain inflicted on savers could have political repercussions. Retirees are among the country's most active voters, with the power to influence a wide range of issues, such as who will bear the burden of fixing the federal government's finances and whether politicians should rein in the Fed.

Over the past few years, seniors have taken a conservative turn: In the 2010 elections, Republican congressional candidates attracted 59% of the over-65 vote, compared to 48% in 2008, according to exit polls—a larger shift than that seen among the general populace.

...

By contrast, the Commerce Department's broader measure of personal saving has risen, to 5.8% of disposable income in 2010 from a low point of 1.4% in 2005. That's in large part because it counts reductions in personal debt, such as mortgages and credit-card balances, as savings. For example, paying down a credit card with a 20% interest rate is a better way to save money than taking out a bank CD yielding 1%. But defaults, rather than saving, have driven much of the decrease in debt.

...

DAMB! - these people are good at manipulating / cooking the books! :rolleyes:

[sailingaway]

Yeah. It is criminal.

[ababba]

There are wonderful things called annuities. If he bought one before the crash, problem solved.

[ababba]

The guy could have also just bought a term structure of TIPS. A one year TIP, a two year TIP, a three year TIP, etc etc. Problem solved again, lock in your real return.

[acptulsa]

The Federal Reserve makes bank accounts unsafe by ensuring inflation outstrips normal interest rates, the SEC is promoted as something that makes investment safe, and the sheep get sheared.

[sailingaway]

There are wonderful things called annuities. If he bought one before the crash, problem solved.

Yeah, because the bank, not you, would have been bailed out. That was not a logical connection to make, pre crash.

[sailingaway]

The guy could have also just bought a term structure of TIPS. A one year TIP, a two year TIP, a three year TIP, etc etc. Problem solved again, lock in your real return.

20/20 hindsight is perfect and the Fed should not be pricefixing interest rates.

[Travlyr]

There are wonderful things called annuities. If he bought one before the crash, problem solved.

Coulda, shoulda, woulda.

Honest money doesn't crash.

This is the fate of fixed income earners who bought into the lies told by the 'authorities.' Didn't Mises and Rothbard predict this scenario?

Honest sound money = problem solved for future generations.

[ababba]

Continued fallacy that free market interest rates are somehow less volatile than interest rates set by the FED without any theoretical or empirical backing for this reasoning.

[hillbilly123069]

Check out the new release 'Inside Job,' narrated by Matt Damon. The investigation that was never published.

[dannno]

Continued fallacy that free market interest rates are somehow less volatile than interest rates set by the FED without any theoretical or empirical backing for this reasoning.

Who said anything about being less volatile? Nobody. That is a point irrelevant to the topic, and secondly we've never had a free monetary market. We had a gold standard before the Fed, and that isn't a free monetary market. You are making assumptions.

The point is that the interest rates are real. Do you know what artificial interest rates do to an economy? Consider this a quiz question. Hint: This is the first thing ANY Austrian Economist will teach you.

[ababba]

Who said anything about being less volatile? Nobody. That is a point irrelevant to the topic, and secondly we've never had a free monetary market. We had a gold standard before the Fed, and that isn't a free monetary market. You are making assumptions.

The point is that the interest rates are real. Do you know what artificial interest rates do to an economy? Consider this a quiz question. Hint: This is the first thing ANY Austrian Economist will teach you.

For an investor who is trying to earn an income with a fixed quantity of nominal dollars, the volatility of short term interest rates determines the volatility of their nominal income.

I think its wrong to think about interest rates set by the FED as artificial in a traditional sense. There are potentially a range of interest rate and output combinations that are consistent with a market equilibrium. As interest rates increase, output tends to fall in the short run because of reduced investment. To raise the interest rate, the FED contracts the money supply. The higher real interest rates and lower output are consistent with the money market because the decline in real money demand consistent with a decline in the money supply. Therefore, all markets are in equilibrium.

[sailingaway]

The fed fixes interest rates. Otherwise when capital is in short supply, interest rates would go up and those with capital would make more. That the fed fixes interest rates, at its own whim, on a range of different numbers isn't the same thing as a market interest rate, at all.

[ababba]

Honest money doesn't crash.
.

60% decrease in the real price of gold from 1980-1985

[dannno]

For an investor who is trying to earn an income with a fixed quantity of nominal dollars, the volatility of short term interest rates determines the volatility of their nominal income.

I think its wrong to think about interest rates set by the FED as artificial in a traditional sense. There are potentially a range of interest rate and output combinations that are consistent with a market equilibrium. As interest rates increase, output tends to fall in the short run because of reduced investment. To raise the interest rate, the FED contracts the money supply. The higher real interest rates and lower output are consistent with the money market because the decline in real money demand consistent with a decline in the money supply. Therefore, all markets are in equilibrium.

Do you even realize that everybody here thinks that explanation is completely bunk?

Have you studied Austrian Economics? The entire point of the school of thought is to completely destroy exactly what you just said. I studied plenty of macro economics in college, you don't need to give me a lesson in "market equilibrium" from changing interest rates. What you need to do is study how artificially low interest rates create mal-investment, and create bubbles, which we have seen time and time again, and how those bubbles hurt the poor and those on fixed incomes the most, just like in the OP.

[ababba]

The fed fixes interest rates. Otherwise when capital is in short supply, interest rates would go up and those with capital would make more. That the fed fixes interest rates, at its own whim, on a range of different numbers isn't the same thing as a market interest rate, at all.

If the market for loanable funds was not in equilibrium, there would be excess supply or demand. This would be people that want to save at a given interest rate, but cannot save or people who want to make investments at the market interest rate but can't invest.

Instead what we see is market clearing despite changes in the interest rate. This is because we have to think about equilibrium in both the goods market and the money market.

[sailingaway]

60% decrease in the real price of gold from 1980-1985

That is because there was a bubble when people fled fiat currency after Nixon left the gold standard until it temporarily leveled. It was an aberration. However, if you look at the trend of 'real price' not v. fiat money which bounces all over the place, it is pretty steady. Doesn't have to be gold, has to be something of inherent value, though.

[ababba]

Do you even realize that everybody here thinks that explanation is completely bunk?

Have you studied Austrian Economics? The entire point of the school of thought is to completely destroy exactly what you just said. I studied plenty of macro economics in college, you don't need to give me a lesson in "market equilibrium" from changing interest rates. What you need to do is study how artificially low interest rates create mal-investment, and create bubbles, which we have seen time and time again, and how those bubbles hurt the poor and those on fixed incomes the most, just like in the OP.

The point I was trying to make is that the interest rates aren't artificial in the sense that they don't clear markets. In the case of rent control, the price is not a market equilibrium, there is excess supply and demand. There is no excess supply and demand at these FED set interest rates.

In other words, the interest rate changes investment, but this is not mal-investment.

[dannno]

60% decrease in the real price of gold from 1980-1985

Thanks for the thoughtful analysis regarding why that occurred.

[dannno]

In other words, the interest rate changes investment, but this is not mal-investment.

Right, so when the interest rates were artificially lowered in the late 90s, we didn't see investors taking out huge amounts of loans in order to invest in .com companies because it was so cheap to take out those loans, and this didn't lead to too much investment in .com companies :rolleyes: When they decided to lower rates even further to supposedly protect against the .com crash from hurting the economy even worse, people didn't go out and buy up a bunch of houses that they couldn't afford because the short term interest rates were so low? How much have you really studied and thought about this?

Please study Austrian Economics.. it's actually really basic, I promise, and it makes a lot more sense than the crap you are regurgitating.. shit like rent control.. are you kidding me? Do you really think that we as a society should be telling property owners how much they are allowed to charge to use their service? If they are making so much profit that they are screwing over their tenants, then somebody else should go into the same business and lower the price a little. If they aren't making too much profit and people simply can't afford the housing, then how is that fair to the property owner?

[Travlyr]

60% decrease in the real price of gold from 1980-1985

Yep... vs. the green paper FRNs... but today the gold is worth $1450 FRN's which are simply electronic data entries stored in banker's computers. BTW, do they keep their computers in the vault at night?

What does tomorrow bring? Who knows? I hope it is real whatever it is.

Maybe I can store my own electronic data on my own computer and use real money for transactions?

[nobody's_hero]

How do you have "excess" supply or demand? What is meant by "excess"?

Let me rephrase: Who gets to decide what is "excess"? The Fed? They appear to have no understanding of the law of supply v. demand at all.

[ababba]

How do you have "excess" supply or demand? What is meant by "excess"?

Let me rephrase: Who gets to decide what is "excess"? The Fed? They appear to have no understanding of the law of supply v. demand at all.

So you can think about it in the rent controlled apartment case. A lot of people would like to rent the cheap rent controlled apartments but they are not legally able to. There is excess demand for apartments at the low prices.

We don't see this in markets for capital goods by firms. The markets clear, there is no legal mechanism for capital rationing.

[ababba]

Right, so when the interest rates were artificially lowered in the late 90s, we didn't see investors taking out huge amounts of loans in order to invest in .com companies because it was so cheap to take out those loans, and this didn't lead to too much investment in .com companies :rolleyes: When they decided to lower rates even further to supposedly protect against the .com crash from hurting the economy even worse, people didn't go out and buy up a bunch of houses that they couldn't afford because the short term interest rates were so low? How much have you really studied and thought about this?



Honestly, I really think most of this is the result of people's expectations of future earnings on dot.com companies or future house price appreciation being too high.

The dot.com bubble was almost completely equity financed, these firms had virtually no debt, so using interest rates as an explanation for high stock prices is a non-sequitur.

In the case of housing prices, you can explicitly calculate the increase in price that happens because of lower long term real interest rates, and its generally small compared to the size of the housing boom. Most people stupidly thought that housing prices would continue to rapidly increase in the future and this justified high prices today.

The nice thing about the plausibility of interest rate explanations is that one can evaluate them by doing simple present value calculations, and they are inadequate.

[dannno]

Honestly, I really think most of this is the result of people's expectations of future earnings on dot.com companies or future house price appreciation being too high.

Do you understand the "bidding up" process in economics? Oh, shit, wait a minute, I just realized you are not going to understand this concept based on your following statement:



The dot.com bubble was almost completely equity financed, these firms had virtually no debt, so using interest rates as an explanation for high stock prices is a non-sequitur.

Did you not read my post????? I said, CORRECTLY, that INVESTORS were taking out loans to invest in the EQUITY of .com companies.. How old are you? Were you around during the .com bubble? Do you know what a margin call is? Half of my friends' PARENTS were getting margin calls when the bust started going down.. This created a huge cascading effect because they not only had to pull out their investment, but the DEBT that was financing their investment in the .com companies! You seem to be reasonably intelligent regarding mainstream economics, but the fact that you can't connect low interest rates to increase in stock purchases on margin is a bit disconcerting...





In the case of housing prices, you can explicitly calculate the increase in price that happens because of lower long term real interest rates, and its generally small compared to the size of the housing boom. Most people stupidly thought that housing prices would continue to rapidly increase in the future and this justified high prices today.

The nice thing about the plausibility of interest rate explanations is that one can evaluate them by doing simple present value calculations, and they are inadequate.

No, you are wrong, those numbers you are referring to are calculated incorrectly. PV calculations are not going to tell you how the interest rate affects the prices because of the bidding up and cascading effects I referred to earlier..

Example: Your neighbor buys a house for $500k and they pay $3k/month in mortgage. When interest rates are lowered, somebody buys your neighbor's house for $550k because they can pay the same $3k/month in mortgage, and your neighbor takes the profit on the house, puts down a bigger down payment in a nicer neighborhood and ends up with the same $3k/month mortgage. You decide that is a good idea, there are more buyers out there who can afford your house so you put your house up for sale at a higher price, and go out and buy an even nicer house. All these low interest rates cause price bidding to increase, and this causes people to think, incorrectly, that the VALUE of real estate is increasing, and that buying a house is a good investment!! Since prices are going up 10%/year, and interest rates are only 5%, people keep going out and buying houses as an investment. The price of housing keeps going up and up and up, and it was ALL triggered by interest rates and had nothing to do with the actual value of the houses going up.

Please, PLEASE study Austrian Economics, this is really simple stuff.

[surf]

The guy could have also just bought a term structure of TIPS. A one year TIP, a two year TIP, a three year TIP, etc etc. Problem solved again, lock in your real return.


2003, 1.27
2004, 1.04
2005, 1.50
2006, 2.28
2007, 2.15
2008, 1.30
2009, 1.06
2010, 0.26

5 year TIPS... http://www.federalreserve.gov/releases/h15/data/Annual/H15_TCMII_Y5.txt

is this the "real return" you think would have solved this guy's problems? TIPS are crap because you're relying on the gov'ts measure of inflation.

[ababba]

Do you understand the "bidding up" process in economics? Oh, shit, wait a minute, I just realized you are not going to understand this concept based on your following statement:



Did you not read my post????? I said, CORRECTLY, that INVESTORS were taking out loans to invest in the EQUITY of .com companies.. How old are you? Were you around during the .com bubble? Do you know what a margin call is? Half of my friends' PARENTS were getting margin calls when the bust started going down.. This created a huge cascading effect because they not only had to pull out their investment, but the DEBT that was financing their investment in the .com companies! You seem to be reasonably intelligent regarding mainstream economics, but the fact that you can't connect low interest rates to increase in stock purchases on margin is a bit disconcerting...





No, you are wrong, those numbers you are referring to are calculated incorrectly. PV calculations are not going to tell you how the interest rate affects the prices because of the bidding up and cascading effects I referred to earlier..

Example: Your neighbor buys a house for $500k and they pay $3k/month in mortgage. When interest rates are lowered, somebody buys your neighbor's house for $550k because they can pay the same $3k/month in mortgage, and your neighbor takes the profit on the house, puts down a bigger down payment in a nicer neighborhood and ends up with the same $3k/month mortgage. You decide that is a good idea, there are more buyers out there who can afford your house so you put your house up for sale at a higher price, and go out and buy an even nicer house. All these low interest rates cause price bidding to increase, and this causes people to think, incorrectly, that the VALUE of real estate is increasing, and that buying a house is a good investment!! Since prices are going up 10%/year, and interest rates are only 5%, people keep going out and buying houses as an investment. The price of housing keeps going up and up and up, and it was ALL triggered by interest rates and had nothing to do with the actual value of the houses going up.

Please, PLEASE study Austrian Economics, this is really simple stuff.

OK, so instead of just using anecdotes, we can recognize that almost all investors in the dotcom boom were small individual investors that weren't buying on margin and that margin loans were a tiny fraction of the stock market.

Beyond that, all you seem to be saying is that people are incapable of forecasting the future in anything close to a rational manner. This may be entirely true, but I find it hard to be used as an argument against government intervention in the economy.

[LibertyEagle]

Guys.... deep breath. Ok, maybe go take 5 or 6. lol.

Use this to hone your debating skills. :)

[dannno]

OK, so instead of just using anecdotes, we can recognize that almost all investors in the dotcom boom were small individual investors that weren't buying on margin and that margin loans were a tiny fraction of the stock market.

No, because that is wrong. A lot of small investors were buying on margin. It was all over the papers, everybody was talking about margin calls constantly, this is not anecdotal. How old are you? Were you even around? Buying on margin, even if it is only a percentage artificially drives up the price of stocks, making people think it is a positive return on value rather than just some credit being shoved into the price. This makes the future value seem more attractive than it actually would, driving the price up even further, increasing the return and making margin buys more attractive.



Beyond that, all you seem to be saying is that people are incapable of forecasting the future in anything close to a rational manner. This may be entirely true, but I find it hard to be used as an argument against government intervention in the economy.

They can't forecast the future in a rational manner when interest rates are being manipulated, as this causes a bidding up process that is unrelated to the true future value of the firm and only related to the credit expansion being funneled into a particular sector, which later causes a cascading effect, or a market crash as the debt bubble is destroyed.

[ababba]

No, because that is wrong. A lot of small investors were buying on margin. It was all over the papers, everybody was talking about margin calls constantly, this is not anecdotal. How old are you? Were you even around? Buying on margin, even if it is only a percentage artificially drives up the price of stocks, making people think it is a positive return on value rather than just some credit being shoved into the price. This makes the future value seem more attractive than it actually would, driving the price up even further, increasing the return and making margin buys more attractive.



They can't forecast the future in a rational manner when interest rates are being manipulated, as this causes a bidding up process that is unrelated to the true future value of the firm and only related to the credit expansion being funneled into a particular sector, which later causes a cascading effect, or a market crash as the debt bubble is destroyed.

I tried to do a quick search for data on this and one example I found was this article http://www.ritholtz.com/blog/2006/04/margin-loans-make-a-comeback/ which says that margin lending was around 2% of market cap at the height of the dot-com boom.

Why can't people forecast the future with manipulated interest rates? For a stock I can say what its expected cash flows are, I can think about what risk premia will be and I can think about the future path of interest rates (regardless of the policy regime I can make a forecast).

The people in your model don't make these kind of forecasts. They just see a price rise and buy a bigger house. If they were rational they would understand that present value logic implies an increase in current price with no change in future cash flow implies lower expected returns in the future.

[acptulsa]

The people in your model don't make these kind of forecasts. They just see a price rise and buy a bigger house. If they were rational they would understand that present value logic implies an increase in current price with no change in future cash flow implies lower expected returns in the future.

So, they can't invest, they have nothing to save because it will shrink in value in the mattress, and pms are volatile. What have they got?

[dannno]

I tried to do a quick search for data on this and one example I found was this article http://www.ritholtz.com/blog/2006/04/margin-loans-make-a-comeback/ which says that margin lending was around 2% of market cap at the height of the dot-com boom.


That info came from a single brokerage firm (Schwabb), and it is still well more than double what it was when the article was written. Do you remember how big day trading was back then? All those folks traded on margin.


Such borrowings, often known as margin loans, were used
extensively in the dot-com era by investors seeking to bulk up their portfolios
with additional securities, but they fell from favor after the market crash.

Do you understand the bidding up process? I've tried to explain it over and over.. when margin is used to artificially bid up the price of a stock, it makes the stock seem more attractive.. it will attract more bids in general, and with artificially low rates, more margin bids, which keeps building and building upon itself. You can't say that the price of stocks only increased 2% just because that's how much margin was used.

http://www.themoneytimes.com/featured/20101120/margin-debt-investors-partying-it039s-1999-id-10142310.html

Even Greenspan was freaking out over margin loans.





Why can't people forecast the future with manipulated interest rates? For a stock I can say what its expected cash flows are, I can think about what risk premia will be and I can think about the future path of interest rates (regardless of the policy regime I can make a forecast).

The people in your model don't make these kind of forecasts. They just see a price rise and buy a bigger house. If they were rational they would understand that present value logic implies an increase in current price with no change in future cash flow implies lower expected returns in the future.

People often see % historical return and don't consider the true value of the investment. As mentioned in the article above, stocks were trading at nearly 30 times earnings during the .com bubble, but only 16 times today. When the % historical return is artificially increased using low interest rates, then people make bad decisions. The % historical return is not going to artificially increase without artificially low interest rates in the first place, and so people would be looking at the future value of the investment rather than becoming enchanted merely with the high rate of historical % return.

[ababba]

That info came from a single brokerage firm (Schwabb), and it is still well more than double what it was when the article was written. Do you remember how big day trading was back then? All those folks traded on margin.



Do you understand the bidding up process? I've tried to explain it over and over.. when margin is used to artificially bid up the price of a stock, it makes the stock seem more attractive.. it will attract more bids in general, and with artificially low rates, more margin bids, which keeps building and building upon itself. You can't say that the price of stocks only increased 2% just because that's how much margin was used.

http://www.themoneytimes.com/featured/20101120/margin-debt-investors-partying-it039s-1999-id-10142310.html

Even Greenspan was freaking out over margin loans.





People often see % historical return and don't consider the true value of the investment. As mentioned in the article above, stocks were trading at nearly 30 times earnings during the .com bubble, but only 16 times today. When the % historical return is artificially increased using low interest rates, then people make bad decisions. The % historical return is not going to artificially increase without artificially low interest rates in the first place, and so people would be looking at the future value of the investment rather than becoming enchanted merely with the high rate of historical % return.

Its hard to see how margin on the order of 2% of the stock market has a huge impact on market prices. I figured that single brokerage would involve people more likely to use margin than the average investor. And I'm not trying to make a quantitative claim about the impact of margin on prices. Many models would say that margin shouldn't impact prices at all, especially over longer horizons. I was just saying that you would need margin debt to be a large fraction of the stock market before it could potentially cause a big bubble.

OK, these are all interesting ideas for irrational models of how assets are priced but they are ridiculously absurdly far from the way assets would be priced if people were anywhere close to rational. Its hard to see why the market allocates recourses well in your world where people are idiots that can't forecast the future.

[lester1/2jr]

I htink TIPS go by the official inflation numbers which don't count like oil and other stuff.

[dannno]

Its hard to see how margin on the order of 2% of the stock market has a huge impact on market prices. I figured that single brokerage would involve people more likely to use margin than the average investor. And I'm not trying to make a quantitative claim about the impact of margin on prices. Many models would say that margin shouldn't impact prices at all, especially over longer horizons. I was just saying that you would need margin debt to be a large fraction of the stock market before it could potentially cause a big bubble.

OK, these are all interesting ideas for irrational models of how assets are priced but they are ridiculously absurdly far from the way assets would be priced if people were anywhere close to rational. Its hard to see why the market allocates recourses well in your world where people are idiots that can't forecast the future.

It has nothing to do with people being idiots, it has to do with the value being thrown off due to their expectations on the investment being thrown out of whack due to low interest rates.

It doesn't take a large percentage of the market on margin to drive up the price A LOT... It's all about the bidding process, I discussed this earlier with home buying. When one person buys based on speculation, due to increased margin buying in the market, it will cause other people to buy in as well. Excess margin is like the butterfly flapping it's wings that creates a hurricane.

I hate to use Barney Frank as a source for anything, but even he said that Greenspan should have increase margin requirements to slow down the dot com bubble... http://www.pbs.org/wgbh/pages/frontline/meltdown/themes/greenspan.html

What he doesn't realize is that by lowering interest rates, that was essentially lowering margin requirements to begin with..

[ababba]

It has nothing to do with people being idiots, it has to do with the value being thrown off due to their expectations on the investment being thrown out of whack due to low interest rates.

It doesn't take a large percentage of the market on margin to drive up the price A LOT... It's all about the bidding process, I discussed this earlier with home buying. When one person buys based on speculation, due to increased margin buying in the market, it will cause other people to buy in as well. Excess margin is like the butterfly flapping it's wings that creates a hurricane.

I hate to use Barney Frank as a source for anything, but even he said that Greenspan should have increase margin requirements to slow down the dot com bubble... http://www.pbs.org/wgbh/pages/frontline/meltdown/themes/greenspan.html

What he doesn't realize is that by lowering interest rates, that was essentially lowering margin requirements to begin with..

If someone was rational, the price of any investment is the discounted value of future expected cash flows. This obviously depends on interest rates but interest rates alone can't explain the enormous fluctuations in asset values.

Your bidding up process is a reason why the price may deviate from the discounted value of future expected cash flows, using a reasonable discount rate. It is irrational and we know this because it is not the result of changes in rational forecasts of cash flows, interest rates or risk premia.

The ability to forecast interest rates, to have an expectation of the path of future interest rates, has nothing to do with how interest rates are set, as long as you have some basic understanding of how interest rates are set.

[dannno]

If someone was rational, the price of any investment is the discounted value of future expected cash flows. This obviously depends on interest rates but interest rates alone can't explain the enormous fluctuations in asset values.

Your bidding up process is a reason why the price may deviate from the discounted value of future expected cash flows, using a reasonable discount rate. It is irrational and we know this because it is not the result of changes in rational forecasts of cash flows, interest rates or risk premia.

The ability to forecast interest rates, to have an expectation of the path of future interest rates, has nothing to do with how interest rates are set, as long as you have some basic understanding of how interest rates are set.

Did you include venture capital in your debt numbers??

http://www.politonomist.com/history-of-economic-recessions-00273/6/



“A combination of rapidly increasing stock prices, individual speculation in stocks, and widely available venture capital created an exuberant environment in which many of these businesses dismissed standard business models, focusing on increasing market share at the expense of the bottom line.” says Wikipedia, rather elegantly on the subject.

Many companies during this period were rated based on their churn rate; that is, how fast they were spending through their venture capital. Since few companies had reached profitability, or ever would reach profitability, they were dependent on the results of their IPOs and venture availability to keep afloat, and the rate at which they spent that money would determine how long they’d survive.


When I read that shit, all my brain sees is "BLEEEPP BLEEEEPP ARTIFICIALLY LOW INTEREST RATES BLEEEEP BLEEEP"

It goes off like a fucking alarm. If you can't see it, then I'm not sure what business you have in investing.

Also, just because only 2% of the market was on margin, I'll bet 90% of that margin was in the dot com and technology sector.

[ababba]

Did you include venture capital in your debt numbers??

http://www.politonomist.com/history-of-economic-recessions-00273/6/





When I read that shit, all my brain sees is "BLEEEPP BLEEEEPP ARTIFICIALLY LOW INTEREST RATES BLEEEEP BLEEEP"

It goes off like a fucking alarm. If you can't see it, then I'm not sure what business you have in investing.

Also, just because only 2% of the market was on margin, I'll bet 90% of that margin was in the dot com and technology sector.

Venture capital is equity not debt.

This reads to me like people ditched the present value model, which is exactly what I have been talking about. How do companies ditching the NPV model have anything to do with interest rates, which are part of the NPV model. I don't even see anything talking about interest rates in that.

The technology sector was a reasonably large fraction of the market capitalization at the height of the boom. And I agree with you that a disproportionate share of the borrowing was for tech stocks.

[Anti Federalist]

Coulda, shoulda, woulda.

Honest money doesn't crash.

This is the fate of fixed income earners who bought into the lies told by the 'authorities.' Didn't Mises and Rothbard predict this scenario?

Honest sound money = problem solved for future generations.

Boy, that ^^^

If this poor fellow had exchanged his cash savings and taken physical possession of gold in 2001 at around $300 bucks an ounce, he would be doing just fine now.

[lester1/2jr]

if they were all bankers they'd be doing well. why made them choose to be old and not congitive of all this wall street malarkey?

[tangent4ronpaul]

if they were all bankers they'd be doing well. why made them choose to be old and not congitive of all this wall street malarkey?

It's like the law - no lawyer knows it all, but ignorance of it is no excuse

[Travlyr]

Boy, that ^^^

If this poor fellow had exchanged his cash savings and taken physical possession of gold in 2001 at around $300 bucks an ounce, he would be doing just fine now.

That's right, AF. ;)

And if they take their FRN's and exchange them for real money now, even as expensive as real money is today, I believe they'll look back on 2011 & be glad they did.