The Only Way is UP!

cells

Generali wrote: »

Is inflation going to stay very low forever? What about when there's a big war in the Middle East and oil prices spike? Is that a ridiculous idea or an accident waiting to happen?

oil has become a much smaller part of advanced economies. For the UK both because we use less than say 1970 and because the economy is a lot bigger. UK uses ~23% less oil while GDP went from ~£660B to now ~£1,800B (inflation adjusted) which means oil is now about 70% less of the economy than it was in 1970

Or another way to think about it is that $50 oil is now only 1.11% of the UK economy. Also the UK produces almost 2/3rds of the oil it needs

Even big oil users USA is below 2% of its economy as oil.

Then there's the huge amount of money printing that's been done. Surely there's at least a risk that at some point that will cause some inflation.

why would a normal bank expanding its balance sheet and the central bank expanding its balance sheet not have the same impact?

Then there's simply the huge distortions that are happening as a result of NZIRP or even ZIRP, per my original post.

Interest rates should not be artificially pushed up to save German insurance companies.

It seems to me to be highly unlikely that something snapped about 5-6 years ago to move us from 400 years of positive real interest rates to permanent negative real interest rates. If we have made that move, what changed to make it happen? If the 1929-1936 Great Depression or the 1873-93 Long Depression couldn't do that, how could the GFC?

I ain't buying it.

real rates will be close to zero from now on for reasons discussed previously

Generali

cells wrote: »

real rates will be close to zero from now on for reasons discussed previously

What changed a few years ago that makes the economy fundamentally different from how it's always been?

If interest rates are going to be zero or negative then any company that is likely to have a positive return to shareholders should have a share price of about infinity. That's ludicrous.

I do wonder how bad the debt problem is, is it widespread or concentrated into a few hands. Why would German insurance companies be expected to bail out people that took too many holidays or made bad, debt back investment decisions?

michaels

Generali wrote: »

What changed a few years ago that makes the economy fundamentally different from how it's always been?

If interest rates are going to be zero or negative then any company that is likely to have a positive return to shareholders should have a share price of about infinity. That's ludicrous.

I do wonder how bad the debt problem is, is it widespread or concentrated into a few hands. Why would German insurance companies be expected to bail out people that took too many holidays or made bad, debt back investment decisions?

So you can't think of a single country that had a collapsed credit boom and then 25 years and counting of zirp?

Generali

michaels wrote: »

So you can't think of a single country that had a collapsed credit boom and then 25 years and counting of zirp?

Only one and due to deflation they still have had positive real interest rates for mostof the period.

DiggerUK

Fantasy stories, of banks considering the purchase of vaults to store cash, aren't just swallowed by Zerohedgers it seems. In case nobody has noticed, most bank balances are held in computers, not fiat.
Even if they start buying gold in quantity, they will just pay storage to the vault it is currently in.

The problem for states is how they pay down their borrowings. If they can't get inflation moving, then they face serious problems in time, but that is over the horizon for now.

Bill Gross is just 8itching because he isn't making much money out of bonds now, best ignored.

Inflation wasn't invented, it arose as an unintended consequence. It has been found that by altering interest rates it could then be turned to a states advantage, but now inflation is proving difficult to control.
Imminent rate rises! Back to normality! Stoopid is as stoopid duz..._

cells

Generali wrote: »

What changed a few years ago that makes the economy fundamentally different from how it's always been?

If interest rates are going to be zero or negative then any company that is likely to have a positive return to shareholders should have a share price of about infinity. That's ludicrous.

I do wonder how bad the debt problem is, is it widespread or concentrated into a few hands. Why would German insurance companies be expected to bail out people that took too many holidays or made bad, debt back investment decisions?

Why would a finite life company with a positive return have an infinite value? You need to think of it as a bond does a 30 year bind with a zero coupon have a infinite value? No.

There is no debt problem.

The economy moves and fairly rapidly from after the war. What was normal when the heights of medicine was blood letting and leaches isn't really comparable today. So looking at positive rates for 500 years and concluding its 'normal' is silly. Why not look at say the computer age from 1990 onwards there was a continuous fall in returns it wasn't just one change in 2008. As you know markets tend not to be perfectly smooth. Better to draw an average from 1990 to now

Real rates of return will be zero for debt from now on. It will take the skeptics another 15 years before they accept

Generali

cells wrote: »

Why would a finite life company with a positive return have an infinite value? You need to think of it as a bond does a 30 year bind with a zero coupon have a infinite value? No.

There is no debt problem.

The economy moves and fairly rapidly from after the war. What was normal when the heights of medicine was blood letting and leaches isn't really comparable today. So looking at positive rates for 500 years and concluding its 'normal' is silly. Why not look at say the computer age from 1990 onwards there was a continuous fall in returns it wasn't just one change in 2008. As you know markets tend not to be perfectly smooth. Better to draw an average from 1990 to now

Real rates of return will be zero for debt from now on. It will take the skeptics another 15 years before they accept

So what changed? Real interest rates haven't been zero for centuries so why would they be now?

DiggerUK

Generali wrote: »

.........Real interest rates haven't been zero for centuries so why would they be now?

We haven't had central bank, let alone central government, interest rates for centuries.
We've also moved from a feudalist to an imperialist world. That's what's changed..._

cells

Generali wrote: »

So what changed? Real interest rates haven't been zero for centuries so why would they be now?

surely the real rate of return have been zero or negative for a lot longer than they have been positive. didn't the Christians Jews and Muslims not take too kindly to usury?

Going further back, humans would have had negative interest rates for thousands of years. They would have lent each other on a comparable basis ie I will give you 10 sheep this year but I want 10 sheep back next year in real terms thats going to be a loss especially as the chance of default and risk is not nil. Going even further back the animal kingdom had had negative real rates of return for millions of years. A squirrel buries its nuts and has a negative rate of return

anyway I think looking back before the digital age is pointless. rates of return have been falling constantly since the 1990s it wasnt one thing one day in 2008

as as we discussed before you can not have a real rate of return much above zero for long periods of time which itself tells you real rates need to go towards zero

cells

Generali wrote: »

What changed a few years ago that makes the economy fundamentally different from how it's always been?

So many things, but the most recent change has been the internet the digital age so lets go with that (globalization and world trade and investment booming was about the same time so maybe put both in the same basket)

If interest rates are going to be zero or negative then any company that is likely to have a positive return to shareholders should have a share price of about infinity. That's ludicrous.

Companies have finite lives. If interest rates were zero a company returning £1 billion a year with an expected life of 30 years will be worth £30 billion minus some percentage for further risk.

I do wonder how bad the debt problem is,

It isnt bad at all

---

Anyway we have had this discussion before and you dont seem to want to know. You can not have a positive real rate of return in a system with a long life expectancy.

Go back to your 5% real return. If say country A (eg China) lends country B (eg UK) £1 billion at a real return of 5% a year for 200 years what happens? Well it becomes a real debt of over £17,000 billion which is about 10 x GDP

On the other hand look at the current gilt rate of 1.2% while inflation is about 0.3%. Lets just say 1% real return to give it a round number. 1% return over 200 years takes the £1 billion debt to £7 billion. Still a lot more than the original debt but within the bounds of possible to pay and service unlike the impossible 5% real return £1 billion going to £17 trillion.