If I'm remembering long-ago reading on the topic, 5% is near the point at which interest service on debts exceeds all government revenue (once enough of bonds have turned over at this interest rate to actually be the effective rate being paid out on the population of 10-year T-bills.)
What is the way to interpret this situation as other than a 10 year countdown to chaos? Hope that we reign in spending in a drastic, unprecedented way (without impacting revenue as well...)? From where I'm sitting, once the debt service exceeds revenue, we'll have to get in a big war, destabilize domestic affairs with tax hikes (which are unlikely to work, based on Laffer curve), or cease to pretend that the US currency is a stable trading platform. I guess the third option seems alright for the rest of the world, except no one else's seems to be particularly appealing.
I'm not informed enough on the topic to speak anything near authoritatively but there was an essay posted here ~6(?) months ago that spoke about how >2-3% inflation effectively serves as a means of effectively reducing government debt.
I would imagine your 5% number has to assume some baseline of inflation and that 5% would increase as inflation increases beyond said baseline.
It's true, you can gradually default on the government's obligations by changing their denomination to make the underlying promises worthless. That's consistent with my third hypothesized path.
I don't see any way that inflation jumps gently in that case. I'm suspecting we wouldn't jump straight to hyperinflation, but annual inflation 30-50% would be my guess for the first couple years that 0% of government services were covered by revenue.
>From where I'm sitting, once the debt service exceeds revenue, we'll have to get in a big war, destabilize domestic affairs with tax hikes (which are unlikely to work, based on Laffer curve), or cease to pretend that the US currency is a stable trading platform. I guess the third option seems alright for the rest of the world, except no one else's seems to be particularly appealing.
...or we just change the price of a dollar. It's good to be the king.
The King scared away its biggest buyers with the sanctions on Russia. China is dumping its dollars. Other non-western countries like India have been slow to add to their reserves after the Russia sanctions as well.
Far from being an expert but from my understanding China’s economy is in a fairly difficult situation at the moment. They are selling because they urgently need lot of cash, not because they are afraid of USD value.
You have to look at the alternatives. There is only one earth and there only a few countries on it with stable enough monetary policy to invest in "risk free". The US tops that list by a massive margin, even given all of our other issues. Can you name a single safer investment today than US Treasuries? And do you think that any other country on earth is able to maintain the stability that we can into the future?
I like to think a primary goal of empire should be to burn out as slowly as possible, and citizens of an empire should work toward that outcome.
Having said all that, no, I believe that the US will be the most stable large state for my entire lifetime. Just the same, I would like my children to live in a US and world that is as stable as the one my parents have had.
Considering that other nations with similar growth rates have much higher taxes, I'd say the evidence is that our current tax rates amount to a giveaway for the rich. Of course, they also happen to be the ones with real political power (see Grover Norquist), so nothing is likely to change any time soon.
Considering that other nations with similar growth rates have implemented VAT, I'd say the evidence is current American tax rates don't amount to a giveaway to the rich. Rather the opposite in fact.
I'll point out what I believe the other commenter was alluding to.
1.Consumption taxes are generally considered regressive because poorer people end up consuming a greater proportion of their incomes and thus paying taxes again on more of their earnings.
2.People who talk about a 'giveaway to the rich' or who advocate for 'tax the rich' generally mean to draw a distinction and say that the rich need to pay an even higher proportion of taxes than the do at the moment. 'The rich' is seldom (I believe never) meant as metonymy.
3. Advocating for consumption taxes is thus advocating against taxing the rich more, and vice versa.
Since roughly WW2, it seems like exemptions have steadily fallen and marginal rates with them, but generally you get consistent revenue as a percentage of GDP. I'm inclined to believe, based on that, the we are near the cultural maximum for the Laffer curve for the US, given present incentives. It's possible you could chase it higher if you disassembled all social programs so that people would fear more for their livelihoods, I guess.
*I'm not going to take the time to source this post, so you can disavow it if you like, but feel free to search for yourself.
> Hope that we reign in spending in a drastic, unprecedented way (without impacting revenue as well...)?
American politicians, deliberately or out of incompetence, use the crisis of the moment and conveniently forego this topic.
I’m convinced the next US administration HAS to do something about this. I don’t see a way that doesn’t involve both spending cuts and raising taxes.
I don’t like discussing politics on HN, but I think this should be deeply concerning for anyone interested in start ups, technology, or innovation. All of our innovation is enabled by having a somewhat functioning democracy, courts, cops, civic culture, where people have the opportunity to critically think about hard problems and innovate, because they’re not worried so much about near term survival.
> enabled by having a somewhat functioning democracy, courts, cops, civic culture
Grab the popcorn for ten years until US divorces. States don't get along anymore, and Feds are out of control.
Democracy - when do I get to vote on the current two war fronts?
Courts - long history of corruption, particularly against minorities. No lawyer in local courts and you lose. Feds have ridiculous rate of plea bargains.
Cops - and govts have broad immunity against lawsuits to hold them accountable. Defund the FBI was relevant for the last five decades, and they keep spying on Americans because we allow it.
> What is the way to interpret this situation as other than a 10 year countdown to chaos?
Officials sadly have realized that they have a solution to everything: inflation.
What is really hilarious is that it's officially to "combat inflation" but their only way out is inflation because they're never ever repaying that debt.
> cease to pretend that the US currency is a stable trading platform
It is toilet paper. But so is the EUR / JPY / etc.
Everyone has an opinion on the optimal part of the Laffer curve.
Evidence may even exist for some of these claims, but we've all got an obvious clear incentive to want lower taxes today while downplaying the long-term risks of the government failing to invest in the future, so I tend to assume we can sustain higher taxes more easily than the loudest voices[0] tell me.
[0] Unless those voices are literally, non-pejoratively, Communists; but even then that's not because they're wrong about the Laffer curve itself, but that the people still promoting Communism today tend to also gloss over all the other mistakes made by the historical examples thereof…
Aside from the fact that the Laffer curve has never been proven accurate in the U.S. based on actual empirical data, it can be proven trivially false, because it implies the closer your tax rate gets to 0 the more tax receipts you will have. So you’re gonna get far more tax receipts at a 0.0001% interest rate than at a 10% interest rate, which would require a GDP at 0.0001% which would be beyond any actual possibility.
Eh? My understanding wasn't that the tax receipts increase as you get closer to a tax rate of zero. Wasn't the point that maximum receipts happen somewhere in the middle, but obviously tax receipts are 0 when the rate is at 0% or 100% (and closer to 0 when near the extremes)?
It's a bound, non-negative function on [0,1], equal 0 at 0 and 1 and having non-zero values at least in some points on (0,1). You are saying it's never been proven that such a function will have a maximum value somewhere in (0,1) in the US? Your proof of the opposite, unfortunately, does not seem right.
The “Kansas Experiment”, built upon the Laffer Curve idea would indicate it is not worth much[0]. There is of course, lots of conservative discourse on why it failed (not extreme enough, just needed to go longer, etc)
tl;dr: stocks go down, investors less aggressive, tech job market stays dipped
US Treasury Bonds are considered the risk-free rate.
If you have $TICKER that you expect to yield 5%, you wouldn't buy it because you undertake risk to invest in a company to get 5%. You'd buy a Treasury bond instead to get 5% risk-free. As a consequence, stock prices should drop until yields + premium to take on risk exceeds the risk-free rate.
> If you have $TICKER that you expect to yield 5%, you wouldn't buy it because you undertake risk to invest in a company to get 5%.
If the expected value of the investment is 5%, that expectation incorporates the risk. There's a chance it yields -100%, there's a chance it yields 5%, there's a chance it yields 100%, etc. If your value of money is linear, you shouldn't have a preference between a(n individual) 5% investment with high variance and one with low variance. It's perfectly reasonable to prefer low variance for a given expected return, but it's also perfectly reasonable to prefer high variance; and of course a portfolio has an expected return and variance that's a non-trivial combination (due to correlated movement) of its individual investments.
Debt is continuing to become more and more expensive. Lenders are not lending to people or companies unless the interest rate is much higher than the risk-free 5% offered by the US government.
VCs are not getting funds from LPs who all would much rather invest in US government treasuries for the easy 5%.
Public stocks are often bought with margin money (which is leverage, aka debt). Now, margin money lenders are charging a higher interest rate on that margin, causing borrowers of margin money to not borrow as much. Thus, stocks are not being bid up as much, causing stock prices to drop.
Mortgage rates track the 10-year Treasury yield and thus mortgage loan rates are going higher and higher. Housing market is expected to sag, if not go into a correction or a crash.
For the average person, the only parts that are affected are:
1. If their employer is dependent on cheap money (real estate, VC tech, growth stocks) these employers will either need to innovate HARD or start laying off people under pressure from investors.
2. If you were looking to borrow money for some reason (say, a house or a car), you are looking at insane interest rates.
But all of this happens in any interest rate rise. What is interesting about this particular threshold of 5% is that the world hasn't seen US treasury rates at this level since the last great recession. Most companies, stock holders, people in general don't know how to evaluate this new world of a higher rate. Should you buy that car you desperately need? Is relocation for an RTO job even possible?
Higher interest rates, lower investment rates can have a devastating impact on people's lives.
A 5% long-term "risk free" rate is roughly equivalent to a company who makes a 'PE Ratio of 20'.
Or in other terms: a $1 Billion company should be making $0.05 Billion (or $50 Million/year) in profits to be comparable to a 10Y bond at 5%. Except... everyone accepts the fact that bonds from the US Treasury (the entity that can literally print US Dollars) is lower-risk than equity from a company. (Equity is junior: if companies go bankrupt they pay their debts first and equity secondly). So you "should" be making more money from equity than bonds/debt for it to make any amount of sense.
Companies will have to change their PE ratios to compete in theory. The easiest way to do this is to... lose valuation. You can't just control profits so easily, so instead of being a $1 Billion company making $50 Million/year, it'd be easier to turn into a $0.5 Billion company making $50 Million/year (now a PE Ratio of 10, or clearly better than Bonds)
Or so the theory of value-investing goes. Which... doesn't really work out in reality but hopefully you get the gist.
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Note that dividends are meaningless from this perspective. Profits are what matters. Companies take profits an invest into themselves, so it doesn't matter if the profits are emitted as dividends (ie: $50 Million returned to the shareholders in a dividend per year), or if the company buys a new $50 million factory each year. Either way, its "the shareholders property" and therefore equivalent.
If the company buys a $50 million factory each year, then in theory, they've grown by $50 million bucks. Ex: the $1 Billion company is now a $1.05 Billion company, and are expected to make $52 Million next year. After all, the "bondholder" could have spent their 5% coupon on buying more bonds, so to be "equivalent" to the risk-free bond strategy, the company also has to grow exponentially.
IE: Everything in the market is now encouraged to grow at 5% (or faster), just to keep up with "risk free government debt".
One effect of this is that stocks historically average about 8% a year. As this gets closer to that number you can expect money from the stock market to start pouring into bonds. Why take risk when you have a guaranteed yield? This will probably drive the market down much further than it has in 2022.
Intuitively it doesn't make sense, but companies can outlast bonds, currencies and indeed the governments that issue them. Daimler-Benz has survived the fall of 3 German governments, the loss of 2 rather large wars and a number of periods of hyper-inflation that accompanied them that'd have made any bond worthless.
We're not there yet, but people do go bankrupt gradually and then suddenly.
Yes, but taxes on capital gains are much, much lower than taxes on interest. You probably need bond yields to be about 10-12% to be tax equivalent to equities returns.
Using your 401K, you can create tax equivalency between stock and bond returns. But then that creates perverse outcome of putting shorter duration / lower risk assets in your longer duration savings account. Thanks Washington!
Fixed income with qualified dividends somewhat avoids this tax drag.
EDIT: Retracted, I'm mistaken, qualified dividends only apply to returns from a US corporation or a qualified foreign corporation. You would need to build a ladder with a holding period sufficient to realize LTCG rates from a fixed income product.
"Qualified dividends" is a term used to describe dividends received from equities. It's not a term related to fixed income unless I'm missing something.
There are things like municipal bonds that are tax exempt, but the yield is usually lower.
It will depend on whether you have other income or not (eg retired or not).
If you don’t have other income the first 45k if single or $90k if married of long term cap gains will be taxed at 0%.
In that case your effective tax rate in CA is around 12% if you’re single or only 2.7% if married, which is going to be a lot lower than any income that is taxed as ordinary income.
You are tossing together several unrelated things here, not sure why.
-federal zero L/T cap gains rate if taxable in come is low enough -- this has zero relevance to CA tax
-different thresholds depending on filing single or married-joint (previous example was for single filer)
-CA "effective" tax rate - while there is no single definition of this, it is clear that no one with an AGI of $100K has anywhere near a CA effective rate of 12%.
I meant overall tax rate for someone based in California...
You are making some case that because California doesn't treat long term capital gains differently that it doesn't make much difference if you were taxed from realizing LTCG or ordinary income in California and your overall tax burden (federal + state) would be about the same.
I'm just pointing out if you're retired, you would naturally have a much lower tax burden if you realized LTCG vs $100k in ordinary income because the federal tax rate for LTCG would be so low for someone with no other income.
> One effect of this is that stocks historically average about 8% a year.
And stocks in rising interest rates environment only average 6.4% a year, not 8%. Here's a study over 13 periods where interest rates rose in the US since 1962 to 2020:
So, indeed, many are now simply doing this: selling (or pausing their buy/DCA) stocks and taking the guaranteed yield.
I typically considered USD/EUR toilet paper but at 5.6% short term I'm now putting some of my money in short term treasuries. And I'm DCA'ing the proceed into stocks.
> This will probably drive the market down much further than it has in 2022.
I remember my family (in the EU) getting 13%+ interest rates on government bonds when I was a kid.
We're "only" at 5.6%: rates have and could again go much higher.
Another effect will be to make the 'buy house/condo in resort town and airbnb the mortgage' less attractive. That game was played when yields were paltry and mortgages cheap.
Correct me if I'm wrong... If you buy an actively managed money market fund (such as VMRXX by Vanguard) when Federal interest rates go up wouldn't the return from your VMRXX assets also go up?
In other words, if in 2033 a stick of gum is $10000, which implies there was high inflation between 2023 and 2033, which likely means Fed increased rates even more, wouldn't that cause your rate of return to go above 5% and therefore roughly maintain the value of your assets (assuming Fed keeps interest rates above inflation)?
Not because the security wasn't safe, but because they held too much of it at an unprofitable rate, and effectively illiquid because of its maturity date.
The likely reason you see banks offering high interest CDs, is because it facilitates them slowly rolling over their long term bond portfolios by attracting CD investment. Especially if they are beating the 1 yr treasury rate, they are losing money to lose less than they would rolling over their bonds.
An unfortunate thing for the banks is that CDs aren't as attractive as they were in the past because technology (ETFs, internet brokers) have made treasuries more accessible
Indeed! After I read the primary HN submission I soon found https://www.treasurydirect.gov/
where in about 10 minutes I was able to open my own personal online account so that now I can buy T-Bills from home with no service charge etc.
Over the long term, the yield will uninvert and normalize.
The problem is that we don't know if it will happen with short-term rates dropping, or if long-term rates increasing (or which combination thereof).
If short-term rates remain 5.5%+ like they are today, the yield-curve could normalize with 10Y being at 7% or higher, meaning today's 10Y at 5% would be a bad buy.
Alternatively, if short-term rates drop to 3% and thus 10Y declines to 4.5% (but still normalizes), then buying 10Y at 5% today would be a good idea and better than buying a 10Y later.
I am sceptical that this is really bad for the stock market.
Those 5% must come from somewhere.
Either from a growing economy: Good for the stock market.
Or from freshly printed money: Also good for the stock market.
The "risk free" interest rate is not really risk free. You do not get back 2023 Dollars. You get back future Dollars, which are devalued by a currently unknown factor.
Investment firms and other orgs with large amounts of money, seeking what they always seek. More money. As I understand it, banks invested heavily in bonds which give under 2% return, but because of the cheap 5% bonds, they can't even dump them to capitalize on the 5%, because nobody wants to buy the old 2%.
In most financial models, the return investors demand on risky assets like stocks depends on the opportunity cost of the risk free rate [eg 1]. As the risk free rate goes up, the return investors expect on risky assets also goes up which pushes their price down.
It's bad for the stock market because the support for equity erodes as capital rotates out of equity and into T-bills & bonds. It also drives up the interest requirements on returns on capital thats loaned out to companies therefore compressing their margins, which in turn puts pressure on their equity. With less money to spend, businesses are more strategic in their capital spend (reducing B2B product purchases).
It also should be mentioned that 5% is actually just above inflation so that yield is nominal and not actual returns. Inflation (Assuming at 3.7% going forward) that 5% is more like 1.3% real return on money.
Worth reminding though the stock market IS NOT the economy.
As bond rates increased, companies went bankrupt because they couldn't afford loans needed to sustain themselves. When the US Government is willing to pay 10%, 15%, or more on debt, that means that "normies" will have to pay 20% or 25% on mortgages or company credit.
Companies who are used to 8% debt or normal people used to 5% mortgages will suddenly find 15% mortgages or 20%+ debt impossible to manage and go bankrupt. This cascades and hampers the economy.
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Everyone complains about US Government debt while ignoring the fact that most people and companies are levered up the wazoo. You think US Government is bad? How much money is typical Silicon Valley company making, and how much is their debt load?
Will (random-unicorn) be able to survive higher interest rates? Even the fear of others going bankrupt will cause banks to hoard money for themselves (too risky to lend it out to others), especially because cash now earns 5% to 6% safely. Why lend to risky companies who'll just go bankrupt when you can lend to US Government more safely?
Either from a growing economy: Good for the stock market.
By saying the economy might not grow. Fair enough.
But you did not address my second point
Or from freshly printed money: Also good for the stock market.
Since 2008, the government has reacted to every problem by doubling, tripling, quadrupling the money supply. If we face a recession, won't it do that again? Then, the dollars you get back are worth less than the dollars you lent to the government. And assets that can't be printed - like companies - would go up in dollar value.
I don't think much can be seen from looking at a single year. The triggers for drastic money supply increases are events like the housing crisis in 2008 and covid in 2020. Events of this size come unexpected once in a decade or so.
2008 was followed by the lowest inflation in decades. In fact, CPI dropped by -0.4% in 2009 so there was even a full year of deflation. I don't think you're looking at the data of your examples very well. Record amounts of M2 increases in 2008 led to deflation. Care to explain why?
Answer: the economy is bigger than just the money printer. If the overall economy is suffering, then you can still have deflation even if the money printer is going.
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Can you point to a period after 2008 when inflation finally happened? Answer: not until 2020+, after COVID19. Well past the era of your earlier example.
And sure, COVID19 and other issues will not be fully figured out until a decade from now. Your assumptions that money printing causes inflation are very one-sided and ignores greater situations that happen in the economy. There's more to economics than just monetary supply.
The CPI is not a good way to evaluate the value of the dollar. Especially not when discussing if rate hikes impact the stock market.
And again: Look at decades, not at years. Assets are way more expensive these days than they were in 2008. The S&P 500 more than tripled. The Nasdaq 100 increased more than 7-fold.
The economy is like a large swimming pool. If an elephant jumps into one side of the pool (increase of M0), it won't lift the water level on the other side (whatever prices you look at) in a linear way immediately. It will cause complex waves. But when the dust settles, you see higher prices.
Sounds to me that CPI just destroys your argument so you want to discount it and/or ignore it.
Here's another one: 1970s were correlated with growing monetary base (M0, M2, whatever) and incredible amounts of inflation. And yet, the stock market and other assets declined.
These opinions of yours aren't really from economic data or analysis, but instead from vibes from some kind of blogger / website out there. The permabears or whatnot. I've seen opinions like yours all over the internet, but consistently they fall apart when the actual economic data is looked upon, as we are doing here. The only argument is to ignore economic data (like you're attempting to do with CPI).
I wish there could be an intelligent conversation about this. I feel like whenever I bring it up, i'm immediately mentally labeled a doomer, prepper, or Gingrich era republican, when the way I see it, this is totally apolitical and just 6th grade math.
It's clearly not sustainable to be growing the national debt at 2 or 3 trillion per year, and especially not at 5% interest rates. People bring up Japan as some sort of model that GDP/Debt can go much higher than the US is currently at, while missing that Japan is paying 0.76% on the 10-yr notes today. In many ways, Japan is lucky that their economy is so tepid and impotent because if they had caught the inflation bug like the US, they would have had to raise rates significantly.
Needless to say, debt levels at 270% of GDP with 5% rates would cause a fiscal catastrophe in Japan. Their interest payments alone would exceed all government revenue. They would have to cut 100% of government services (military, medical, pensions, administration, legislation, the courts) AND raise taxes, or issue mountains of new debt in some sort of horrible debt spiral until there was no more demand for yen bonds, at which point there would be sovereign bankruptcy I suppose? IMF bailout of Japan?
At current rates, US government debt will hit $41 trillion this time next year. It grew $604 billion in the last thirty days, and every bond sold is at 5% interest or more. It's just not something that can be done forever unless the US economy starts growing 10-15% per year, or unless rates can be pushed down to 0% indefinitely with no negative consequences.
One thing is for sure, your current tax rate you are paying is as low as it will be for the rest of your lifetime.
It's not unsustainable if that's your question. There's no mechanism that automatically turn this into some clear case of failure.
As a consequence, "what is the solution?" will get sidelined by the question of "should we even solve anything?", even though high interest rates are clearly damaging.
On the actual question of how to solve it, I don't have any answer. Both austerity and inflation come with side-effects that may or may not increase that rate even more.
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[ 3.5 ms ] story [ 180 ms ] threadWhat is the way to interpret this situation as other than a 10 year countdown to chaos? Hope that we reign in spending in a drastic, unprecedented way (without impacting revenue as well...)? From where I'm sitting, once the debt service exceeds revenue, we'll have to get in a big war, destabilize domestic affairs with tax hikes (which are unlikely to work, based on Laffer curve), or cease to pretend that the US currency is a stable trading platform. I guess the third option seems alright for the rest of the world, except no one else's seems to be particularly appealing.
I would imagine your 5% number has to assume some baseline of inflation and that 5% would increase as inflation increases beyond said baseline.
I don't see any way that inflation jumps gently in that case. I'm suspecting we wouldn't jump straight to hyperinflation, but annual inflation 30-50% would be my guess for the first couple years that 0% of government services were covered by revenue.
...or we just change the price of a dollar. It's good to be the king.
https://en.wikipedia.org/wiki/Modern_monetary_theory#Governm...
For what, though? This is a matter of China needing cash, not exchanging one investment for another.
> or cease to pretend that the US currency is a stable trading platform.
Same thing.
You have to look at the alternatives. There is only one earth and there only a few countries on it with stable enough monetary policy to invest in "risk free". The US tops that list by a massive margin, even given all of our other issues. Can you name a single safer investment today than US Treasuries? And do you think that any other country on earth is able to maintain the stability that we can into the future?
Having said all that, no, I believe that the US will be the most stable large state for my entire lifetime. Just the same, I would like my children to live in a US and world that is as stable as the one my parents have had.
Doesn't that assume we are currently sitting at the optimal point of the curve? Is there any reason to think that is the case?
1.Consumption taxes are generally considered regressive because poorer people end up consuming a greater proportion of their incomes and thus paying taxes again on more of their earnings.
2.People who talk about a 'giveaway to the rich' or who advocate for 'tax the rich' generally mean to draw a distinction and say that the rich need to pay an even higher proportion of taxes than the do at the moment. 'The rich' is seldom (I believe never) meant as metonymy.
3. Advocating for consumption taxes is thus advocating against taxing the rich more, and vice versa.
*I'm not going to take the time to source this post, so you can disavow it if you like, but feel free to search for yourself.
American politicians, deliberately or out of incompetence, use the crisis of the moment and conveniently forego this topic.
I’m convinced the next US administration HAS to do something about this. I don’t see a way that doesn’t involve both spending cuts and raising taxes.
I don’t like discussing politics on HN, but I think this should be deeply concerning for anyone interested in start ups, technology, or innovation. All of our innovation is enabled by having a somewhat functioning democracy, courts, cops, civic culture, where people have the opportunity to critically think about hard problems and innovate, because they’re not worried so much about near term survival.
Grab the popcorn for ten years until US divorces. States don't get along anymore, and Feds are out of control.
Democracy - when do I get to vote on the current two war fronts?
Courts - long history of corruption, particularly against minorities. No lawyer in local courts and you lose. Feds have ridiculous rate of plea bargains.
Cops - and govts have broad immunity against lawsuits to hold them accountable. Defund the FBI was relevant for the last five decades, and they keep spying on Americans because we allow it.
Culture - free to choose what you ingest.
A key thing to note here is that the US government typically holds shorter term notes which have much lower yields than their 10y counterpart.
[1] https://home.treasury.gov/resource-center/data-chart-center/...
Maybe a T instead of a B.
slow down there. 1.65T.
Officials sadly have realized that they have a solution to everything: inflation.
What is really hilarious is that it's officially to "combat inflation" but their only way out is inflation because they're never ever repaying that debt.
> cease to pretend that the US currency is a stable trading platform
It is toilet paper. But so is the EUR / JPY / etc.
Wealth is anything that is not that toilet paper.
Everyone has an opinion on the optimal part of the Laffer curve.
Evidence may even exist for some of these claims, but we've all got an obvious clear incentive to want lower taxes today while downplaying the long-term risks of the government failing to invest in the future, so I tend to assume we can sustain higher taxes more easily than the loudest voices[0] tell me.
[0] Unless those voices are literally, non-pejoratively, Communists; but even then that's not because they're wrong about the Laffer curve itself, but that the people still promoting Communism today tend to also gloss over all the other mistakes made by the historical examples thereof…
[0] https://en.m.wikipedia.org/wiki/Kansas_experiment
US Treasury Bonds are considered the risk-free rate.
If you have $TICKER that you expect to yield 5%, you wouldn't buy it because you undertake risk to invest in a company to get 5%. You'd buy a Treasury bond instead to get 5% risk-free. As a consequence, stock prices should drop until yields + premium to take on risk exceeds the risk-free rate.
If the expected value of the investment is 5%, that expectation incorporates the risk. There's a chance it yields -100%, there's a chance it yields 5%, there's a chance it yields 100%, etc. If your value of money is linear, you shouldn't have a preference between a(n individual) 5% investment with high variance and one with low variance. It's perfectly reasonable to prefer low variance for a given expected return, but it's also perfectly reasonable to prefer high variance; and of course a portfolio has an expected return and variance that's a non-trivial combination (due to correlated movement) of its individual investments.
stays dipped or this is the beginning of the dip and continues to dip further is a fear/the fear
VCs are not getting funds from LPs who all would much rather invest in US government treasuries for the easy 5%.
Public stocks are often bought with margin money (which is leverage, aka debt). Now, margin money lenders are charging a higher interest rate on that margin, causing borrowers of margin money to not borrow as much. Thus, stocks are not being bid up as much, causing stock prices to drop.
Mortgage rates track the 10-year Treasury yield and thus mortgage loan rates are going higher and higher. Housing market is expected to sag, if not go into a correction or a crash.
For the average person, the only parts that are affected are:
1. If their employer is dependent on cheap money (real estate, VC tech, growth stocks) these employers will either need to innovate HARD or start laying off people under pressure from investors.
2. If you were looking to borrow money for some reason (say, a house or a car), you are looking at insane interest rates.
But all of this happens in any interest rate rise. What is interesting about this particular threshold of 5% is that the world hasn't seen US treasury rates at this level since the last great recession. Most companies, stock holders, people in general don't know how to evaluate this new world of a higher rate. Should you buy that car you desperately need? Is relocation for an RTO job even possible?
Higher interest rates, lower investment rates can have a devastating impact on people's lives.
Or in other terms: a $1 Billion company should be making $0.05 Billion (or $50 Million/year) in profits to be comparable to a 10Y bond at 5%. Except... everyone accepts the fact that bonds from the US Treasury (the entity that can literally print US Dollars) is lower-risk than equity from a company. (Equity is junior: if companies go bankrupt they pay their debts first and equity secondly). So you "should" be making more money from equity than bonds/debt for it to make any amount of sense.
Companies will have to change their PE ratios to compete in theory. The easiest way to do this is to... lose valuation. You can't just control profits so easily, so instead of being a $1 Billion company making $50 Million/year, it'd be easier to turn into a $0.5 Billion company making $50 Million/year (now a PE Ratio of 10, or clearly better than Bonds)
Or so the theory of value-investing goes. Which... doesn't really work out in reality but hopefully you get the gist.
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Note that dividends are meaningless from this perspective. Profits are what matters. Companies take profits an invest into themselves, so it doesn't matter if the profits are emitted as dividends (ie: $50 Million returned to the shareholders in a dividend per year), or if the company buys a new $50 million factory each year. Either way, its "the shareholders property" and therefore equivalent.
If the company buys a $50 million factory each year, then in theory, they've grown by $50 million bucks. Ex: the $1 Billion company is now a $1.05 Billion company, and are expected to make $52 Million next year. After all, the "bondholder" could have spent their 5% coupon on buying more bonds, so to be "equivalent" to the risk-free bond strategy, the company also has to grow exponentially.
IE: Everything in the market is now encouraged to grow at 5% (or faster), just to keep up with "risk free government debt".
Equity can evaporate -- unlikely US T will though the politicians certainly are trying.
We're not there yet, but people do go bankrupt gradually and then suddenly.
Using your 401K, you can create tax equivalency between stock and bond returns. But then that creates perverse outcome of putting shorter duration / lower risk assets in your longer duration savings account. Thanks Washington!
EDIT: Retracted, I'm mistaken, qualified dividends only apply to returns from a US corporation or a qualified foreign corporation. You would need to build a ladder with a holding period sufficient to realize LTCG rates from a fixed income product.
Interest received from treasuries are taxed like ordinary income. The only special tax benefit is interest income is exempt from state income taxes.
"Qualified dividends" is a term used to describe dividends received from equities. It's not a term related to fixed income unless I'm missing something.
There are things like municipal bonds that are tax exempt, but the yield is usually lower.
Not true in California: Capital gains are taxed at normal income rates, and treasury interest is state tax exempt.
For the hypothetical taxpayer earning $100k/year:
Long term capital gains: 15% federal + 9.3% state = 24.3% total tax
Treasury interest: 24% federal + 0% state = 24% total tax
If you don’t have other income the first 45k if single or $90k if married of long term cap gains will be taxed at 0%.
In that case your effective tax rate in CA is around 12% if you’re single or only 2.7% if married, which is going to be a lot lower than any income that is taxed as ordinary income.
-federal zero L/T cap gains rate if taxable in come is low enough -- this has zero relevance to CA tax
-different thresholds depending on filing single or married-joint (previous example was for single filer)
-CA "effective" tax rate - while there is no single definition of this, it is clear that no one with an AGI of $100K has anywhere near a CA effective rate of 12%.
You are making some case that because California doesn't treat long term capital gains differently that it doesn't make much difference if you were taxed from realizing LTCG or ordinary income in California and your overall tax burden (federal + state) would be about the same.
I'm just pointing out if you're retired, you would naturally have a much lower tax burden if you realized LTCG vs $100k in ordinary income because the federal tax rate for LTCG would be so low for someone with no other income.
And stocks in rising interest rates environment only average 6.4% a year, not 8%. Here's a study over 13 periods where interest rates rose in the US since 1962 to 2020:
https://www.lpl.com/newsroom/read/weekly-market-commentary-r...
So, indeed, many are now simply doing this: selling (or pausing their buy/DCA) stocks and taking the guaranteed yield.
I typically considered USD/EUR toilet paper but at 5.6% short term I'm now putting some of my money in short term treasuries. And I'm DCA'ing the proceed into stocks.
> This will probably drive the market down much further than it has in 2022.
I remember my family (in the EU) getting 13%+ interest rates on government bonds when I was a kid.
We're "only" at 5.6%: rates have and could again go much higher.
tl;dr: You will receive $10,000 in 10 years by investing $6,140 today in the world's safest security.
In other words, if in 2033 a stick of gum is $10000, which implies there was high inflation between 2023 and 2033, which likely means Fed increased rates even more, wouldn't that cause your rate of return to go above 5% and therefore roughly maintain the value of your assets (assuming Fed keeps interest rates above inflation)?
The likely reason you see banks offering high interest CDs, is because it facilitates them slowly rolling over their long term bond portfolios by attracting CD investment. Especially if they are beating the 1 yr treasury rate, they are losing money to lose less than they would rolling over their bonds.
An unfortunate thing for the banks is that CDs aren't as attractive as they were in the past because technology (ETFs, internet brokers) have made treasuries more accessible
Invest $6,140 at 3.0% (2% inflation) compounding for 10 years = $8,269.69
Invest $6,140 at 2.5% (2.5% inflation) compounding for 10 years = $7,871.71
Invest $6,140 at 2.0% (3% inflation) compounding for 10 years = $7,491.97
The problem is that we don't know if it will happen with short-term rates dropping, or if long-term rates increasing (or which combination thereof).
If short-term rates remain 5.5%+ like they are today, the yield-curve could normalize with 10Y being at 7% or higher, meaning today's 10Y at 5% would be a bad buy.
Alternatively, if short-term rates drop to 3% and thus 10Y declines to 4.5% (but still normalizes), then buying 10Y at 5% today would be a good idea and better than buying a 10Y later.
Those 5% must come from somewhere.
Either from a growing economy: Good for the stock market.
Or from freshly printed money: Also good for the stock market.
The "risk free" interest rate is not really risk free. You do not get back 2023 Dollars. You get back future Dollars, which are devalued by a currently unknown factor.
Investment firms and other orgs with large amounts of money, seeking what they always seek. More money. As I understand it, banks invested heavily in bonds which give under 2% return, but because of the cheap 5% bonds, they can't even dump them to capitalize on the 5%, because nobody wants to buy the old 2%.
https://www.youtube.com/watch?v=sixGjiYSxAk
[1] https://www.investopedia.com/terms/c/capm.asp
Maybe they are from before 2008 when printing money was considered a "slight background noise" and not a doubling every few years like we see now?
https://fred.stlouisfed.org/series/BOGMBASE
It also should be mentioned that 5% is actually just above inflation so that yield is nominal and not actual returns. Inflation (Assuming at 3.7% going forward) that 5% is more like 1.3% real return on money.
Worth reminding though the stock market IS NOT the economy.
As bond rates increased, companies went bankrupt because they couldn't afford loans needed to sustain themselves. When the US Government is willing to pay 10%, 15%, or more on debt, that means that "normies" will have to pay 20% or 25% on mortgages or company credit.
Companies who are used to 8% debt or normal people used to 5% mortgages will suddenly find 15% mortgages or 20%+ debt impossible to manage and go bankrupt. This cascades and hampers the economy.
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Everyone complains about US Government debt while ignoring the fact that most people and companies are levered up the wazoo. You think US Government is bad? How much money is typical Silicon Valley company making, and how much is their debt load?
Will (random-unicorn) be able to survive higher interest rates? Even the fear of others going bankrupt will cause banks to hoard money for themselves (too risky to lend it out to others), especially because cash now earns 5% to 6% safely. Why lend to risky companies who'll just go bankrupt when you can lend to US Government more safely?
But you did not address my second point
Since 2008, the government has reacted to every problem by doubling, tripling, quadrupling the money supply. If we face a recession, won't it do that again? Then, the dollars you get back are worth less than the dollars you lent to the government. And assets that can't be printed - like companies - would go up in dollar value.How does this factor into your model? Not only has interest rates spiked to 5%, but dollars are getting erased from existence.
Additionally, I prefer to look at M0.
Answer: the economy is bigger than just the money printer. If the overall economy is suffering, then you can still have deflation even if the money printer is going.
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Can you point to a period after 2008 when inflation finally happened? Answer: not until 2020+, after COVID19. Well past the era of your earlier example.
And sure, COVID19 and other issues will not be fully figured out until a decade from now. Your assumptions that money printing causes inflation are very one-sided and ignores greater situations that happen in the economy. There's more to economics than just monetary supply.
And again: Look at decades, not at years. Assets are way more expensive these days than they were in 2008. The S&P 500 more than tripled. The Nasdaq 100 increased more than 7-fold.
The economy is like a large swimming pool. If an elephant jumps into one side of the pool (increase of M0), it won't lift the water level on the other side (whatever prices you look at) in a linear way immediately. It will cause complex waves. But when the dust settles, you see higher prices.
Here's another one: 1970s were correlated with growing monetary base (M0, M2, whatever) and incredible amounts of inflation. And yet, the stock market and other assets declined.
These opinions of yours aren't really from economic data or analysis, but instead from vibes from some kind of blogger / website out there. The permabears or whatnot. I've seen opinions like yours all over the internet, but consistently they fall apart when the actual economic data is looked upon, as we are doing here. The only argument is to ignore economic data (like you're attempting to do with CPI).
This video by Ray Dalio explains it much better than I ever could:
https://www.youtube.com/watch?v=PHe0bXAIuk0
It's clearly not sustainable to be growing the national debt at 2 or 3 trillion per year, and especially not at 5% interest rates. People bring up Japan as some sort of model that GDP/Debt can go much higher than the US is currently at, while missing that Japan is paying 0.76% on the 10-yr notes today. In many ways, Japan is lucky that their economy is so tepid and impotent because if they had caught the inflation bug like the US, they would have had to raise rates significantly.
Needless to say, debt levels at 270% of GDP with 5% rates would cause a fiscal catastrophe in Japan. Their interest payments alone would exceed all government revenue. They would have to cut 100% of government services (military, medical, pensions, administration, legislation, the courts) AND raise taxes, or issue mountains of new debt in some sort of horrible debt spiral until there was no more demand for yen bonds, at which point there would be sovereign bankruptcy I suppose? IMF bailout of Japan?
At current rates, US government debt will hit $41 trillion this time next year. It grew $604 billion in the last thirty days, and every bond sold is at 5% interest or more. It's just not something that can be done forever unless the US economy starts growing 10-15% per year, or unless rates can be pushed down to 0% indefinitely with no negative consequences.
One thing is for sure, your current tax rate you are paying is as low as it will be for the rest of your lifetime.
As a consequence, "what is the solution?" will get sidelined by the question of "should we even solve anything?", even though high interest rates are clearly damaging.
On the actual question of how to solve it, I don't have any answer. Both austerity and inflation come with side-effects that may or may not increase that rate even more.
https://www.wsj.com/finance/investing/five-investors-on-inve...
https://archive.ph/NCv4a