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Comment by runeks | Hacker News Reader

From Buffet’s explanation, it doesn’t sound like it’s inflation in and of itself that swindles the equity investor, but rising or falling inflation. I.e. if inflation were constant, the market would easily adjust, but when it rises or falls slowly over decades, investors are bound to make decisions that will turn out to be wrong in the future.

It seems to me that exactly the same is the case for interest rates: no rate is “right”, but falling or rising rates will force market participants to make wrong decisions:

* In a rising interest rate environment, all bond purchases will prove unwise, since the investor could have earned a higher rate by waiting a bit longer.

* In a falling interest rate environment, all bond selling (issuance) will prove unwise, because the issuer could have paid a lower rate by waiting a bit longer.

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Real interest rates - those set by banks based on demand for money, and not set by central banks are a price signal. What we have now is straight market manipulation which causes problems.

Interest rates should be a signal about consumption vs investment.

Does a "real interest rate" per your definition actually exist? Googling the term returns an inflation-adjusted interest rate.

In theory if we didn't have central banks this might be possible. However, central banks "print" money to adjust short-term interest rates that are a lever for influencing demand for money. It seems unlikely that it is possible to decouple supply from demand in the real world.

In this case I think "real" interest rate means a rate derived in the free market, rather than at the whim of central planners (fed).

My point is that the notion of a "real" interest rate as defined doesn't exist. The idea of a currency that cannot be manipulated is a chimera. Here are two reasons:

1. Currencies are created by some government or government-equivalent (e.g., maintainers of bitcoin/bitcoin fork), and these governors set the supply of currency. Sometimes they use interest rates, sometimes they just print more currency, sometimes they set a schedule for mining digital currency, it doesn't matter. However, the "free market" is inherently manipulated by the "owner" or "creator" of the currency.

2. If you consider a "commodity-currency" like gold or diamonds (or probably bitcoins) whose supply is not determined by a central authority, these commodity-currencies can also be manipulated. In fact, without the check of a government, capitalism works in such a way that these commodities become centralized into a few large holders who are incentivized to manipulate the currency. This is why governments like to get off of the gold standard, so they can manipulate their currency without interference from other governments.

> Does a "real interest rate" per your definition actually exist? Googling the term returns an inflation-adjusted interest rate.

> In theory if we didn't have central banks this might be possible. However, central banks "print" money to adjust short-term interest rates that are a lever for influencing demand for money. It seems unlikely that it is possible to decouple supply from demand in the real world.

With gold standard, central banks could not directly print money. It was abandoned by the US about 40 years ago, and by Europe, even earlier (because world wars).

The gold standard gets abandoned because countries want to manipulate their currency independently of the impact of other countries' currency manipulation. This is sometimes because they want to pay for costly wars via currency manipulation, but that's not the only reason.

You can still manipulate a gold standard it just takes more effort. EX: This coin represents 2% less gold every year.

Then prices include the weight, not the nominal value. Also, it's a lot of effort. You can also lower the content of gold in coins, but the process of remaking existing coins would be quite expensive.

Paper money is much easier in this regard.

It may sound odd, but gold coins are not on the gold standard. The gold content represented a value floor, but their value should exceed that, or they would have just used bars not coins. If nothing else they where less likely to be fake.

Gold standard only really refers to paper money which was used as a proxy for actual gold. Arguably it's even preferable to physical coins as historicly people would often clip them.

Bank no longer need customer’s money.

If I record correctly, bank can borrow from the Fed and turn around and leverage up and buy bonds and notes. Basically risk free money for banks.

A commercial bank needs some sort of collateral, e.g. customer deposits, in order to borrow money from the central bank.

"Real" means inflation adjusted in the economics and finance world.

Let's call it a "True" interest rate. Central banks directly influence the shorter end of the yield curve. They can influence the longer end only indirectly.

> Does a "real interest rate" per your definition actually exist?

I think the closest measure we have is the difference between the interest rates banks charge from loans compared against the "overnight rate" of interbank lending. This is controlled by the fed (through the federal funds rate) and is another control the fed has to control interest rates.

If I remember correctly, one of the hindrances for the 2008 recession recovery was that the interest rates (offered by banks) remained high as the fed lowered the federal funds rate. The goal of the rate is to control lending and in that recession it was not working.

What problems has the fed caused since the 1980's? Prices are stable, employment is good.

Prices are not stable, but increasing at 3 to 4% per year.

Employment is okay, but more than a 10th of the population is in their working years but not working.

Since '81 it's actually exactly 3% per year, and since '90 it's 2.36% per year. The variance is around 1%, I'd call that pretty stable.

Fair point, and also depends on which measure you're looking at.

https://fred.stlouisfed.org/graph/?g=iFuv

Predictable increases == stable.

"but more than a 10th of the population is in their working years but not working."

Fed has very limited set of things they control. They don't do fiscal or policy.

> What problems has the fed caused since the 1980's? Prices are stable, employment is good.

Which prices have been stable since the 1980s?

Prices, in US Dollars, have more or less been stable. Some have risen a lot (e.g., medical, education). Some have gone down a lot (e.g., clothing). Overall though....stable-ish.

Some of this the fed controls, some of this they don't. They are not all powerful. For example, the share oil revolution has done a lot to reduce prices. Has nothing to do the the fed. China coming online as manufacturing powerhouse has also reduced prices. Again, fed has nothing to do with that.

Healthcare prices are stable? Once you have food, shelter, and heat, that’s the next thing on the list and it’s a crushing liability for almost everyone.

Real interest rates are a monetary measure, to be contrasted with nominal interest rates [1]. I believe you are referring to the rate of interest absent a central bank.

[1] https://www.imf.org/en/Publications/WP/Issues/2016/12/30/The...

correct - I used the wrong term.

Isn't really unexpected change that cause investors to make wrong decisions? Expected change should be already incorporated into prices.

"* In a rising interest rate environment, all bond purchases will prove unwise, since the investor could have earned a higher rate by waiting a bit longer.

* In a falling interest rate environment, all bond selling (issuance) will prove unwise, because the issuer could have paid a lower rate by waiting a bit longer."

Not quite. Bond prices incorporate future expectations of real rates and inflation rates and then also associated risk premiums. Thus, a bond purchase will lose money only if realized rates come in higher than what is already discounted. That is, it is possible for short term rates to rise, and yet a bond increases in value (i.e., because the ST rates came in lower than what was already assumed in the bond).

> Bond prices incorporate future expectations of real rates and inflation rates and then also associated risk premiums. Thus, a bond purchase will lose money only if realized rates come in higher than what is already discounted.

Isn’t the fact that bond interest rates falling for the past ~35 years — on a 5-year average — then a testament to the market being unable to predict future interest and inflation rates?

If the market were able to correctly predict future interest and inflation rates, the rate of interest wouldn’t change. So, as far as I can see, the fact that it has been dropping, on average, for the past three decades seems to indicate that the market fails at this prediction under our current monetary system.

Or, perhaps a better question: if the rate of inflation were to slowly increase by one percentage point per year, for the next 30 years, what would be the right real rate of interest right now — assuming we knew this were going to happen? In other words: how do you discount a rate that’s slowly but steadily changing (even if it’s in a known direction)?

With regards to short term rates, I should have explicitly written “the long/bond rate of interest” since the two indeed are fairly independent.

> if the rate of inflation were to slowly increase by one percentage point per year, for the next 30 years, what would be the right real rate of interest right now — assuming we knew this were going to happen?

the rate would increase exponentially according to the number of days between the present and the maturity date. the rate for securities that could be redeemed on demand would steadily increase, but represent the lowest rate (because you would always have the option to decide to claim your money). whereas a 30 year cd would have the highest rate in the market.

One could equally say that its bad for someone whenever a stock price moves. I think it's okay for interest rates to vary, that's just the normal reponse of the market to changing conditions.

It's not contraversial that inflation should be steady. That's literally the point of a central bank.

Actually according to Buffet even _constant_ inflation can be very bad if the business is capital intensive with high fixed-costs. See my point here: https://news.ycombinator.com/item?id=16458373

Bear in mind that most bonds are callable so the seller really has little choice in a falling rate environment.

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