The thing I like best about PP...

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Stewardship
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The thing I like best about PP...

Post by Stewardship » Mon Mar 10, 2014 6:34 pm

The thing I like best about the PP is that unlike most portfolios, it doesn't place, as termed by Pope Francis in Evangelii Gaudium, "a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system."
In a world of ever-increasing financial intangibility and government imposition, I tend to expect otherwise.
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Re: The thing I like best about PP...

Post by Fragile Bill » Tue Mar 11, 2014 12:23 pm

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Re: The thing I like best about PP...

Post by Kshartle » Tue Mar 11, 2014 1:50 pm

It's interesting how two people can view something so differently.

The thing I dislike about the PP is that I see it as "a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system."


:)

When I look at it, objectively I hope......I see 50% of the assets in the form of promises to pay from those wielding economic and military power. No one can force them to pay, and they control how much of those slips of paper are printed. They have a means of defaulting, and you have no recourse. And they have strong incentive to default by devaluing.

I like the idea of wide diversification, it's just that so much of the assets are concentrated in investments that you hope the powers that be will make good on. I don't trust they'll ever repay and at some point in my life the losses in that half will be catastrophic. In the meantime there is no hope for long-term gain there so I stay away.
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Re: The thing I like best about PP...

Post by Lowe » Tue Mar 11, 2014 2:17 pm

Political risk can be mitigated by creating a PP in another country.
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Re: The thing I like best about PP...

Post by Kshartle » Tue Mar 11, 2014 2:46 pm

Lowe wrote: Political risk can be mitigated by creating a PP in another country.
Ahh but then it's not a PP right!

That's the thing I said when I joined the forum back in 2011 or 2010.

Diversify your stocks by going global and diversify your bonds by having an ex-US ST bond fund, since there are no good long-term options.

This idea was considered a big risk or something. I saw it as risk mitigation.
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Re: The thing I like best about PP...

Post by AdamA » Tue Mar 11, 2014 4:55 pm

Kshartle wrote:
The thing I dislike about the PP is that I see it as "a crude and naïve trust in the goodness of those wielding economic power...
Even though it holds 25% physical gold?
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Re: The thing I like best about PP...

Post by moda0306 » Tue Mar 11, 2014 5:22 pm

AdamA wrote:
Kshartle wrote:
The thing I dislike about the PP is that I see it as "a crude and naïve trust in the goodness of those wielding economic power...
Even though it holds 25% physical gold?
As in 25% is too much or not enough?
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Re: The thing I like best about PP...

Post by ns3 » Tue Mar 11, 2014 5:42 pm

Kshartle wrote: The thing I dislike about the PP is that I see it as "a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system."
Say what?

I read Harry Browne's political writings long before I read any of his investment advice and if there was any trust in "the goodness of those wielding economic power" I totally missed it.

If there is a bias toward the belief that those who wield economic power will continue to do so and we should act accordingly, that sounds reasonable to me but trust them? Definitely don't see that with HB.
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Re: The thing I like best about PP...

Post by Kshartle » Wed Mar 12, 2014 5:56 am

ns3 wrote:
Kshartle wrote: The thing I dislike about the PP is that I see it as "a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system."
Say what?

I read Harry Browne's political writings long before I read any of his investment advice and if there was any trust in "the goodness of those wielding economic power" I totally missed it.

If there is a bias toward the belief that those who wield economic power will continue to do so and we should act accordingly, that sounds reasonable to me but trust them? Definitely don't see that with HB.
50% of the assets are in the bonds of one government. They control the printing press and long-term inflation rate (as Yellen said), and if they default no one can seize thier assets like a corporations might be seized. Yes, currency issuing countries have defaulted outright, rare as it may be.

This is a lot of faith in the powers that be.

Let's not forget they control the economic rules of trade in this land. Yes the US stock market is the biggest and many of the companies are global but I think 50-60% of the S&Ps revenues still come from domestic spending. If the taxes and regs tighten in this country there's a good chance it hurts the US market more than non-US stocks.

It doesn't matter what Browne said, I've read all his books. Look at it objectively. He's not a God....although close.
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Re: The thing I like best about PP...

Post by Kshartle » Wed Mar 12, 2014 5:59 am

TennPaGa wrote:
Kshartle wrote:
Lowe wrote: Political risk can be mitigated by creating a PP in another country.
Ahh but then it's not a PP right!
Actually, Lowe has it exactly right.

"Creating a PP in another country", i.e., holding that country's stocks, bonds, and cash, would indeed mitigate political risk (assuming one also held a PP in her home country).

However, holding stocks in country A and bonds/cash in country B would not be a PP.
Ok how many different PPs can I have before you don't consider me having a PP.

What if I have 20 different PPs.......can you really say I ascribe to the PP theory?

My argument is that a global PP is safer, especially in the long-run.
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Re: The thing I like best about PP...

Post by Lowe » Wed Mar 12, 2014 9:27 am

Since there isn't much political risk in a country as wealthy as the US, one more would likely be enough.  As long as it is in a politically stable country, and one not closely tied to the US.  Japan and Switzerland come to mind.
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Re: The thing I like best about PP...

Post by AdamA » Wed Mar 12, 2014 10:02 am

moda0306 wrote:
As in 25% is too much or not enough?
I think 25% is the right amount.  I was just asking Kshartle if he considers 25% to be a naive gold allocation (naive = not enough).
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Re: The thing I like best about PP...

Post by Kshartle » Wed Mar 12, 2014 10:03 am

AdamA wrote:
moda0306 wrote:
As in 25% is too much or not enough?
I think 25% is the right amount.  I was just asking Kshartle if he considers 25% to be a naive gold allocation (naive = not enough).
No I don't.

I do think having 50% of your money in government bonds regardless of interest rates and the government's fiscal situation is naive.
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Re: The thing I like best about PP...

Post by Stewardship » Wed Mar 12, 2014 10:19 am

Kshartle wrote: This is a lot of faith in the powers that be.
Howso?  Powers break promises...  I lose 100% of paper assets... gold goes berserk... I suddenly become the richest guy I know  8)
In a world of ever-increasing financial intangibility and government imposition, I tend to expect otherwise.
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Re: The thing I like best about PP...

Post by Kshartle » Wed Mar 12, 2014 11:26 am

Stewardship wrote:
Kshartle wrote: This is a lot of faith in the powers that be.
Howso?  Powers break promises...  I lose 100% of paper assets... gold goes berserk... I suddenly become the richest guy I know  8)
Berserk in dollar terms. Think in purchasing power terms. The HBPP puts double the purchasing power in government bonds as it does gold, regardless of interest rates and government debt levels.

You might end up with a trillion dollars......and have less purchasing power than you did before you started.

Anyway.....the HBPP is certainly safer than traditional stock/bond portfolios. I just think it's risky in today's environment with the low interest rates and exploding debt levels.
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Re: The thing I like best about PP...

Post by Gosso » Wed Mar 12, 2014 12:08 pm

Kshartle wrote: Berserk in dollar terms. Think in purchasing power terms. The HBPP puts double the purchasing power in government bonds as it does gold, regardless of interest rates and government debt levels.
Real interest rates aren't all that far from historic levels.  And if we looked at it after-tax, then we'd be even closer to the average.  We are in a low inflation environment so bond yields look worse than they really are.

(click to enlarge)
[img width=500]http://i61.tinypic.com/24cdzcy.jpg[/img]
Data from Robert Shiller's site: http://www.econ.yale.edu/~shiller/data.htm

Looking into my crystal-ball I see deflation or low inflation as more likely than high or hyper-inflation, so it makes sense to protect ourselves from a low inflation environment.  But if someone KNOWS that the US government is going to default at any minute, then I agree that holding bonds is a dumb idea.  I think this is an extreme position and is fueled by "doomers" looking for subscriptions or hits at their website.
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Re: The thing I like best about PP...

Post by Stewardship » Thu Mar 13, 2014 3:53 am

Kshartle wrote: Berserk in dollar terms.
Berserk in purchasing power terms.
In a world of ever-increasing financial intangibility and government imposition, I tend to expect otherwise.
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Re: The thing I like best about PP...

Post by moda0306 » Thu Mar 13, 2014 8:33 am

Stewardship wrote:
Kshartle wrote: Berserk in dollar terms.
Berserk in purchasing power terms.
Yes. 

Kshartle,

Gold is not just an inflation meter... It's a gauge on the health and fairness of fiat monetary systems.... Mostly the main one (USD).

This is why when the fed arranges artificially low rates given the amount of safety of the assets and inflation in the market (2000-present), gold rises, but when the fed engineers artifially high rates (1981-1999), gold drops.

If you collapse the world's reserve currency, gold would go gangbusters (IMO) in real terms.
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Re: The thing I like best about PP...

Post by Kshartle » Thu Mar 13, 2014 11:13 am

Moda, please.

If you think you’ll be better off in purchasing power terms after a hyperinflation because you have 25% of your money in gold then good luck to you. I highly doubt it and I’m sure many of you blindly following the PP will re-balance out of gold several times on the way up. There is no way you’ll be richer afterward than you are now while the dollar is still strong, but ok. Good luck. You will be better off than people who are all in cash, but much worse off than people avoiding government debt right now.

Regardless, I put the chance of hyperinflation as remote, less than 10%. Stagflation is much more likely to me (50%ish) which means your 50% bonds will do no better in the next five years than they have in the last five. That is to say, a modest loss in real terms. It could be much worse though. I understand why many people are holding them, but if you have a decent time horizon (5-10 years), why not wait until rates are higher or the government doesn’t need to borrow just to pay the interest?

I don't shun the bonds based on moral principles or political ideals (I'm apolitical). I shun them because the rates are absurdly low and debt levels extremely high.

I see some of you think we're in a low-inflation environment, no doubt because the government keeps telling you that. I prefer to look at the cost of things, groceries, stocks, medical care, education, home prices etc. They say something different. Obviously the money supply as reported by the Fed is growing at 6-8% per year. That is M2, they no longer report an M3 estimate unfortunately.

We've had this discussion and disagreement on current inflation many times and there is considerable disagreement. People who agree and disagree with the CPI have been unable to convince each other so let's not go there.

However, if inflation is low.....why are stocks up 185% and gold up 45% in the last five years? I know 5 years ago was almost the bottom and stocks were really low but 185%?!?!?!?

You must think we are really prosperous despite falling real incomes and falling employment. If inflation hasn't pushed up these prices then what has done it? Also realize there is a lag between when inflation hits financial prices and gets to consumer prices. Browne explains this clearly in some of his books and puts it at usually around 2 years.
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Re: The thing I like best about PP...

Post by Kshartle » Thu Mar 13, 2014 11:29 am

Here's the thing about hyperinflation guys........

If Gold goes to 1 million an ounce, it will first hit 2k, 3k, 4k.....

The move from 2k to 4k is the same percentage as 500k to 1 million.

Will you know the warning signs and prevent yourself from selling at 2k, 3k, 4k, 10k?

If so please share with us when you see them.

My point is it will be extremely difficult to do this, and if the gold is the only thing really going up (maybe stocks by a much smaller measure), you'll sell out at least a couple times before the gravity of the situation is really grasped. Your current allocation of 25% gold will end up being more like having 5-10% gold currently and holding all the way through. This will not make you wealthy or even close to it. Everything that is tangible will be going up in price.

Your neighbor who owns has a big mortagage, some cars, a boat, guns, extra food, ammo etc. will be a lot better off in real terms. You will be left with something though.

I'm not trying to bag on the PP, just saying it is not a solution for a really bad inflationary scenario. There is too much invested in USD bonds without regards to rates and debt levels....currently IMO.

I think it's a fine strategy for people with very short time horizons and when the fiscal position of the bond issuer is not so....precarious as it appears to me now.
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Re: The thing I like best about PP...

Post by Pointedstick » Thu Mar 13, 2014 11:47 am

Kshartle wrote: Here's the thing about hyperinflation guys........

If Gold goes to 1 million an ounce, it will first hit 2k, 3k, 4k.....

The move from 2k to 4k is the same percentage as 500k to 1 million.

Will you know the warning signs and prevent yourself from selling at 2k, 3k, 4k, 10k?
The flip side to this question is of course: "How do you know when to sell and take profits if you're laser-focused on the possibility of a hyperinflationary price explosion?"

If the hyperinflationary gold price explosion never happens in our lifetimes, then we could lose a lot of money never taking profits when gold rises. It is, after all, a highly volatile asset whose price movements we can harvest for profits just like stocks and bonds.
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Re: The thing I like best about PP...

Post by moda0306 » Thu Mar 13, 2014 11:50 am

Kshartle,

Please what?  The mini-duscussion was "what would happen to gold if my paper assets went to zero?"  I laid out my case for a real boom in gold rather than just nominal.  If gold just went up nominally with inflation, it wouldn't be the right asset for the PP.  I want an asset that acts as a "canary in the coal mine."  Not the news reporter that gets to the coal mine two days after the mine collapses to report the deaths.

This is a compliment, not a criticism, to gold.  It's basically saying that it's so good at what it does within the context of a properly-diversified portfolio, that you don't need much of it.  Is that so ridiculous to warrant an "eye-rolling" response? 

The only way this might look like a criticism, is the recognition that gold can go down for decades if the government is effectively subsidizing savers by giving them an FDIC or fed-protected real rate of return that is nice and lucrative. 

The important thing isn't to judge gold as "good" or "bad," but get a feel for what its "skillset" truly is, and use it accordingly.
However, if inflation is low.....why are stocks up 185% and gold up 45% in the last five years? I know 5 years ago was almost the bottom and stocks were really low but 185%?!?!?!?

You must think we are really prosperous despite falling real incomes and falling employment. If inflation hasn't pushed up these prices then what has done it? Also realize there is a lag between when inflation hits financial prices and gets to consumer prices. Browne explains this clearly in some of his books and puts it at usually around 2 years.
So now you're measuring inflation via the price of long-term contract financial assets?  Does that mean we had staggering deflation when the stock & bond market got hit in 1981, even though CPI still rose by 10 that year?

I measure inflation not by financial asset prices, but general price level of goods and services.  Expectations of future inflation does factor into how the market prices certain financial assets, to be sure, but their prices are a horrible measure of inflation in-and-of-themselves.  For instance, if the market (in a world free of the fed, shall we say, where hypothetically we are looking at pre-% interest rates) expected sharp deflation general price deflation due to some sort of massive exogenous event, bond prices would likely rise considerably on the "safe" end of the bond curve.  Does this mean that we have "inflation" because the bond prices rose?  That seems like a foolish way to look at it.

Further, the market knows the fed is going to play with the safest end of the dollar-denominated bond market (t-bills/t-bonds) to set an effective "floor" for interest rates, and that expectations of future actions in this arena is going to affect LT bond prices considerably.  There's always going to be relatively big swings in the 30-year bond market due to what future fed expectations are.  Does this mean every time they go down, we have deflation, and every time they go up, we have inflation?

The stock market is simply trying to price itself against alternatives.  I don't think rises in the stock market really mean all that much, except some indication of relative future stability, and expectations increasing that earnings will be generated, or a repricing of those earnings against other investments (real estate, bonds, etc).

The price of long-term financial assets, especially if they're fixed-income generators, is a horrible way to measure inflation, unless we're going to start re-defining why inflation is good or bad.  The reason inflation is even measured, is because we want to get a feel what the increasing price of daily REAL economic purchases/expenses are.

Kshartle wrote: Here's the thing about hyperinflation guys........

If Gold goes to 1 million an ounce, it will first hit 2k, 3k, 4k.....

The move from 2k to 4k is the same percentage as 500k to 1 million.

Will you know the warning signs and prevent yourself from selling at 2k, 3k, 4k, 10k?

If so please share with us when you see them.

My point is it will be extremely difficult to do this, and if the gold is the only thing really going up (maybe stocks by a much smaller measure), you'll sell out at least a couple times before the gravity of the situation is really grasped. Your current allocation of 25% gold will end up being more like having 5-10% gold currently and holding all the way through. This will not make you wealthy or even close to it. Everything that is tangible will be going up in price.

Your neighbor who owns has a big mortagage, some cars, a boat, guns, extra food, ammo etc. will be a lot better off in real terms. You will be left with something though.

I'm not trying to bag on the PP, just saying it is not a solution for a really bad inflationary scenario. There is too much invested in USD bonds without regards to rates and debt levels....currently IMO.

I think it's a fine strategy for people with very short time horizons and when the fiscal position of the bond issuer is not so....precarious as it appears to me now.
There is a point where the rejection of the domestic currency is such that you really can't call it your "domestic currency" anymore.  Heck, most of the reason I advocate for the U.S. PP is the U.S.'s stability in the world. 

And this is assuming that gold is simply going up with CPI (assuming that's about what you mean by "in real terms."  It seems we have yet to agree on what "inflation" is even a measurement of).

But a rejection of a currency is essentially going to result in the de-facto rejection of half of your PP, since the entire thing is suggested on the premise of the current financial stability of the U.S. government and monetary system.

It's not about whether gold hits $2k, $3k, or $10k, but how quickly the U.S. dollar is losing real value.  If the dollar is losing value fast enough (25% per year), one might want to consider putting a pause on their rebalances. 

At least I have the option.

If we have a deflationary recession harsh enough that the fed can't swap its way into inflation (CPI inflation), an inflationist's gold and stocks could get slaughtered... however, unlike me, they don't even really have an option at that point.  They've made their bed.

I'm also confused... you say that what the fed's doing is jacking the prices of the stock & MT/LT bond markets.  But then you say they're punishing savers.  I think it's important to point out that a "saver" is just someone who doesn't spend income.  They're not necessarily putting it into 1-year CD's. Many forms of savings benefit from low interest rates or inflation.  So you might want to be more specific about the savers that are being punished (assuming that the fed is grossly setting interest rates too low).
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Re: The thing I like best about PP...

Post by moda0306 » Thu Mar 13, 2014 11:54 am

One thing that the "I-wanna-do-the-PP-but-I'm-an-inflationist-and-can't-stand-the-50%-bond-portion,-half-of-which-is-extremely-volatile-against-interest-rate-spikes" crowd is to use EE bonds as part of your LT bond portfolio.

EE bonds promise you that they'll double after 20 years, which is an implicit tax-deferred 3.5% ROR.

However, they earn a guaranteed fixed rate in the meantime, which is pretty awful (.1% if memory serves), but you can get some decent long-term deflation protection, but keep a much more stable asset in the event of a hyperinflation.
Last edited by moda0306 on Thu Mar 13, 2014 12:13 pm, edited 1 time in total.
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Re: The thing I like best about PP...

Post by Kshartle » Thu Mar 13, 2014 12:46 pm

Pointedstick wrote:
Kshartle wrote: Here's the thing about hyperinflation guys........

If Gold goes to 1 million an ounce, it will first hit 2k, 3k, 4k.....

The move from 2k to 4k is the same percentage as 500k to 1 million.

Will you know the warning signs and prevent yourself from selling at 2k, 3k, 4k, 10k?
The flip side to this question is of course: "How do you know when to sell and take profits if you're laser-focused on the possibility of a hyperinflationary price explosion?"

If the hyperinflationary gold price explosion never happens in our lifetimes, then we could lose a lot of money never taking profits when gold rises. It is, after all, a highly volatile asset whose price movements we can harvest for profits just like stocks and bonds.
If you're laser-focused on hyperinlation then you'll be fine if it happens. What do you mean take profits? You mean sell your gold?

I think you just buy stuff you want and go on with life as best you can. If gold shoots to 1 million an ounce because of hyperinflation you'll be using your gold to buy stuff....automatically taking profits. Maybe it will fall down some in normal dollar terms but so what? It'll be obvious that you can scoop up a lot of stuff you actually want with your gold. Buying it locks in your gain.

I mean, who really wants a lump of metal....I really want other stuff that enhances my life.

Agreed on the last part, but you're kind of making my point that the PP won't protect you during hyperinflation. You'll sell out on the way up. That's why I say this strategy is not designed to protect you for an event like that. Even a 1/3 stocks, 1/3 gold, 1/3 ten-year would be safer if you're going to adhere strictly to in and not take into consideration the current economic situation. I think that's a reasonable assesment.
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Re: The thing I like best about PP...

Post by Kshartle » Thu Mar 13, 2014 1:08 pm

moda0306 wrote: 1. So now you're measuring inflation via the price of long-term contract financial assets?  Does that mean we had staggering deflation when the stock & bond market got hit in 1981, even though CPI still rose by 10 that year?

2. Does this mean that we have "inflation" because the bond prices rose?  That seems like a foolish way to look at it.

3. Does this mean every time they go down, we have deflation, and every time they go up, we have inflation?

4. It's not about whether gold hits $2k, $3k, or $10k, but how quickly the U.S. dollar is losing real value.  If the dollar is losing value fast enough (25% per year), one might want to consider putting a pause on their rebalances. 

5. So you might want to be more specific about the savers that are being punished (assuming that the fed is grossly setting interest rates too low).
So many points to respond to...I picked the top 5/25 :)

The "moda....please" comment was I thought you were trying to educate me on how atrificially low rates spur gold up and artificially high pushes it down. Wait, are you now agreeing the fed creates "artificially" low or high rates? This is a breakthrough :).

as to the others..........

1. 1981 saw a blow off top in gold crushing the latecomers to the party and a flush out of hope for stocks in a bear market before a 20 yearish bull run. The fed succeded in destroying inflationary expectations with double digit rates and slayed the inflation beast....at least for a while.

2. Seems foolish or is foolish? Bond prices rise for a lot of reasons. One of them happens to be the central bank printing trillions of dollars to buy them. Yes this is inflation and also suggests to the market a greater likelihood of more printing to come.....possibly a massive amount. Can't fight the fed so the smart money will front-run if it can.

3. No

4. If gold is slicing through 2k, 3k, 4k then the dollar is losing purchasing power in real terms, no question. How will you know it's dropping 25%? Do you think the government or media will tell you? :):):)  The smart money will move first into gold and bid it up in anticipation. PPers will be selling to them on the way up before they know what hit them.....unless you are really savy or have  a rule in place like....I only rebalance every 2-3 years, not based on fixed rules like 15/35 bands. That last point I think is a much better option since we all know now (hopefully) that there's no such thing as a re-balance bonus.

5. Simple, short-term rates are lower than inflation and lower than the market would put them absent fed manipulation. Buying 30 year bonds to get 4% is NOT a solution. There's a lot more risk there that many people don't want. The artificially low rates discourage people from having savings accounts and CDs, really saving for a rainy day and making that capital available to grow the economy. Instead they might as well consume it or stick into stocks they don't want and maybe have no business buying.
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