Gyroscopic Investing

MeDebtFree wrote:

Libertarian666 wrote:

MeDebtFree wrote: Wow...my apologies.  I was trying to be sincere.  I don't proclaim to be an expert.  These are just my opinions/observations based on my little humble understanding of how things work.  I welcome your insights...perhaps I can learn something.  Thanks.

Well, if you really don't know that governments can't just set interest rates at any level they want forever, then it's never too late to learn.

If that were possible, then there would never be a hyperinflation or a depression, because governments never want those things to happen.

However, these things do happen sometimes, so there must be limits on what governments can do.

Most governments have to worry about their debt if they spend more than they tax for more than a short period of time. This is because the people they owe money to will start to get nervous about lending them more money with no obvious way of repaying the debt already incurred.

However, governments that have the "exorbitant privilege" of effectively being an issuer of a reserve currency can get away with this for a much longer time because governments of other countries will tend to keep their currency in reserves rather than turning it in as soon as they get it. This allows the issuing country's government to spend in excess of their income for much longer than other governments could do.

Does this mean reserve currency governments can spend as much as they want forever without interest rates going up? No, because at some point the other governments will realize that they are being taken advantage of and make other arrangements.

In my opinion, we are at the beginning of such a shift, with China a main player among the other governments. Once this really gets rolling, the "exorbitant privilege" of reserve currency issuance may disappear very quickly, and then the real costs of the US government's profligacy will become apparent.

Thanks for your response.  It was insightful.

I must admit that when I made the statement

The government can do whatever they want with interest rates...

I was using a bit of hyperbole (again, my apologies).

For clarification, my intent of the statement was to imply the US government has the ability to, and does, set interest rates via  the federal funds rate, the discount window, and programs like QE that influence treasury auctions.  Paul Volcker blasting the fed funds rate in the late-70s/early-80s and the current Bernanke (and I guess now Yellen) QE program stand out in my mind as clear examples of the government "doing what they want" with interest rates. Based on that clarification, I still think that is a fair, rather than absurd, statement.

It seems we do have some common ground in that I also stated at the end of my original post that

There are, of course, limits to what the government can do if things get really get out of their control...

which seems to align with your statement

Well, if you really don't know that governments can't just set interest rates at any level they want forever, then it's never too late to learn.

It seems we are both saying that the government can (and does) set/control interest rates but only up to a point where other market forces take over when things get too out of whack (I don't see, however, anywhere I stated or implied anything about setting rates at any level "forever", not sure where that inference came from).

MeDebtFree wrote: As for "yielded that much a few years ago"... I wouldn't be surprised if I never see 6% again in my lifetime.  The 30 year has not been at 6% since 2000 and from where I sit there is no way our government will ever allow those rates again due to our debt load and interest payments.

MeDebtFree wrote: ↑Wed Jan 01, 2014 10:38 pm

Pointedstick wrote:

MeDebtFree wrote: Another thought I have is that if long term rates get high enough (say 5.5% to 6%) I may just lock in most of my net worth in LTT and keep, say, 20% in gold as an insurance policy against the potential evils (high inflation, currency debasement, government default, etc).  But this is nothing more than a swirling trade off in my head right now.

This is just me, but if I was going to lock most of my portfolio into long-duration fixed income, I'd want the rate of return to be a hell of a lot higher than nominal 6%. I had a savings account that yielded that much a few years ago!

Amen!  The only reason it is still on the table for me is I am at an age and net worth where that would provide a VERY comfortable lifetime fixed income and would possibly relieve me of ever having to think about investments again (not that I necessarily want to stop investing, but just saying).

As for "yielded that much a few years ago"... I wouldn't be surprised if I never see 6% again in my lifetime.  The 30 year has not been at 6% since 2000 and from where I sit there is no way our government will ever allow those rates again due to our debt load and interest payments.  It could very well be that the current 3.9% on the 30 might look awfully good over the next few decades if we get down to Japan type rates for an extended period of time.  So, locking in at 6% will probably never be an option for me anyway  .

yankees60 wrote: ↑Mon Feb 24, 2020 9:32 am

MeDebtFree wrote: ↑Wed Jan 01, 2014 10:38 pm

Pointedstick wrote:

MeDebtFree wrote: Another thought I have is that if long term rates get high enough (say 5.5% to 6%) I may just lock in most of my net worth in LTT and keep, say, 20% in gold as an insurance policy against the potential evils (high inflation, currency debasement, government default, etc).  But this is nothing more than a swirling trade off in my head right now.

This is just me, but if I was going to lock most of my portfolio into long-duration fixed income, I'd want the rate of return to be a hell of a lot higher than nominal 6%. I had a savings account that yielded that much a few years ago!

Amen!  The only reason it is still on the table for me is I am at an age and net worth where that would provide a VERY comfortable lifetime fixed income and would possibly relieve me of ever having to think about investments again (not that I necessarily want to stop investing, but just saying).

As for "yielded that much a few years ago"... I wouldn't be surprised if I never see 6% again in my lifetime.  The 30 year has not been at 6% since 2000 and from where I sit there is no way our government will ever allow those rates again due to our debt load and interest payments.  It could very well be that the current 3.9% on the 30 might look awfully good over the next few decades if we get down to Japan type rates for an extended period of time.  So, locking in at 6% will probably never be an option for me anyway  .

It's only been about six years since the above was written and who knows what the future decades will really bring....but so far it's looking fairly prescient!

Vinny