Post: #1

My parents and grandparents occasionally remind me about how great it was to get anywhere from 7-11% returns on their savings. Savings accounts, CDs, etc.

Could any economist rooshvers comment on what would shift the market back to 7-8% interest?

If your immediate reaction is 'stock market' assume for the moment the question is not "how do i get 8% returns" and instead "how could the market return to 8% interest."

Post: #2

When inflation hits 10% the banks will happily pay 7-8% interest.

Post: #3

The formula is like this:

Interest banks pay you < market interest rate

Interest banks pay you < inflation rafe

The bank always wins.

Post: #4

Famous quote.

"What is the crime of robbing a bank compared to the crime of owning a bank?"

Post: #5

So high interest rates are often used to stem inflation, which in the general sense means an increase in the amount of money relative to the amount of 'stuff' out there. Appreciate too, that the banks can more or less create money out of thin air.

Take Canada for instance, for the last 15 years, people have gorged themselves on housing, going into massive debt, but at the same time causing the prices to go way up. The reasons for this (or in any asset) could be societal, social, due to shortages etc. You can think of this as inflation in the house price.

Now the rest of the economy wasn't really following suit. The reason we have rock bottom interest rates, is so that people will happily take on debt, spend the money in the economy, and create work for lots of people. Unfortunately, unless that spending actually improves society in a real sense (a transit system so ppl can get around quicker, better farming techniques so more food is produced) the result is simply more money out there, chasing the same amount of goods. Repaving a road that doesn't really need it creates work, but it doesn't really help anyone but the road workers.

As a consequence of this, prices rise. Now, people need to borrow more money to pay for the increasingly expensive things, and it wont cost them anything if interest rates are low, which increases the amount of money out there more, which causes prices to rise further. The only way to put the brakes on run away inflation is to raise the interest rates, which would make people think twice about borrowing money to bid up the prices of whatever even further. As a result, price appreciation halts, since you now have fewer people with money able to chase the same goods. Which in turn slows the economy, puts people out of work and requires lower interest rates again to get people spending to create jobs. And it goes on ad infinitum.

So in other words, once the economy starts screaming, everyone's working, and prices of goods start to rise, that's when you can expect interest rates to rise. The economy is picking up in the US now, jobs being added, and there (at least was) talk of rate hikes this year. If the economy can absorb that, pay 5% to borrow money, and still remain profitable, add jobs, etc, then the rates might go even higher. However with the deflationary pressure on oil now, how that plays out remains to be seen.

Post: #6

Yeah high economic growth basically.

Post: #7

Ok are there any investor types here?

At what point in inflation once this QE stops is it time to buy heavily into 5 and 10 year CDs (or Treasury Bonds to get tax savings) to lock in the savings? If there is runaway inflation then everyone is fucked at that point anyway. May as well bet it is going to be cured in a few a years and take advantage.

I am going to guess whenever savings % beats the stock market which is historically around 9%.

So at 9%+ buy as many CDs as you can as locked in savings?

Post: #8

You are never going to build wealth on 3% interest, 7% interest or hell even 15% return.

You need to shoot for 300%+ returns, and you don't get that through investing. You get that through a business. Look at hedge funds: they don't become billionaires from investing their money, they become billionaires because they are sales people who convince investors to invest billions with them and then they take 20% commission to basically not underperform the market (essentially, cutting your losses and letting your winners run)! That's not investing - that's sales!

So while I'm sure you're grandparents are great people, why are they waxing so enthusiastic about 7-8% returns when they're still middleclass? If 7% was that great that'd be living in a mansion and you'd be living off a trust.

When you look at it like this there's no difference between 2% interest or 10% interest. You're not going to become rich either way. Your standard of life won't improve by any significant factor. Yes, if you're already rich, then you could live off 10% interest, but you have to get to the point of richness first, and you don't do that through investing your money on some small returns opportunities. You do that by shooting for 1000% returns.

Post: #9

^I don't think any serious and honest investment adviser would every say that long term and low maintenance investing is a way to get rich. Basically, it's a reasonably good way to protect your money from inflation. We know that the dollar loses its value over time, just like any other currency. We know that the government owes a shitload of money and has an incentive and the means to continue devaluing the dollar in the future.

Investing in a balanced portfolio doesn't guarantee protection against inflation. However, if you do, let's say, invest 50% in a low cost etf that tracks s&p 500, another 20% a similar etf for international stocks and keep the rest in bonds/cds/emergency checking account, you'll have a much better chance of protecting your money from losing value in the long term.

Basically, for most people investing is a sensible way to keep their money, not to earn it.

Post: #10

Last year 10 year Treasury yields were over 8% was in 1991. It was at the tail end of the Fed's fight against inflation (and more importantly, inflation expectations), which piqued in 1982 with yields over 14%.

So when would we see those rates again? Most likely when we have a bout of unexpected inflation. Highly unlikely anytime in the near future. With the Fed slowly ending QE, you'll see the yield curve rise, but maybe to 3-3.5%.