The Fed recently announced a small interest rate hike, but rates remain astonishingly low in the US and in most other countries. In several countries the interest rate is negative - you have to pay the bank to hold your money - a bizarre situation which many economists previously dismissed as a theoretical impossibility.

How should individuals respond to this weird macroeconomic situation? My naive analysis is that demand for investment opportunities far outstrips supply, so we should be trying to find new ways to invest money. Perhaps we should all be doing part-time real estate investing? Are there other simple investment strategies that individuals are in a better position to pursue than big investment firms?

I don't think that anyone ever thought that paying the bank to hold your money was a theoretical impossibility -- paid checking accounts are not a new thing. What is supposed to be 'impossible' is for bank loans have a negative interest rate -- if the bank pays you to borrow money. Of course, even that was/is only 'impossible' with certain exceptions (specifically, deflation is bad for lenders; but they try to predict deflation, and try not to loan at a negative real rate).

4Lumifer5yDo not buy bonds and be wary of bubbles (a lot of underutilized money sloshing around tends to lead to asset inflation). I would probably say that the supply of investment funds far outstrips demand :-) but you would be concerned about "new ways to invest money" only if you had significant money to invest, which is not a common situation on LW. Yes, there is class of investment strategies which go by the name of "liquidity constrained". If there is a small... market inefficiency out of which you can extract, say, $100,000/year but no more, none of the big investment firms would bother -- it's not worth their time. But for an individual it often is.

Open thread, Dec. 21 - Dec. 27, 2015

by MrMind 1 min read21st Dec 2015233 comments

2


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