Re: poly: Re: Why interest rates may stay low

From: Peter C. McCluskey <>
Date: Fri Mar 13 1998 - 07:53:54 PST (Robin Hanson) wrote (just before I left on vacation):
>Now consider the case of no property rights in projects. In this case
>all projects are undertaken by someone as soon as their ROI rises to the
>point where it is just above the marginal ROI. Thus in this case the
>average ROI isn't much above the marginal ROI. The market value that
>the project would have in the property rights case is in this case
>burned up in the race to get there first.
>To the extent that the supply curve for investment funds is relatively
>flat (as it seems to me that the literature suggests), the marginal ROI
>will be similar in the two cases. And to the extent that growth rates
>are tied more to the average ROI than to the total amount invested,
>growth rates may be lower in the no-property-rights case, and may be
>relatively insensitive to the real ROI that technology allows.

 This reasoning probably works for most circumstances, but I'm hesitant
about extending it to unusually large changes in ROI.
 This flat investment supply curve can only have been observed over a
small range of real interest rates. While I can believe it's easy for
many people to increase their savings rate from, say, 3% to 10% of their
income, I doubt that there is an easy source of additional investment
once savings rates start approaching 100% of income.
 I expect that in the not-too-distant future, there will be at least
one investment opportunity will test this upper limit of investment
supply. I'm thinking primarily of the opportunity to launch self-reproducing
probes at near lightspeed to colonize large parts of the galaxy, although
it's also conceivable that a race to produce a molecular assembler or
the first AI could do similar things. (Robin Hanson) writes:
>Ingemar Hansson, Charles Stuart, "Malthusian Selection of Preferences",
>American Economic Review, June 1990, V.80 No. 3. pp.529-544. deals
>specifically with how time preferences should vary with age & gender.
>On average though, people should discount a factor of two per generation,
>because when you trade off resources for you now vs. resources for a
>child of yours a generation from now, your child only shares half your

 This seems to imply a lower discount rate once most reproduction is done
primarily by copying, unless something else like memetic evolution is able
to cause people to discount their future identity such that versions of
themselves one generation away are only half identified as themselves. (Hal Finney) writes:
>(A year or two ago I made a similar point on Extropians, that if we believe
>that growth rates will eventually become higher than our personal discount
>rates, and stay that way, then rationally we should give stock prices an
>infinite value today. My idea was not very well received, but this
>graphical approach suggests the same conclusion.)

 Let me restate my main objection to this: infinite stock prices imply
an inifinite supply of capital which businesses would use for new investment,
which is clearly unrealistic. ("Perry E. Metzger") writes:
> The
>yield curve generally grants higher rates of return for long term debt
>investments because of the added risk, although historically the curve
>has inverted during periods of high inflation.

 Most of your responses to Robin have been merely irrelevant, but this claim
is also probably false.
 There is no reason to expect that long term debt is generally riskier
that short term debt. As long as interest rates are dominated by liquidity
constraints rather than risk of default, the fluctuations are more likely
to average out to something insignificant over a 30 year period than over
a one year period.
 Some possible reasons why yield curves have been positively sloped for
much of this century (at least in the US):
 - denominating bonds in politically manipulatable currencies created
  an abnormally high risk of partial default
 - the Fed's mechanism of injecting new money into the system may be
  biased towards the short end of the curve
 - the unusual rate of technological obsolesence may be causing the risk
  of default over 10-30 year periods to be higher than the business-cycle
  driven liquidity changes
 None of these factors applied during the 19th century, and I'm fairly
sure that the yield curve was inverted more than half the time then.

 The only shred of truth to your claim that high inflation causes inverted
yield curves is the modest connection between liquidity shortages at the
starts of recessions (the main cause of strongly inverted yield curves) and
short term peaks in the inflation rate.

Peter McCluskey  |  | Has anyone used           | to comment on your web pages?
Received on Fri Mar 13 15:56:05 1998

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