Re: poly: Why interest rates may stay low

Hal Finney writes:
> > The claim is that the historical "rate of return on investment" has
> > been in that range (whatever it may mean...)
>
> As I understand it, the risk-free ROI is generally calculated by taking
> the interest rate on short term U.S. government bonds and subtracting
> the inflation rate.

First problem: U.S. Government securities have not had identical
terms of offer over the history of the U.S. -- in particular, the
bonds used to be gold backed, then stopped being gold backed. They
also once were callable, and are no longer callable. There once
were bearer bonds, there are no longer bearer bonds -- etc. It is hard
to precisely compare differing securities.

> Today, inflation is something like 2.1% and short term bonds are
> about 5.2%,

The inflation rate is measured by a mechanism that can only be
considered analagous to the study of chicken entrails. In particular,
it is based on a number of astonishingly specious assumptions, like
the notion that a particular good should remain stable in price
through time in a zero inflation scenario. However, most goods become
more efficiently produced through time, and we would expect their
prices to fall, not remain stable. Even given the notion of the
"stable priced basket of goods", the methods used to measure inflation
have been, er, less than entirely honest or accurate.

It is also especially hard to get accurate measures in a historical
context.

Given that I'm not entirely sure what CURRENT inflation may reasonably
be measured at, I'm hardly certain that you can figure out what the
historical inflation rate has been.

> for a real risk-free return on investment of 3.1%.

BTW, one last interesting comment: risk.

U.S. Government debt is not "risk free", and indeed has never been
risk free. In the 19th century there was substantial risk involved,
and even today there is some risk.

Perry
Received on Wed Mar 4 03:57:12 1998