Thursday, September 29, 2022

Benefit of higher risk free rate


The higher rates provide higher risk free income to critical USD accounts.  

This is and will turn out to be a better policy than the MMT policy of permanent ZIRP with current institutional arrangements of ERISA.

A drawback of the policy adjustment though has been the severe reduction in NPV of all financial assets of moving it from 0.05% in March to the projected 4.5% in December…  9 months…

A 10-yr asset would project a 35% reduction in NPV due to an immediate adjustment from 0 to 4.5%… so with a 9 month adjustment period we perhaps see a bit less than this…

They should have done this a lot slower over multiple years for a more stable outcome for financial assets… but we ofc have Art degree morons in there trying to run it and reduce their figurative “inflation!” so there’s going to be chaos…




6 comments:

Marian Ruccius said...

It is an interesting argument you make, Matt. However, I think it is fair to note (as I understand it) that the MMT/Mosler/Mitchell/Fulwiler position on this has never been to deny the advantages you highlight, but rather that it would be better for society if the (real) economy were to adjust to a permanent zero interest rate. How about Smithin's proposal that the real rate of interest should be stabilized at a low level?

Matt Franko said...

They ignore the institutional arrangements of ERISA… which is a US Law… so you have to operate under the law..

In fact iirc the ERISA authorized Treasury to issue fixed rate 6% APR securities FOR ERISA ACCOUNTS ONLY… but Treasury has never issued them to my knowledge…

Probably because the policy rat was higher than 6% in 1978 when ERISA was passed and they forgot about it…

Adam Eran said...

Matt's got the right idea: pension returns guaranteed by Treasury are far preferable to penalizing the entire economy with high interest rates (and less, and more uncertain employment)

Matt Franko said...

I could see participation rate falling due to perhaps an acceleration in retirement ts from the higher rate…

Which is not what Fed stated objective is…

NeilW said...

"Matt's got the right idea: pension returns guaranteed by Treasury are far preferable to penalizing the entire economy with high interest rates (and less, and more uncertain employment)"

You don't need negotiable instruments that anybody can buy to do that, and that have uncertain impact on the lending market and a load of other things.

Pension returns can be guaranteed by Treasury using a 'state pension' or a National Savings index linked deposit account.

US law can be changed - since you'd need to change it anyway to shut the Fed down and handle the zero rated overdrafts required to keep the banks going.

There is no economic benefit to having by default interest payments in the vertical circuit.

Matt Franko said...

Don’t need to change any law Neil it’s already in ERISA iirc…

6% guaranteed ERISA only UST securities …