Subject: Re: meaningless predictions
It's the real interest rate that counts. Interest rates are higher, but inflation is higher too.

Plus, there is tax to pay on the NOMINAL interest earned, so there is actually a loss if both inflation and interest rates rise the same amount.

Sorry for that false start.

Jim makes a very insightful and convincing argument. However: there’s a lot of percentage gain, when you’re starting at less than zero return, and it makes a difference, when you’re working with $160b.

So from about 2010 to 2015, 3 month Treasuries were earning about 0%, with inflation at about 2%. Then from 2016 to 2019, there was a brief spike in these treasuries to almost 2.5%, with inflation still at about 2%. Then the COVID madness, with treasuries back to zero, until about the beginning of 2022, and inflation around 2% (2020), 5% (2022) and 8% (beginning of 2023). And in 2023, inflation has dropped back to about 2-3%, with treasuries at just over 5% now.*

So we have had 4 different periods, with the difference between treasuries and inflation about -2% from 2010 to 2015, +0.5% (2016-2019), -2%, -5% and -8% (2021, 2022 and early 2023), and now about 2.7% (late 2023).

It is quite true that we pay taxes on the 5.2% current rate, not the 2.2% spread, so maybe we only keep half of that spread (5.2% less 1.3% tax, so 3.9% post tax, less 2.5% inflation, so we’re at plus 1.4%.

But still, +1.4% is so much better than the negative spread we’ve had for so long, now, almost 14 years, averaging about -2%. Although float has kept slowly increasing during that time, for comparison’s sake, -2% on $160b would be -$3.2b, and +1.4% would be +$2.2b. So the same float generates $5.4b more in earnings. Give that a 15x multiple, wouldn’t it be fair to say that the $160b in float is worth $80b more, at current treasury and inflation rates, compared to the past 14 years?

Regards, DTB

*P.S. I have been unable to find a graph showing the exact spread between 3-month treasuries and inflation over time, say in the last 20 years, or the average rates from year to year, so I have just eyeballed the data. Perhaps someone with access to this data (a Bloomberg terminal, for instance?) could sharpen this analysis. TIA