No. of Recommendations: 10
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
