Mental Models discussed in this podcast:
- Discount Rate
- Equity Risk Premium
- Second-Order Effects
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Show Outline
Interest Rates
I discuss The Fed and their recent actions to lower interest rates to zero using the overnight lending rate.
I also cover the equity risk premium and second-order effects of zero interest rates.
Discount Rates
- Your Required Rate of Return
- Your need to save and invest can increase as rates fall
Summary:
When the Fed reduces interest rates to zero the first-order effect is a disincentive to save. Yet, zero interest rates should not reduce your discount rate because the second-order effect is because lower returns would increase your need to save money.
