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The DIY Investing Podcast

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  2. 80 - Zero Interest Rates should not reduce your Discount Rate

80 - Zero Interest Rates should not reduce your Discount Rate

Jun 16, 2020

Mental Models discussed in this podcast:

  • Discount Rate
  • Equity Risk Premium
  • Second-Order Effects

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode80

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.