The problem of zero rates

“By holding interest rates at zero, the government is basically tricking the population into going long on just about every kind of security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can’t stand earning 0% on their money, so the government is forcing everyone in the investing public to speculate.”

Seth Klarman

The reach for yield only increases when financing and cash rates are at zero. Buy gold, the carry is zero. Buy long bonds, the carry is zero. Buy stocks. Limited financing costs. Get out of cash. With inflation you are getting even less for cash and fund costs as a percentage of yield are increasing. There is no financial brake in the system.

So what happens when rates start to move up? This is a key problem for the largest central banks. How do you signal a rate increase without causing a major sell-off? I guess the answer is just to push the decision into the future. At some point, the level of asset prices will be high enough that the reversal in fortune will not be enough to sink the wealth of investors. It is not clear that this is viable strategy.