Time Value of Money?

Michael Lewis, a pretty savvy financial guy who has written a lot about financial markets, says this:

 There is no such thing as a riskless asset. The reason an asset pays a return is that it carries risk.

Actually, even a perfectly risk-free financial asset (which I agree does not exist) theoretically pays a return, a payment for the use of your money for some period of time, which compensates you for the opportunities to use that money in other ways which you forgo when you buy that asset.

It is an odd mistake for him to make, but perhaps it is a nomenclature issue, with financial guys thinking of returns in terms of spreads, say against the risk-free rate.  Certainly if you define it that way, returns on financial assets would be all due to risk.


  1. Brian:

    Splitting hairs here, but couldn't I argue that by tying my money up in a (theoretical) risk-free asset, I "risk" missing a higher-return investment that comes available during the term of the risk-free asset?

  2. will:

    Not for the next ten years, it doesn't!

    (This would be a minor point except that I think it's pretty strong evidence against your macroeconomic theories. You say that fiscal stimulus is bad because it uses up "money" that private firms were using. But if the supply of money is limited and so the marginal firm is using it in an effective way, why is there a 0% interest rate?)

  3. OneEyedMan:

    There is no rule that says the time value of money has to be positive. It could well be that once you stripped all the risk from risk-less assets, they would have a negative return. One can argue that over long enough time horizons, reliable stores of value (gems, gold) pay negative interest once you account for storage, protection, and the like.

  4. JoshK:

    One of the first thing I learned when I started my first job at a bank was that the "risk free rate" really meant your overnight financing rate. For example. If you could buy gold now and sell the 90 day future you would need to finance that gold to make it worth it (and that's why gold futures cost more than the gold itself). The rate that makes me indifferent is my "risk free" or financing rate. It's really just where bank internal financing would come out.

  5. Don:

    will: "But if the supply of money is limited..."

    Fail. The money supply is NOT limited. That's the whole argument against the Fed and not requiring an asset-backed currency (e.g. gold, silver, whatever).

  6. will:

    @Don: Did you read my post? I was saying that the supply of money is NOT limited.

    Sometimes, the supply of money is limited in a sense because, if the fed printed more money, it would create unacceptable inflation. What this means is that the supply of stuff, right now is limited, and a bunch of people want more stuff right now so they can create capital to get more stuff later, and so interest rates are high. I was saying that we were not in such a situation. Right now, not many people want stuff now, and so inflation and interest rates are low, and the Fed can print money without changing that.

    I think we agree about that, at least.

  7. Mark:

    "asset-backed currency"

    The problem with the "asset backed" argument is that the "asset" is as fiat as the paper. There is absolutely no reason why "gold" or "silver" should be the basis of your currency value. Gold and silver have no more intrinsic "money" value than paper.

    ANd the notion that gold and silver based money make an economy more stable is simply not born out by historical results.

  8. Mesa Econoguy:

    Michael Lewis is not actually very financially savvy.

    He was a retail wirehouse broker, not a hotbed of financial genius traditionally.

    He obviously has not studied CAPM.

  9. Sameer:

    No, that's actually exactly what he meant. Michael Lewis is not quite a "pretty savvy financial guy". He's a great writer, but he lives in Berkeley ferchrissake.

    Here's a good takedown:


  10. Sameer:

    I still agree that there is no risk free asset. It's not the "reason an asset pays a return". Everything has risk because we live in an uncertain world. There is no free lunch. There is no monotonic relationship between risk and return. CAPM is bullshit.

  11. J.R.:

    Swap in "premium" for "return" and give him the benefit of the doubt.