MONEY Health Care

What is Obamacare?

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Robert A. Di Ieso, Jr.

Here's how President Obama's health insurance reform law actually works

Today, there’s been a lot of talk about the Supreme Court’s latest ruling on the Affordable Care Act, better known as Obamacare. But while the law signed by President Obama in 2010 made huge changes to the health insurance system, most people under 65 still get their coverage the way they always did: from their employer. Unless you bought a health insurance plan on a government-run marketplace, you might not be familiar with how the ACA provides coverage. Here are answers to some common questions:

How does the law help people get insurance?

The law set up insurance “exchanges” that offer consumers and small businesses a choice of standardized and heavily regulated health plans. For the most part, this marketplaces serve people who aren’t offered insurance by a large employer.

And how is that different from the way people bought their own insurance before?

On the exchanges, insurers are not able to turn anyone down because of a pre-existing condition; from pregnancy to heart disease, they’re all covered. The law also restricts or blocks annual and lifetime limits on what insurers, including in employer plans, will pay.

Rates aren’t tied to your health, although smokers may have to pay up to 50% more. The oldest people in a plan will pay no more than three times the rate paid by the youngest. In short, policies you buy yourself will be a lot more like the group plans you get at work.

What does coverage cost?

The insurance on the exchanges isn’t free—a family of four could well face annual premiums of $10,000 a year. But many of those using the exchanges will also receive federal subsidies—technically, tax credits—to help them buy. Those subsidies reach deep into the middle class: For families earning up to four times the poverty line—about $95,000 for a couple with two kids—the tax credits will be set so that they pay no more than about 9.5% of their income for a fairly basic health plan. (That cap is designed to rise gradually should premiums grow faster than incomes.)

People with lower incomes pay even smaller percentages. Some pay almost nothing.

The law was also meant to allows millions of the near poor to join Medicaid through the exchanges, although a Supreme Court decision left it up to individual states whether to participate in the expansion. Currently, 21 states are opting out.

What kind of coverage can I get?

All the plans must provide at least a standard menu of essential benefits. They come in four basic types: bronze, silver, gold, and platinum.

Although plans can compete by mixing different premiums, deductibles, and co-pays, you’ll know the average level of out-of-pocket costs you can expect in each type. For example, the silver plans ask you to pay about 30% of your costs out of pocket. (Subsidies are based on the cost of the silver plans.) The more expensive platinum plans, which would be most similar to a large employer’s coverage, would have out-of-pocket costs of just 10%.

How is all this paid for?

In a number of ways, but the most direct one is that high earners got a payroll tax hike. Starting in 2013, couples have paid additional taxes on earnings above $250,000 ($200,000, if you’re single)—0.9% on earned income and 3.8% on investment income.

Why are some people fined for not buying coverage?

By 2016 you’ll be dunned $695 a year or 2.5% of your income, whichever is higher, if you don’t have health insurance. However, there’s an exemption if premiums top 8% of your income. Insurers fought for this provision. Even with subsidies, some people may decide that coverage is too expensive. They’ll tend to be healthier than average—that’s why they’d be willing to take the risk. But that poses a problem in a system where insurers have to take all comers. If healthy people drop out, the pool of people paying in will typically be sicker and more expensive to treat. That causes premiums to rise, which causes more healthy people to drop out, which means higher premiums, and so on. To prevent this “death spiral,” the law pushes people to buy.

Adapted from “The Truth About Health Care Reform,” which appeared in the May 2010 issue of MONEY.

MONEY Airlines

Airline Group Says Your Carry On Bag Should Be Even Smaller

You might have to pack lighter--and buy a new carry-on bag

On Tuesday, a trade group representing airlines around the globe published new guidelines for the size of carry-on bags. The International Air Trade Association says that if bags are limited to 21.5 inches high (standing up on wheels) by 13.5 inches wide by 7.5 inches deep, then “theoretically” everyone on a 120-seat plane should be able to bring a suitcase on board.

(The press release doesn’t elaborate on whether their theory accounts for duty-free-shop hauls and that guy in front of you who insists his weirdly-shaped garment bag can fit if you push down on the door really, really hard.)

According to the Washington Post, the new guidelines, which individual airlines may or may not choose to adopt, call for bags about 21% smaller than currently allowed by major U.S. carriers. (That’s measuring by volume.)

carryon2

Considering that many travelers intentionally purchase the largest carry-on bag possible in order to pack as much as they can, many pieces of luggage would be too big to be carried onto the plane if the change is made.

That’s a big if, of course. An American Airlines spokesman, for one, told the Post the carrier has no current plans to change the rules.

Here’s a look at the current rules for airlines (in inches), and how much your bag might have to shrink if they went with the new guidelines. One thing that jumps out is how varied the rules actually are.

American, United, Delta, Jet Blue, Aeromexico, Virgin Atlantic

Current policy: 22 high x 14 wide x 9 deep

How it would shrink if they followed IATA guidelines: 0.5 x 0.5 x 1.5

Change in volume: 21%

Southwest

Current policy: 24 high x 16 wide x 10 deep

How it would shrink if they followed IATA guidelines: 2.5 x 2.5 x 2.5

Change in volume: 43%

Air Canada

Current policy: 21.5 high x 15.5 wide x 9 deep

How it would shrink if they followed IATA guidelines: 0 x 2 x 1.5

Change in volume: 27%

Alaska Airlines

Current policy: 24 high x 17 wide x 10 deep

How it would shrink if they followed IATA guidelines: 2.5 x 3.5 x 2.5

Change in volume: 46%

WestJet

Current policy: 21 high x 15 wide x 9 deep

How it would shrink (grow) if they followed IATA guidelines: (+0.5) x 1.5 x 1.5

Change in volume: 23%

Spirit

Current policy: 22 high x 18 wide x 10 deep

How it would shrink if they followed IATA guidelines: 0.5 x 4.5 x 2.5

Change in volume: 45%

British Airways

Current policy: 22 high x 18 wide x 10 deep

How it would shrink if they followed IATA guidelines: 0.5 x 4.5 x 2.5

Change in volume: 45%

Air France

Current policy: 21 high x 13 wide x 9 deep

How it would shrink (grow) if they followed IATA guidelines: (+0.5) x (+0.5) x 1.5

Change in volume: 11%

Lufthansa

Current policy: 21.6 high x 15.7 wide x 9 deep

How it would shrink if they followed IATA guidelines: 0.1 x 2.1 x 1.5

Change in volume: 28%

Read next: Airlines Aren’t Making Nearly As Much Money As You Think

MONEY The Economy

What’s Inflation?

What's inflation? How is it calculated? And how does it affect your life? Money's Pat Regnier has the answers.

In this Money 101 Explainer, editor Pat Regnier walks through how inflation, the rate of change in the prices you pay for everything in your life, is calculated. He also explains why you might feel that inflation is worse than the government tells you it is, and why a big jump in housing prices might not be a sign of inflation. Also covered are how taxes and Social Security benefits can be linked to inflation, and why the Federal Reserve pays close attention to it.

MONEY The Economy

What Do the Jobs Numbers Actually Mean?

A look at the monthly employment reports and what they mean.

The unemployment rate can often be used as a measure of how tough or easy it may be to get a job at a certain time. That one number, however, paints a picture that’s a little too simplistic. The unemployment rate fails to include people who have given up looking for work and those who consider themselves underemployed. To get a clearer picture, look at the employment growth number and the unemployment rate together.

MONEY Taxes

What Happened When I Did My Taxes With My 10-Year-Old

What I learned about my kid—and what she learned about money—when we filled out the Form 1040 together.

This past weekend, I asked my 10-year-old daughter Lucy to help me do our family’s taxes. She read off from my W-2 and our 1099 forms as I filled in the boxes on the tax prep website we use. This meant, of course, that she got to see exactly how much her parents earn.

I expected that this was going to feel like the Big Reveal of a closely guarded secret. As I probably should have known, the numbers at first meant nothing to her. Annual incomes are an abstraction to a kid who has never written a rent check.

The real talk came a couple of days later, when Lucy and I had a chance to look over the actual 1040 I sent to the IRS, and I could show her how it all fit together. I’m glad we did that.

Before I get that to that conversation, though, a word about why I decided to do this. I was inspired in part by New York Times columnist Ron Lieber’s case for telling your children what you make. As Lieber points out, kids have a knack for figuring this out anyway. And showing them how you handle money—even when (believe me) you are far from perfect at it—can be a first step toward showing them how to be competent with it themselves.

I was also motivated by a more cranky-old-man impulse: I’ve been surprised by the number of young adults I meet who don’t know how to do their own taxes. To me, knowing how to fill out a 1040 is a just a basic life skill everyone should have by 18. I know this is more sentimental then reality-based. After all, I also put driving a stick shift in this category. And for years I’ve been farming out the hard work of my own taxes to the H&R Block website. (Thanks, AMT.)

Still, I remember that I was in the eighth grade, our teacher Sister Loretta had students fill out 1040s using mock W-2s as a math exercise. She was cracking the door on the adult world a little bit wider. Kids are always eager for those peeks, and when they get one, they seem especially open to learning. And talking.

For me and Lucy, the tax talk turned into one of the most impressively grown-up discussions we’ve ever had. She saw what we make, and I tried to put that in the context of what other Americans earn. She also saw what we pay, and so then we turned to where that money goes and what it’s used for. I tied the conversation in to a news story I read that day, about legislation in Kansas that would bar families on public assistance from spending that money on a long list things, including casinos, but also movie tickets and trips to the swimming pool. We talked about why some families need financial help, and why people have such strong opinions about that.

Lucy doesn’t need me sharing her nascent political views with the world, so I’ll just say that she surprised me (the way kids do) with her insights about what’s fair and about the choices people should have. Her ideas seemed too thought-out for her to just be parroting back what she guessed I’d like to hear. So I learned something about my daughter. And my wife and I also had a chance to articulate some of the values we are trying to pass on to our kids.

Lucy also asked a simple but very good question about our own money: “So this is how much you made, but how much do you have?” The distinction between making money and actually having any is an important one, and these days in our family we are frankly doing better on the former than the latter. Turning from our income tax forms to our savings, I was able to at least hint at some of the tricky choices her mom and I are trying to juggle.

Lucy didn’t get a “wow” moment of understanding from this, but I think I laid the groundwork for future discussions of things we have to be realistic about. Like how we’ll pay for Lucy to go to college, and where she’ll be able to go. And why (to hit on a question that’s really on her mind) she still has to share a room with her little brother.

I was able to have this conversation from a standpoint of some comfort. For a lot of parents, opening up about money means talking about losing a job, or how they’re dealing with a foreclosure, or how they’re going to buy the groceries this week. Those are much tougher things to talk about. But starting from where we are, and knowing we’ll have some ups and downs in the future, I think I’m glad that for my daughter this part of real life is already a little less mysterious.

MONEY Economy

The Gloomy Economic Message Hidden in the Fed Statement

Despite hints of a rate hike, stocks and bonds rallied on the Fed's latest announcement. Here's the kinda depressing reason why.

For the uninitiated, here’s a primer on Fed-ology 101: When the economy looks stronger, the Federal Reserve will want to raise interest rates to curb inflation. And once the Fed’s benchmark rates go up, that’s generally bad for the price of bonds — and (indirectly) for stocks too.

But we aren’t in a 101 class right now.

On Wednesday, Fed chair Janet Yellen announced the latest Federal Open Market Committee decision on rates, and dropped the word “patient” from her statement. That’s a signal that the Fed could raise rates as early as June. In other words, it thinks the economy is healing from the Great Recession.

So what happened next? The stock and bond markets rallied. That’s partly because the market already expected the language change. But it may also be because traders hear the Fed suggesting something a bit unnerving about the economy.

Along with the statement on current rates, the Federal Reserve also releases a survey of where FOMC members expect rates to go in the future. They brought down their estimates for where short-term interest rates are headed next year, from a median of 2.5% to 1.875%. In other words, even if the economy is getting better, the definition of “better” is looking a little slower than previously thought.

This at least rhymes with, even if it does not confirm, a worry among some economists that the global economy could be at risk of something called “secular stagnation,” or a pokey “new normal.” In a new normal world, interest rates and inflation tend to be lower for longer, but long-term growth is subdued too.

Factors that might contribute to a long-run slowdown range from inequality (which dampens demand) to demographics (slowing the growth of the workforce) to technology (which could mean companies need fewer workers and less capital investment.) Economist Lawrence Summers, who put the phrase “secular stagnation” on the map, says that this is a risk to be guarded against, not a sure thing or even the most likely one. And “new normal” has been a bit of a fad among bullish bond investors, who of course may be overconfident in their prediction that rates will stay low.

That said, the Fed’s latest statement is a reminder that the global economy is still very wobbly.

MONEY Federal Reserve

If the Fed Is Worried About Wall Street Bubbles, Maybe It Should Regulate Wall Street

Foot of George Washington statue with view of NYSE in the background
Randy Duchaine—Alamy

The Fed ponders raising interest rates to tamp down on financial speculation, but tight money is not the only option.

The Federal Reserve and the bond market are in a weird place right now.

Many officials inside the central bank are anxious to start getting back to normal, and to move short-term interest rates off the near-zero they’ve been at since the financial crisis. But the bond market isn’t listening: Even knowing that the Fed wants to tighten, investors have piled into long-term bonds, holding the benchmark interest rate for 10-year debt at just 2%.

This could mean that the bond market thinks the Fed is just plain wrong in its increasingly upbeat assessments of the economy. Investors’ eagerness to park money in low-yielding but credit-safe Treasuries seems to indicate deep worries about the prospects for long-term growth, and little concern about inflation. But as the Wall Street Journal’s Jon Hilsenrath noted yesterday, some inside the Fed are considering another interpretation of low bond yields. Maybe foreign investors are just pumping up U.S. assets because troubles overseas make anything denominated in dollars more attractive. If that’s the case, the Fed should be worried about asset bubbles.

And so, counterintuitively, New York Federal Reserve president Bill Dudley has been arguing that low long-term bond yields may be a reason for the Fed to tighten short rates even faster — to prick any bubbles that might be forming. Dudley, in a December speech cited by Hilsenrath, draws a comparison to the mid-2000s:

During the 2004-07 period, the [Fed] tightened monetary policy nearly continuously, raising the federal funds rate from 1% to 5.25% in 17 steps. However, during this period, 10-year Treasury note yields did not rise much, credit spreads generally narrowed and U.S. equity price indices moved higher. Moreover, the availability of mortgage credit eased, rather than tightened.

Easy mortgages, it hardly needs pointing out, did not work out so well.

But raising rates is the only way policymakers could respond to concerns about reckless borrowing. On Twitter, economist Adam Posen, a former member of the Monetary Policy Committee at the Bank of England (the U.K.’s version of the Fed), ticked off some other possibilities.

All of these things amount to greater scrutiny of and tighter controls on bank lending behavior. Such policies are known in central-banking jargon as “macroprudential” regulation. The Fed itself is a regulator of banks. And even in the parts of finance where the Fed doesn’t have direct regulatory authority, it has influence as part of an umbrella group of “stability” regulators created after the crisis. It can also sound loud warnings, asking Congress for more regulatory tools and better rules.

Confronted with the possibility of financial-sector bubbles, we seem to have two choices:

1) Raise interest rates until the economy cries “uncle” and no one wants to speculate anymore. Do it even if it’s taken years and years for the economy to get anywhere close to full employment, and even if wage growth is still sluggish.

2) Make sure banks don’t leverage themselves up too their eyeballs, that Wall Street doesn’t create AAA-rated derivatives on junk mortgages that no one understands, and that people don’t get loans they can never pay back.

If forced to choose, I suspect people in finance, who most certainly have the Fed’s ear on these things, prefer the blunt hammer of option #1 over option #2. They’ll moan about regulation, and question whether it’s even realistic. And frankly, the Fed often hasn’t done that job very well. Wall Street has some of the cleverest people in the world working 24/7—crack down on one crazy, risky scheme, and they’ll come up with a new one. It’s also not crazy to be skeptical of the idea that central bankers will be able to know a bubble when they see it.

But of course trying to prevent bubbles by raising rates and tightening money is a form of regulation, too. The immediate costs are spread out a lot more widely, to everyone looking for a job or hoping to get a raise. And if the Fed should be humble about its abilities as a Wall Street regulator, well… it doesn’t have such a great track record on predicting when the economy will be healthy, either. So maybe it shouldn’t be too quick on the interest-rate trigger when inflation is still very low, unless there’s real evidence of an asset bubble somewhere.

MONEY

The Fed Sees the Economy Getting Back to Normal. The Market’s Not So Sure.

150107_INV_FEDRATES
SAUL LOEB—AFP/Getty Images

Why bonds are rallying even as the Fed hints at tightening.

The Federal Reserve has been signalling that it is getting ready to raise short-term interest from near-0% later this year. It recently ended its purchases of bonds under the unconventional stimulus program known as quantitative easing. Read the front-page newspaper headlines, and it looks like the era of very low interest rates is coming to an end.

But the numbers on the market tickers are telling a different story. This week the yield on safe 10-year Treasury bonds, a benchmark for long-term interest rates, tumbled to below 2%. What gives? How is it that interest rates are going down when it looks like the Fed wants to raise them?

The answer, in part, is simple. The Fed doesn’t get to set interest rates on its own. Day-to-day market commentary make it sound like interest rates can be changed with the push of a button: Fed chair Janet Yellen and the rest of Federal Open Market Committee declare that rates shall rise, and then, boom, you get a better deal on CDs and have to pay more to refinance your house.

In fact, in normal times, the Fed only sets short-term rates. What happens to rates on loans maturing years down the road is determined by investors, and it all plays out in the moment-to-moment fluctuations of yields on the bond market. When demand for bonds is high, their prices go up and yields go down; yields rise when bond prices fall. Bond investors think a lot about Fed policy, but they also have their eyes on a host of other economic fundamentals that determine how much it should cost to borrow money.

“Fed policy matters a lot in the short term,” Ben Inker, co-head of asset allocation at the mutual fund manager GMO, recently told me. “It only matters in the long-term if they show themselves to be incompetent.”

Of course, these haven’t been normal times. With the quantitative easing program, the Fed had also been buying up longer-term Treasuries. Lots of people believed that this meant yields were artificially low, and would spike once it looked like QE was over. But the end of the Fed’s bond purchases hasn’t led to a spike in rates. It turns out investors still really want to hold long-term government bonds. “I think now what people are saying is maybe rates weren’t artificially low—maybe they were low for a reason,” said Inker.

Investors like to hold Treasury bonds when they don’t care for the alternatives, such as putting money into expanding their businesses or building new office buildings, houses, and factories. And they are happier to accept low rates when they don’t see much risk of the economy overheating and producing inflation. In short, the low long-term yield on bonds reflects the market’s fairly pessimistic outlook for growth in the long term.

The latest economic numbers from the U.S. are looking healthier lately. Unemployment has come down, and consumer confidence is up. Bond markets, however, are seeing a lot of bad news abroad, and perhaps are worrying that it will spill over to the U.S. In Europe, for example, very low inflation is threatening to turn into deflation—or falling prices—which may sound nice for consumers, but reflects weak demand and makes it harder for borrowers to settle their debts.

The weak global economy has also brought down yields on other government’s bonds—Germany is paying 0.5%—which make Treasuries look like a comparatively good deal. That’s another factor keeping demand for U.S. bonds high and yields low right now.

So here’s the picture: The Fed sees an economy that’s getting stronger, and is looking to raise short-term rates sometime this year to get ahead of the risk of inflation. But markets still see plenty to worry about. Those worries may include, as economist Brad Delong has pointed out, the risk that the Fed may slow down the recovery too soon.

MONEY bonds

Why Skimpy Bond Yields Are a Retirement Game Changer

farmer in field of bad crop
Adrian Sherratt—Alamy Is a long season of slow growth and low returns ahead?

A 10-year Treasury bond now pays less than 2%. That may make it harder to earn the returns you expect in your 401(k).

Yields on the benchmark 10-year Treasury slipped below 2% on Tuesday as bonds rallied. (Bond prices rise when yields, or interest rates, fall, and prices fall as rates rise.) Since the aftermath of the 2008 financial crisis, bond yields have bounced around near historic lows. That’s had many investors worried about what would happen to their fixed-income investments when the seemingly inevitable rise in bond interest rates finally arrives.

Screen Shot 2015-01-05 at 3.44.58 PM

But in fact, today’s low yields could present a long-term challenge to retirement-oriented savers, even if interest rates stay low, and even if bonds today aren’t overpriced. And investing mostly or entirely in equities won’t immunize you from the problems of investing during a low-return era.

What happens if bond yields rise. First, let’s consider what happens if the conventional wisdom is right, and bond yields do start to rise again. If you hold bonds in a mutual fund as part of, say, a 401(k) plan, the most important thing you can do is understand your risk when bond prices fall. A plain-vanilla, intermediate-term bond fund these days has a “duration” of about 5.5. That measure of interest-rate risk roughly means that if rates rose by one percentage point, the fund would fall 5.5% in value. (Your actual loss would be lower, since you’d still be getting paid interest on the bonds in the fund.)

A decline in the value of a fund that’s the safe part of your retirement portfolio could come as a shock, and for money you may need soon, a shorter-duration bond fund makes sense. But keep short-run bond fund losses in perspective: Over the longer run, a shift up in rates can also help make up for what you lost, and the current yield on bonds gives you a strong clue about what to expect.

Say you own a diversified bond fund. Assume the yield is about 2% when you buy it, and the fund’s average bond matures in seven years. According to numbers from Vanguard, a sudden two-point jump in rates—a huge spike—would cause the fund to lose about 8% in total. As its bonds paid out higher yields, however, your annualized return after seven years would still be likely to level off to just about 2%.

What happens if yields stay low. The real risk with bonds today, however, may not be losses in the short run. It’s that the returns will stay frustratingly low for a long time.

Ben Inker, co-head of asset allocation at GMO, a Boston fund manager, lays out two scenarios, one he calls “purgatory” and the other “hell.” In purgatory, rates are headed for a spike. Bond prices will fall, and stocks might too. But after that you pick up better yield and better returns.

In hell, interest rates stay low. Part of the reason it’s hell is why interest rates stay low: The economy never gets back to its pre-2008 strength. With low growth prospects, there’s less demand for capital, and many investors around the world are content to accept relatively low returns on cash and bonds.

Part of the reason yields have recently fallen below 2% is that bond investors still see some risk of this “secular stagnation” scenario.

Ironically, in hell, your bond investments don’t lose money, since there’s no big rate spike. And today’s stock prices, oddly, might make sense too. Here’s why: When the price of stocks is high relative to long-run past earnings, future returns tend to be lower. Today the P/E ratio for stocks is expensive at 27. (The average is 17.) So stock returns may be on the low side. You still may be willing to take that deal, however, if you are earning only 2% on your bonds.

That may help explain why stocks have recently shot up. But if so, that’s a one-time adjustment. Hell is not just a low-bond-yield world. It’s a low-total-return world.

That would be bad news for savers, especially younger ones who will be putting much of their money into the market in the future. In the hell scenario, a typical portfolio earns 3.4% after inflation instead of the 4.7% Inker assumes you’d have gotten in the past. “Let’s say you turned 25 in 2009 and started saving,” he says. “You end up accumulating 25% less by retirement.”

Inker stresses he doesn’t know which scenario we’re headed for. The one constant is that in neither are there lots of opportunities to make money with low risk. “This is a frustrating environment for us as investors,” admits Inker. “It is less clear what the right thing to do is than throughout almost the rest of history.” The trouble with bonds, it turns out, is bigger than unpalatable yields. And it’s the trouble with an economy that is taking a long time to find its true normal.

 

This story is adapted from “How 2% Explains the World,” in the 2015 Investor’s Guide in the January-Feburary issue of MONEY.

MONEY bonds

This Nobel Economist Spotted the Last Two Bubbles—Here’s What He Says About the Bond Boom

Economist Robert Shiller
Joe Pugliese Economist Robert Shiller

The economist who wrote about irrational exuberance in stocks and real estate says bonds don't look like a classic bubble. But they're no bargain.

This month, Yale economist Robert Shiller, who shared the Nobel Prize in economics in 2013, is publishing the third edition of his classic book Irrational Exuberance. Some might take this as an ominous sign. The first version came out in 2000, and it made the case that stock valuations looked awfully high, and that people seemed too optimistic about tech stocks. You know what happened next.

The second edition, published in 2005, had a new chapter about the unusually high price of real estate. You know what happened that time, too.

Now Shiller has added a new chapter on another asset class that has become historically expensive: bonds. Should we be freaking out?

Bond prices rise when yields fall, and on Tuesday the benchmark Treasury yield slid below 2% for the first time since October. The long-term average for longer-term bond interest rates is 4.6%. Rates have been low ever since the 2008 financials crisis—and since at least 2009, some market observers have called the bond market a bubble.

Shiller, however, resists applying the B-word to bonds. “It doesn’t clearly fit my definition of ‘bubble,’” he says. “It doesn’t seem to be enthusiastic. It doesn’t seem to be built on expectations of rapid increases in bond prices.” (Shiller spoke with Money in December.) In the unlikely event you meet anyone at the proverbial cocktail party talking about bond funds, he’s probably complaining about the lousy yields, not talking about the killing he expects to make.

Still … Shiller does point to one similarity between today’s low yields and past bubbly episodes. Bubbles are a result of a psychological feedback loop: As asset prices go up, people come up with stories to explain why, which helps push prices higher, reinforcing the story, and so on. In the tech boom the story was of a new era of dotcom-fueled growth. The rationalizations about housing prices centered on cheap mortgages and financial “innovations.”

With bonds, too, says Shiller, “there are theories that have been amplified by the price performance.”

The low-rate story driving bond prices, however, is a gloomy one. Investors seek the relative safety of bonds—especially sure-to-pay-back Treasuries—when they feel pessimistic about the economy and comfortable that inflation will be low.

Professional bond managers today can tick off a host of factors weighing down rates and propping up fixed-income prices. There’s inequality, which may be holding back spending. The risk of deflation (falling prices) in Europe and Asia. Bad demographic trends in developed economies. You can even add robots, says Shiller. “There’s a suggestion that computers are going to create a more unequal world, and that this is inhibiting people’s spending plans,” says Shiller. Instead consumers try to save more, bidding up the prices of assets.

The idea of an economy that never quite gets back to prosperity has been labeled “secular stagnation” and the “new normal”—the latter term popularized by Bill Gross, before he made his surprising turn away from Treasuries. (Gross recently left Pimco for Janus. Here is a 2010 interview with Money in which he discussed his “new normal” view. )

The “new normal” story is at least partly built into today’s bond prices. That means even if yields stay low, the strong return on bonds in recent years are unlikely to repeat. (As a rule of thumb, the current yield on a 10-year Treasury is also the total return you can expect over the next decade. So that suggests a slim 2% return.)

Shiller also points out that his research with Wharton economist Jeremy Siegel has shown that bond investors are pretty bad at anticipating inflation. Forget fever dreams of ′70s-style price hikes—a return to 3% inflation would render Treasuries a money loser in real terms. (Inflation is currently below 2%.) That doesn’t seem like such a high bar to clear. It’s what some economists think a healthy economy would look like.

Screen Shot 2015-01-05 at 3.45.15 PM

That said, the slow-growth, mild-inflation scenario remains compelling. The last long period when rates were this low, before World War II, was followed by a long climb upward—but that coincided with postwar expansion, Cold War defense spending, and the baby boom. Maybe that was the anomaly. (If secular stagnation turns out to be real, here’s what that might mean for investors.)

Low rates have probably been even more important, says Shiller, in driving up stock prices. With yields on bonds so meager, investors may have shifted money into stocks in hopes of getting a better return. In early versions of his new edition of Irrational Exuberance, Shiller described today’s bull market as the “post-subprime boom.”

“But I changed it at the last minute,” he says. Now Shiller calls this era “the new normal boom.”

This story is adapted from “How 2% Explains the World,” in the 2015 Investor’s Guide in the January-Feburary issue of MONEY.

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