WHAT is the best estimate of future investment returns? This is
more than just a theoretical issue since, as this blog has
pointed out many times, US pension funds use future real returns
as the discount rate for their liabilities; the higher the
assumed return, the lower the liabilities then appear. They tend
to base those returns on their long-term results, often over 30
years. But that means the starting period is the early 1980s,
when Treasury bond yields were in the double digits and equities
yielded 6%. As inflation fell, yields dropped commensurately;
there was a revaluation effect on equity and bond prices that
boosted investor returns.  That effect was a one-off and cannot
be assumed to continue. If inflation falls much futher, the
developed economy will drift into deflation, which is negative
for equity returns and could easily trigger defaults on
corporate bonds (since revenues would fall while the nominal
cost of servicing the debt would be unchanged).   The key
variable for future returns is the