Why Interest Rates Will Go Up 19 comments
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How much longer can global central banks depress the true cost of money? If the business world has become a riskier place, then the cost of borrowing should be going up. If governments around the world need to borrow more to finance their spending programs, they should be paying higher rates on bonds, not lower rates.
Welcome to a world of inverted economics courtesy of quantitative easing and public debt issuance. The problem of course with suspending the laws of gravity for a period is that eventually the sky will come crashing down. This means a period of very high inflation at best, and at worse an inability to raise funds for public expenditure on health, welfare and education, and real spending cuts or higher taxation. Why inflation? This is the simplest phenomenon to understand. If governments print money then this inflates the money supply and more money in circulation leads to inflation. Of course, this only happens when this money is spent. If consumers choose to save – as they are now – then the impact of the increase in the money supply is delayed until that new money finds its way into the economy. That buys the government time – to get re-elected perhaps – but it does absolutely noting to tackle the underlying problem, in fact it makes it worse. The longer the delay in correcting imbalances and the worse the inflationary problem will be. Once the new money is spent, then the inflation arrives, and bank account holders will demand a higher interest rate as compensation or take their money out and spend it, adding to inflation. In these circumstances central banks have no alternative but to raise interest rates. Imagine what an impact that will have on financially stretched consumers, quite apart from the negative implications for public spending and its impact on economies. It is nothing short of a double-dip recession scenario. Yet there is a sense of historic inevitability of this process. It all happened before in the late 1970s. Then the only investors who did well bought gold, silver and oil, and even cash out performed equities, bonds and real estate.
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i follow some of your other non-SA works as well. i think the most disturbing part is not even in the near future, ie interest rates going up, but in the immediate. you can see the law of diminishing returns started to seep into the debt inflated system. one printed debt $ was leading to a rough 3$ of gdp growth and now is returning less than .50$ of gdp growth for that same dollar of debt. how the gov still finds a way to justify qe and then some (expanding talf etc) just escapes me.
but what do i know...im just writing on the internet
We are on the cusp of not only more bank failures but of several sovereign countries de facto failure. S & P's (we know how late they are on downgrading) negative warning on England's bond rating should be a wake up call. Except for political purposes, they do need their business, they would have downgraded them now instead of waiting for the inevitable. Italy, Spain and, definitely, Ireland are in terrible financial condition.
The move up last week in U.S. Treasuries is an indication of things to come. Mr. Cooper's gave a good explanation of why Keynesian Economics creates inflation - politics. From Greenspan to Bernanke, no one wants to take away the punch bowl so market forces will do it for them, BHO, Pelosi, Barney Frank, Chris Dodd and Harry Reid (Is this the best we can do for political leadership then Congressional Term Limits please!) notwithstanding.
This recession teaches us what recessions are supposed to teach us in a Free Market Economy: We have overcapacity and we must trim our sails as we are consuming more than we produce like a bunch of drug addicts and we will be forced to lower our standard living insofar as our wants are concerned. Unfortunately for politicians who prostitute themselves to the voters, their wasteful policies blow up in their faces, e.g., California and other states with irrational public polices to reward the unproductive and parasitic.
This condition will remain until the country returns to the disciple of Free Enterprise which will require of major political shift. The realities is that the political elite will give us more of the poison that is killing us which will create Stagflation.
Bernanke studied the Great Depression. Unfortunately for us he didn't learn anything and we once again have the "Forgotten Man", that person who pays the bills, fights the wars, is an entrepreneur and is productive, who must pay for it. Our government and its bureaucracy are staffed with students of Bernanke's irrational policy of all-knowing Central Government that will lead us our of this recession. Where are the facts to back this philosophy up? Certainly not The Great Depression or The Great Society and Vietnam or Jimmy Carter. Try the eighties! As I have lived during all of these times, all I can say is that "You had to be there!),
That would be a rational statement if the average person had the financial savvy of a corporate CFO who was balancing costs and rewards of capital allocation. If every American really had that degree of financial savvy then the credit card industry, the real-estate boom and less credible source of ready-cash such as auto-title loan companies, rapid refund services and payday loans would never have come into existence. Inflation is going to occur in this economy, though not at the Weimar Germany or Zimbabwe style rates that doom and gloom forecasters are predicting. I think that the typical American consumer has been burned badly enough by this last economic down-turn that there will be some memory, and related side-effects such as reduced retail sales (which given the effects of globalization don't do anything for the economy anyway but subsidize second-rate business plans and less-than-living wage jobs), and a resurgence of "Buy American," sentiment.
I'm firmly convinced that most of the upset over inflation is relatively political in nature and is at least partially rooted in the fact that given the cumulative effects of the last several "bubble to bust," cycles in the US economy the spending habits of Generation-X and Generation-Y consumers may start to resemble the spending habits of the WWII generation more than the "Me," generation.
On May 25 10:01 AM Mono wrote:
> great pete
>
> i follow some of your other non-SA works as well. i think the most
> disturbing part is not even in the near future, ie interest rates
> going up, but in the immediate. you can see the law of diminishing
> returns started to seep into the debt inflated system. one printed
> debt $ was leading to a rough 3$ of gdp growth and now is returning
> less than .50$ of gdp growth for that same dollar of debt. how the
> gov still finds a way to justify qe and then some (expanding talf
> etc) just escapes me.
>
> but what do i know...im just writing on the internet
Interest is a function of risk and our debt levels are sure starting to look risky overseas. The Fed is backing our existing creditors into a corner by monetizing debt and violating the principles of our symbiotic relationship. We cannot afford to behave as though we don't need one another.
Let's hope they don't go too far too fast.
Since when the governments borrowing plays the primordial role into world economy ?
PRIVATE companies don't need money to expand since demand is lower, so money should be in high supply.
Governments are borrowing the extra money to try and increase the demand.
As demand continue to slowly decrease, borrowing costs should be lower, not higher.
As well, I think the risk is decreasing, as companies start to make cost cuts and increase profitability, adjusting to the demand.
In my opinion you are very wrong on your assumptions.
Either by the debtor or by the lender.
Either with pennies on the dollar, or with dollars that are worth pennies.
For those nations with massive 'quantitative easing' amounts of currency, hyperinflation and crippling high rates of interest await.
To the extent that this investment yields a healthier and better educated population ready to work to improve living standards while living within our means- OK. To the extent this investment yields a population unwilling or unable to produce the goods and services required to yield these improvements, then the debt is a disaster.
But the US is not Zimbabwe, so don't look for runaway inflation anytime soon.
Like many authors, you're great at complaining about the state of things but you aren't so good providing alternative solutions.
-Matt
As much as communism was unsustainable, so is pure, free-market capitalism - it just goes against (selfish) human nature. Prophets of the pure free-market system are as misguided as was Karl Marx I fear.
On May 25 10:08 AM Prudent Man CFA wrote:
> An excellent primer. It isn't so much that history repeats itself,
> it doesn't have to. It is that people, especially politicians and
> bureaucrats, don't learn anything from history. Evidently their egos
> are so big and brains so small that they think they can rescind reason.
>
>
> We are on the cusp of not only more bank failures but of several
> sovereign countries de facto failure. S & P's (we know how late
> they are on downgrading) negative warning on England's bond rating
> should be a wake up call. Except for political purposes, they do
> need their business, they would have downgraded them now instead
> of waiting for the inevitable. Italy, Spain and, definitely, Ireland
> are in terrible financial condition.
>
> The move up last week in U.S. Treasuries is an indication of things
> to come. Mr. Cooper's gave a good explanation of why Keynesian Economics
> creates inflation - politics. From Greenspan to Bernanke, no one
> wants to take away the punch bowl so market forces will do it for
> them, BHO, Pelosi, Barney Frank, Chris Dodd and Harry Reid (Is this
> the best we can do for political leadership then Congressional Term
> Limits please!) notwithstanding.
>
> This recession teaches us what recessions are supposed to teach us
> in a Free Market Economy: We have overcapacity and we must trim our
> sails as we are consuming more than we produce like a bunch of drug
> addicts and we will be forced to lower our standard living insofar
> as our wants are concerned. Unfortunately for politicians who prostitute
> themselves to the voters, their wasteful policies blow up in their
> faces, e.g., California and other states with irrational public polices
> to reward the unproductive and parasitic.
>
> This condition will remain until the country returns to the disciple
> of Free Enterprise which will require of major political shift. The
> realities is that the political elite will give us more of the poison
> that is killing us which will create Stagflation.
>
> Bernanke studied the Great Depression. Unfortunately for us he didn't
> learn anything and we once again have the "Forgotten Man", that person
> who pays the bills, fights the wars, is an entrepreneur and is productive,
> who must pay for it. Our government and its bureaucracy are staffed
> with students of Bernanke's irrational policy of all-knowing Central
> Government that will lead us our of this recession. Where are the
> facts to back this philosophy up? Certainly not The Great Depression
> or The Great Society and Vietnam or Jimmy Carter. Try the eighties!
> As I have lived during all of these times, all I can say is that
> "You had to be there!),
On May 25 12:01 PM Hedged In wrote:
> There's no evidence that inflation will take off in the short term
> given the weakness of the economy. It looks instead that the trigger
> for higher interest rates will be a collapse in the dollar (which
> in any case will lead to higher inflation anyway).
Hedged only said no inflation take off in the "short term".
historically, economic peformance lags monetary policy by 2 years. the Fed started dropping interest in late 08 and printing press started running early 2009. by Q1 2011, we will see the result of Fed's great work. amen!
On May 25 01:14 PM Mistrofan wrote:
> Absolutely agree. There are absolutely no hints of High INflation
> in the real economy. Only the commodities market (paper based) went
> crazy. The real life is in deflation mood.
Watch out we are in a trading range and will test the bottom with the (SPX =702) I am not a good chartist but do have a crystal ball and a straight edge. :+).
1. Unemployment is moving higher for June July and August with the added paradigm shift in lower consumer spending and higher savings rates.
2. Short term deflation is real and next earnings will be low with dividends non existent for a few years and extreme pressure on raising capital and or selling bonds.
3.The US dollar will drop, foreign central banks will think its a run on the dollar overshoot the feds target causing some interest rate adjustments.
That third shoe is there:
-commercial real estate
-credit cards defaults
-Iran- Israeli nuke confrontation
-Eastern Europe depression causing European banks collapses
-terrorist attack to a major international center
The rainbow after the storm of 2009 is also there:
-obama is impeached
-the fed is abolished for raping the country
-the military comes home and parks its assets with in 50 miles of the US boarder.
-unionization is abolished
-the dollar stabalizes at 1 USD equals 5 Yuan
Markets begin to move up with April 1010 (SPX = 900 again).
The jobs of Bernanke and his cohorts must be eliminated. They have shown no leadership in bringing us out of depression; in fact there could be a case made that they have actually caused this deep and long recession. The market needs to set interest rates and the market doesn't need such a heavy influx of money. The money supply which is out there is plenty already. It just needs to be circulated and all this talk of recovery will eventually disappear.