Going Up! Interest Rates Must Increase

Summary

• US money supply has quintupled in the past year.
• Because of this money printing, inflation is here for the long run.
• Inflation forces increases in interest rates.

JLGutierrez/E+ via Getty Images

Zero Interest Rate Policy (ZIRP) has propped up bond prices and inflated a stock market bubble, but at what cost and when will it end? How will it end?

The cost of ZIRP has been a quintupling of the money supply that is certain to cause inflation, and the Federal Reserve knows it. The Fed is trying to gaslight investors into thinking inflation will be transitory. But they can't control our minds or interest rates for long.

Inflation will cause increases in interest rates despite Fed efforts to maintain control. Here again we're being gaslighted into believing that tapering will be the cause. Interest rates are going up regardless of who is turning the interest rate dial - investors or the Fed. Absent Fed manipulation against them, investors require a return on investment that is above inflation - a real return.

Insane money printing

The US government is poking the inflation bear, printing insane amounts of money testing to see its inflationary effects. We've even out-poked Japan. The M1 money supply has quintupled from $4 trillion at the beginning of 2020 to $20 trillion today and there is hot Congressional debate about printing another $4.5 trillion.

Forget the printing press. Money is "printed" when the Treasury issues debt. In "normal" times, investors, including foreigners, invest in this debt, but most of the new debt has been bought by the Federal Reserve. This game reveals itself in the money supply.

The money supply has increased because of spending on Quantitative Easing (QE), ZIRP, COVID relief and new government programs. Most are noble purposes, but the price tag is imminent inflation. Inflation will increase interest rates, putting an end to ZIRP.

The end of ZIRP

Some call it "Taking the punchbowl away" because the party is over. ZIRP has artificially inflated stock and bond prices. The inflation we haven't seen in the CPI has all been in security prices. Inflation goes where the money goes.

Bond prices will plummet because that's what happens when interest rates increase.

Stock prices will fall because the present value of future earnings will plunge. Stocks will be worth less because the discount rate will be higher.

Conclusion

We are currently getting a glimpse of the inflation that lies ahead. There is still time to protect. Cybercurrencies are a reaction to the possibility that fiat money could become worth less or even worthless. Other defenses include TIPS (Treasury Inflation Protected Securities), real estate, precious metals, and a host of derivatives (like put options) that bet on decreases in stock and bond prices.

Do you see ZIRP in your future?

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Comments

[CMoneyEverywhere]

No they aren’t going up. Not by much at least. It’s a game of chicken. Don’t be the chicken.

[sunsetdeb]

I call it Houdini Economy. Nothing real about it folks. It's a house of cards.

[Bob the accountant]

The Fed is walking a knife edge. Keep interest rates in check to control federal interest payments from spiraling out of control while letting inflation run long enough to devalue the US debt. The balancing pole US economy wobbles up and down. Look out below!!

[dawgydaddy]

@Bob the accountant This is the game. To devalue the debt by devaluing the dollar. It’s been obvious for years that it’s the only solution. And then covid comes along and provides the political cover needed to enact the economic policies to make it happen.

But don’t start thinking something untoward is happening. All of the CDC scientists tied to research at the Wuhan lab in China is purely a coincidence.

[FlaYankee]

It’s beyond me that the ten year is at 1.5% while inflation is running hot at 5 to 6% ‘“officially” while the real rate is probably much higher. Bonds are grossly overvalued with negative real rates of return. The Fed has ushered in the everything bubble and it’s not a matter of “if” but when it all pops losses will be in the trillions. Be fearful when so many are being greedy!

[22thoroughbred]

@FlaYankee short long term govvies have been the most crowded trade for the last 6 months, waiting and waiting,

[FlaYankee]

@22thoroughbred The most overvalued bond market in history completely manipulated by Fed bond buying and a fed taper which can trigger the bursting of the everything bubble. Slowly nibbling on cef purchases as the market gets whipsawed but still heavily in cash at over 60%.

[Sheltie02]

No wonder Buffett is sitting on $140 billion cash. It may not be enough.

[FlaYankee]

@Sheltie02 Good point! With hyperinflation it may get you a hamburger!

[DonPaul Olshove]

The logic behind this article is very weak. It seems to be something like "I don't understand why interest rates haven't been increasing in spite of so much money printing, so it must be that interest rates are about to increase because of all the money priniting."

[pelle]

@DonPaul Olshove The Fed print for bank accounts, and banks move it back to the Fed so the huge money printing does not enter circulation and inflation never happens.

[DonPaul Olshove]

@pelle OK, that's a theory based on some observable details of the movement of cash. It doesn't explain WHY this is happening. More importantly, what is changing that will make this circulation change?

I'd really like to hear from our author. I DO want to understand HIS theory.

[Mark Ferry]

I think we'll get a spike in interest rates but it simply cannot stay that way for too long. The money printing will have to stop otherwise the middle class will get killed by the inflation, which has already started. Prior to COVID, many states' finances were disasters that could be fixed only by refinancing older muni bond debt with new lower interest rate debt. 20 years ago AA rated state GO debt paid 4%. Now it’s 2%. It will need to stay at this level or perhaps 25-50 basis points lower to keep local governments budgets from blowing up.

As soon as the states burn through their stimulus cash they will be looking to continue the refinance plan and if we get a big move up in the long bond rate, then they can’t do that. You can’t finance a 29 trillion dollar national debt and 4 trillion state/local debt with high interest rates for very long.

So I am asking the author and anyone calling for higher rates on debt over 10 years on the yield curve the following 3 questions:

1. How high do you see the 30 year yield going: 2.5%? 3.0%? 3.5% 4.0%...higher?

2. How long will it stay there: 6 months? 1 year? 2 years? 5 years...longer?

3. What will happen when states and cities can’t refinance their old debt or issue new debt because high interest rates preclude it?

I think we get a spike and then the QE resumes and 3 years from now we have lower interest rates in the 10-30 year range.

[22thoroughbred]

@Mark Ferry The Fed has really created a disaster scenario. While JPow was saying inflation is transient everyone could see it was up and continuing to go up, food inflation has been running 25-35% over the last 6-12 mos. and BTW everything is "transient" except death which is permanent, the only question is how long does it stay around. Recessions are a natural and important part of the economic cycle and the Fed has worked really hard to avoid the last 2 recessions so now how deep is the next one? Our economy would be in pretty good shape had they just stayed out of managing stock prices and stopped buying $1.2B a week in debt, primarily Mtg Bonds. I doubt you do but I remember 30yr Govvies with a 15%+ coupon so don't think for a minute "high" is 4%. Thus high inflation,(Fed) higher than normal unemployment (Fed), Low confidence in the Fed getting it right (Fed) and now the talk of dumping JPow for a real hawk (Yellen?). I do not see this ending well, but where do you go? Sometimes breaking even is a win if your option is a loss. I had the best 2-3 year period during the Economic Crisis (2008-09) when I bought S&P puts in the AM sold before the close and never held over a weekend, this time, nobody who's honest knows and anyone who says they do is lying.

[Ronald Surz]

@Mark Ferry I agree with @22@22thoroughbred . This is going to be a bad one. The can has been kicked to the end of the road.

[pelle]

@22thoroughbred the bottle necks will be resolved next year, and there is no increase in real wages - helicopter money excluded since it has ended - so no sustained inflation. Growth is slowing down.

[ckarabin]

Several thoughts:
1) people forget the monetary actions have a very long lead time. If the Fed stops its insanity now, the effect will first be felt about summer of 2022.
2)MMT advocates like to point to Japan as an example where printing money does not result in inflation. Notice how they like to ignore Venezuela, US in the 1970's and any other case that does not support their theory
3) how long will it be before people refuse to lend at rates less than inflation? They haven't refused yet. Do they have to think inflation is permanent before they do? Why not spend instead of save/invest if it avoids a 5%+ loss of purchasing power to use it now? Or invest it is something that benefits from inflation, i.e. commodities, fixed assets like homes.

[bluescorpion0]

totalitarianism can do anything. with a gun, the government can make you do anything, forever. So tell me again what isn't under their control? They can close borders, they can confiscate passports. Anything is possible in a totalitarian dystopia.

Btw, your characterization of inflation and rates could be more nuanced.

Stocks won't go down due to higher rates/inflation necessarily..but they will go up less fast. Inflation and equities are on a horserace. They don't come off , they just overtake each other or fall behind. But the key point is that they are always moving forward over time. Of course they dance back and forth so think of InflationETF. It represents the inflation rate benchmark. Your goal is to beat that ETF.

[Wallstreet Hunter]

interest rates won't increase substantial. Not substantial enough to prevent an inflation much higher the last generation has experienced so far.
At the end.....the debt clock is already showing what will be ...someday.....after an runaway inflation.....hyperinflation......the last step will be so short.....weeks maybe months...too late to react.

[ckarabin]

@Wallstreet Hunter Getting there now! This week I am running into countless items in short supply from waffle cones at Dairy Queen to soda lid tops and straws at McDonalds. Christmas ornaments not likely to arrive in quantity until January. Nike running out of gym shoes. Auto companies are now short by 9MM units worldwide. Semiconductor shortages literally emptying the shelves at best buy. Does anyone think they will get a good deal on any of those items when the seller has such a surplus of demand over supply?

[CMoneyEverywhere]

@ckarabin
I own a restaurant and everything is in short supply. It’s a nightmare.

[ckarabin]

@CMoneyEverywhere Sorry to hear! At McD's yesterday they ran out of cup lids and straws! Dairy Queen doesn't have waffle cones! It is well past the point of absurdity now. The Fed is pushing demand far beyond the ability to supply. They will curtail the monetary madness come November and move faster than people expect out of necessity. And that NEVER is good for markets. Then the margin collapse comes shortly thereafter.

[22thoroughbred]

Recessions are a normal and important part of an economic cycle, the Fed has artificially disrupted the cycle and avoided one possibly two recessions, the part where demand lessens, prices increase and interest rates are rising. So here we are today beginning a normal slowing but what will happen? The normal cycle or will it be so much deeper due to previous artificial moves by the Fed.

I’m convinced the latter, for all the reasons we now see daily, prices rising well over the “usual” 8-12%, the fact a large number of “investors” have never seen a lasting drop in stock prices over 12-24 months nor have many seen 10%+ Prime rate, etc etc so there’s no telling their reactions. No I see a really bad resolution to this cycle as the Fed has NO more arrows in their quiver. Add to that if we have a terrorist attack their is no emergency measures available, even if it’s 1/4 the size as 9/11.
Be prudent and safe going forward.

[ckarabin]

@22thoroughbred The amount of potential forced selling (margin related) has cascaded to a tremendous overhang on stock prices now. Once this Flying Walendas act tips over, it is going to go splat VERY quickly. Stay close to the Etrade computer screen and put your finger on the sell button to speed up your reaction time!

[Ronald Surz]

@22thoroughbred As I say in my book, when someone says "It's different this time," they're usually wrong, but here's why it really is different this time: (1) Interest rates have never been lower, (2) stock prices have never been higher, (3) we have never printed this much money, (4) the wealth divide has never been wider and (5) we have never had 78 million people (baby boomers) all simultaneously in the Risk Zone

[22thoroughbred]

@Ronald Surz thus rates must rise, stocks must drop, dollars must be taken out of circulation, lower income folks must get better educated and more in demand, and I have no clue what 78mm people should be doing, but it's not what they're doing now, sure, I see the Fed navigating that without a hitch