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The Big Lie About Ultra-Low Interest Rates

by Jeff Nielson, Sprott Money:

A normal, benchmark interest rate for a national economy is between 3 – 5%. Indeed, if we go back a little further in history , a normal rate was significantly higher than that range. This fact is mentioned because after eight years of monetary madness in the West, many (most?) people have completely forgotten what “normal” is with respect to interest rates.

The title of this article is something of a misnomer. There are, in fact, numerous big lies being disseminated concerning the Western world’s utterly insane, totally criminal, near-zero interest rates (and now “negative” rates). However, all these Big Lies are then piled on top of each other, in order to create an even Bigger Lie.

When Japan introduced the world to the “0% interest rate”, it was universally castigated for this monetary voodoo. But when the Western world copied Japan (after Japan’s policy had already failed for more than 20 years), suddenly near-zero interest rates became normal and acceptable. This brings us to the 21 stCentury Principle of Monetary Policy. If one nation institutes a really crazy monetary policy, by itself, it is labeled as “insanity”. But if everyone engages in that same, really crazy monetary policy ( after it has been proven to be a failure) then it becomes “normal” and acceptable.

To deceive our Zombie populations into believing that these Criminalized Interest Rates are “normal”, the mainstream media has turned up its propaganda machine to maximum decibels, broadcasting an endless series of lies and half-truths, as our governments pretend that they are not perpetrating the complete destruction of our economies. A particularly obvious-and-nauseating example of such lying comes from (where else?) Bloomberg News .

People have come up with a lot of reasons to worry about zero interest rates. At first they worried about inflation, and later about financial instability and bubbles caused by a reach for yield. But the years passed, and there was no inflation, no bubble or instability in financial markets . [emphasis mine]

Clearly the remarks above represent such audacious lies that no sane writer could possibly believe them to be true. “No inflation”? Food costs have more than doubled over the past eight years. Housing costs (in many markets) have also more than doubled.

“No bubble”? U.S. equity markets are at all-time bubble-highs. The U.S. bond markets is also at an all-time bubble-high – and it isn’t even supposed to be theoretically possible to have a stock bubble and a bond bubble, simultaneously. There are obvious real estate bubbles throughout all Western regimes.

“No instability”? We see daily headlines from Europe, across various jurisdictions of Big Banks in grave,financial peril . Indeed, more “bank bail-outs” have already begun. However, for the moment, let’s pretend that all of the pathetically obvious lies above were actually true – for the moment – and simply examine the reasoning behind the lies.

But the years passed, and there was no inflation, no bubble or instability in financial markets.

More generally, this reasoning translates as follows: our economies haven’t been destroyed yet, so this means there is no problem with near-zero interest rates. The ‘logic’ behind this assertion is so infantile that we have a joke/cliché which exposes such stupidity.

A man jumps off the roof of a 100-storey building. As he sails past an open window on the 50 th floor, someone inside the building hears him remark, “So far, so good.”

Here we have a liar/apologist hired by Bloomberg to pretend that near-zero interest rates are not destroying our economies, and this is the best fiction the writer could produce. Near-zero interest rates haven’t destroyed our economies yet, so they are OK. And (as already noted) every facet of the “evidence” used by the writer was a bald-faced lie. We do have raging inflation. We do have extreme asset bubbles. We do have massive, financial instability.

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2 comments to The Big Lie About Ultra-Low Interest Rates

  • Ed_B

    “A normal, benchmark interest rate for a national economy is between 3 – 5%. Indeed, if we go back a little further in history , a normal rate was significantly higher than that range.”

    Agreed. I well remember interest rates on CDs being in the 5% area maybe 15 years ago. That was a time when many pensioners were able to earn a fair rate of interest on their savings to supplement their Social Security and small pension benefits. Not any longer. Loaning a bank $100,000 of our hard-earned dollars only to get back $500-700 in interest after 1 year is ridiculous. That meager a payment does not adequately compensate anyone for the inherent risk in these low-interest investments, IMO, especially after taxes and inflation are considered. Specifically because of this, many pensioners are now consuming their capital at a frightening pace, not to fund a lavish lifestyle, but just to live. Most of these are aware of this problem and are hoping that their life runs out before their money does.

    I understand that this interest rate manipulation policy is part of the US Gov and Fed plan to force people into MUCH riskier stock and bond investments, as they search for some shred of reasonable interest with which to support their rising cost of living. But it is terribly risky… MUCH more so than the Fed and the US Gov care to admit.

    But then, all of this economic flailing can be laid directly at the feet of the Keynesians who promote these grand economic experiments without regard to the damage they do to real people, real businesses, and real economies. IMO, negative rates are a financial abomination as well as a sign of central bank capitulation. Their much talked-about lowering of rates policy has backfired on them and us BIG-TIME. It has not worked after 8 years in the US and nearly 25 years in Japan. If it was going to work, it would have by now.

    The reason that it has not worked is that the equation of borrowing costs vs. economic growth is not linear and is subject to a considerable dose of diminishing returns. The trend in this tends to go as follows: Reducing interest rates from 5% to 4% stimulates healthy economic growth. This encourages the bankers, cheered on by the US Gov, to reduce rates further to 3%. This also stimulates the economy and spurs its growth but not nearly so much. They continue to reduce the interest rates to 2% which shows almost NO increase in growth. But do they stop to figure out WHY this isn’t helping nearly as much as it once did? No, they barge on in the hope that it will start working again. Not only will it not start working again, it CAN’T start working again, because they have already gotten ALL of the gains from it that are possible. Beyond this point, no further gains will come because it is not possible for them to come. Apparently, however, this is too difficult a concept for them to figure out, so on they blunder with it. Thinking that this is either faulty data or a fluke of some kind, they again reduce interest rates to 1% and less.

    By now it is clear that there are many unintended consequences to these manipulated interest rates but the Fed is trapped in a vortex of its own making and from which it cannot escape. Because of this, they continue to cut interest rates far past the point where diminishing returns has brought the usefulness of this technique to zero. Instead, all they are now doing is enabling misallocations of capital because money is so cheap to borrow. People and businesses continue to borrow because they can and not because it is a good idea that they can use to make money. Business opportunities that ordinarily would be passed up are now seen as profitable because the cost of borrowing money to implement them is so low. This is a fallacy on their part because lousy business does not magically become good business just because it is a little cheaper to do.

    Businesses that are publicly owned use cheaply borrowed money to fund their share buy-backs. Reducing the share float doesn’t add anything to the bottom line but it does raise their dividends as about the same earnings become distributed over fewer shares. This makes the shareholders happy and may even cause the stock price to rise somewhat.

    All this becomes exacerbated by the fact that the US Gov is a HUGE debtor who cannot afford reasonable and historic levels of interest on its debt, so it strongly encourages the Fed to keep the rates much too low for much too long so that rolled-over US Treasury paper interest remains low enough to be paid each year. An $18T national debt funded at 2% means that the interest alone amounts to $360B. That is a LOT of money, yet it pales when compared to the interest on this debt if rates were to rise to their historic norm of, say, 5%. That would require 2.5x $360B to fund or $900B, which is 25% of US Gov annual spending. Since other mandated spending must be done, there is no room in the US annual budget for this. Taxes would HAVE to be raised and quite harshly at that. Higher taxes put a lot of pressure on the economy, making it less productive and therefore smaller in the coming years. This too creates a downward spiral in economic activity, which is not sustainable, so is not a long-term solution. Currently, business has curtailed all activity that is not completely necessary. They are cutting costs by closing business locations and laying off workers. They are fully in survival mode now and hoarding their capital until a more business friendly administration comes into office in January of 2017. Hopefully, this will usher in some much needed changes and not simply be another 4-8 years of the same pitiful excuse for leadership.

    Capitalism is a marvelous economic system but it is prone to “irrational exuberance”, often in the form of excess investment in things that do not warrant such investment. From time to time, a capitalistic system MUST purge itself of these excesses via a recession that brings capital allocation and malinvestment back into balance. If these are not excised from the system periodically, GREAT harm is done to the system that eventually can spiral out of control and lead to a serious depression that does severe damage to businesses, individuals, and the nation.

    But the US Gov and the Fed are firmly convinced that recessions are bad things that need to be stopped from happening, regardless of what sort of intervention / market manipulation is done to achieve that goal. All this achieves is that the lid on the pressure cooker is held down tighter and tighter for longer and longer. Eventually, it blows up in their faces and then we are treated to a round of “Who could have seen this coming?” from the idiots in the MSM. Yes, who indeed? Perhaps all of us who know more about real world economics than all the Piled Higher and Deeper folks who have been raised in an idiotic economic system that works wonderfully on paper but not worth a damn in the real world? I suppose that if we all lived on paper, Keynesianism would be the best way to run an economy because it most certainly is not working in the real world.

    So, just what IS the solution here? Well, our economy is sick and for it to get better it must take a dose of strong medicine. That medicine comes in the form or reduced government with fewer rules, regulations, laws, permits, taxes, and spending. We also need to stop allowing a gaggle of unelected bureaucrats at the Fed the luxury of setting interest rates. IMO, interest rates should be set in the same way that a free market sets any price: by competitive bidding between sellers and buyers or in the case of interest rates, between borrowers and lenders. Both of these are necessary, neither alone is sufficient to solve this problem. We also need a rather harsh recession to cleanse our economy of all the excesses that have been allowed into it over the past decade or so. This will not be fun but it sure is necessary if our economy is ever to recover from its current terminal malaise. We can also add tax and banking reform to our growing list of required economic medicine.

    When significant problems are not addressed and solved quickly, they only ever become bigger, more difficult, take longer, and cost MUCH more before a solution is finally found. This one is no exception to this rule… and we have already dithered and piddled away a lot of time and money on non-solutions. It’s more than time to roll up the sleeves and get to work on real solutions and not simply creating more textbook fantasies masquerading as solutions.

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