Sunday, March 20, 2016

Interest Rates Are Never Going to be Normal Again

Well, that may not be strictly true.  They're just not going to go back to being normal, market-driven rates until after the current system of rates set by fiat collapses.  The Federal Reserve will NEVER return interest rates back to normal on their own.

You may have heard a bit of buzz this week that the Market is now up for the year.  On Wednesday, the Fed said they were going to stay the course on the interest rate increases they ordered in December (while not raising them farther).  That was seen as positive sign to the markets and indices went up by the end of the week.

The problem is that the entire world the central banks have created is fake.  Why should a handful of technocrats, whether Janet Yellen and the Fed or Mario Draghi and the ECB, know better than the billions of decisions of the free market what the rates should be?  Figuratively, the Zero Interest Rate Policy of the last 10 years has been to the economy like keeping delicate plants in a temperature controlled greenhouse, pumping the air full of CO2 and the soil full of fertilizer.  Yes they'll grow, but if you remove the prodigious amounts of Miracle-Gro and CO2, they'll die back because they've grown bigger than can be supported in a normal environment.  They may simply die.

By analogy the financial "plants" that grew up in that ZIRP environment are grotesque mutants that require huge doses of liquidity, not liquid fertilizer.  They won't be able to survive a change of financial seasons.

What those financial plants need is a correction, just like actual plants need to be pruned back.  Market corrections are necessary for real free markets to work properly.  Excess debt must be purged out of the system. That’s what credit cycles, bankruptcies, and depressions are for.  “Normal” includes market corrections, but the feds can’t let it happen.  They've staked their lives and livelihoods on pumping up growth.  In a way, they're like court alchemists whose lives are on the line because they convinced the kings they can turn lead into gold and there hasn't been any gold forthcoming. 

Bill Bonner puts it this way:
In a normal, healthy economy, people work, save, invest, and build real wealth one dollar at a time. But today’s dollar is different. And the economy is different, too. It runs on credit, not real savings, and builds debt – not wealth.

Instead of encouraging savings – which is what you need to make progress – it penalizes thrift. Over the past 10 years, U.S. savers have lost nearly $8 trillion, extracted from them by the Fed’s ZIRP.

While savers were punished, borrowers were rewarded.

Since 1980, the U.S. economy has added about $50 trillion in excess debt – above and beyond the real output that can comfortably sustain it.

This $50 trillion came not from honest work and saving. Instead, it was conjured up by banks – out of thin air.

And now, the productive Main Street economy must pay interest… and principle… on that debt – effectively extracting real wealth from the real economy and sending it to Wall Street and other favored industries.

The scam is so elegant that not one person in 1,000 understands how it works. We’ve been studying it for years, and we’re still in awe. But the result is obvious: Honest working people struggle to stay in the same place, as real wealth goes to the elite.
I've been singing this tune since I started this blog in 2010.  The central banks are actively attacking savers - and probably literally killing some people trying to live on savings.  Their policies can no more create real growth in an economy than you can create more pizza by cutting the same pie into 16 slices instead of 12.  
Central banks destroy the real economy with cheap money and extractive policies. Then, as the economy slumps, they need to bring their policies in line with the slumping economy. They need to swear off raising rates back to normal.

And since their policies can never produce real prosperity, they can never produce an economy that can support normal interest rates.
Bonner concludes with...
Eventually, normal will make a comeback. But not because the Fed wants it. Instead, the markets will normalize – brutally ­– over the Fed’s dead body…


  1. Yeah, it's totally nuts.

    I remember getting more interest in 6 months on a $2500 CD than I'm getting on a $100k money market cert I have now.

    Just INSANE....

  2. It's a lot of things but it's not 'nuts'. What it truly is would be part of a concerted coordinated effort to destroy American capitalism
    and render the middle class indentured servants to the elite. The goal is the transfer of wealth from those who can and do to those who either cannot or can't be bothered. This group votes for the lies they continually believe. The bulk of the wealth actually ends up in the hands of a few very elite who control most of what goes on.

    The problem of course is untenable. The VERY wealthy don't actually produce ANYTHING.....the very poor produce only garbage and trouble.

    The middle class that is actively being destroyed to create the socialist utopia those in power think they will own are the ones that
    build the things EVERYONE needs and uses. When that class is gone there will be two classes of people....the very poor who eke out an existence and the very rich....who will use up what was built till it falls apart. Then because they can't actually do anything the entire system collapses. The VERY rich can't see beyond their greed to understand that by destroying and enslaving the productive people they are sowing the seeds for the downfall of the empire....a downfall where EVERYONE is in danger. The barbarians didn't care how rich or how poor a Roman citizen was.....they were all to be killed. And killed they were because the greedy rich destroyed the capacity that
    Rome had to stay healthy and safe. The same thing is in play now.

    1. Thanks Dan. I guess I'll roll over and pull the covers over my head.

  3. IT is kinda like the first moments when in a speeding car on a ice slicked road you lose control. The FED is desperately trying to get the car back on the straight and narrow while simultaneously trying to slow it down. The problem is that the FED is and has been for the last 8 years, using everything they have to do this and it is merely covering up the problem. Anything at all could tip this economy over the cliff. The FED is out of bullets and the economy under the smoke and mirrors is no better and we are really simply waiting for a miracle or a disaster whichever comes first. We would have been better off in 2008 to "let it go" and let the chips fall where they may. Arguably we are in a far worse position today with twice as much debt and an underlying unemployment rate of 12-23% depending on how you measure it, no increase in middle class pay over the last 8 years, etc.

    We are in uncharted territory. Certainly we have had other great depressions in history and if this ends in a great depression that part is historically familiar. But what is different today is 7 billion world population, and 330 million Americans where about 320 million of them do not live on farms and are 100% dependent on farms, transportation and ultimately government for their very survival. If this all crashes nothing short of a massive and sustained emergency effort on the part of our government will save us, millions of us. We have already seen how effective our government is during the Katrina crisis so I have little hope that we will suddenly up our game enough so that in a much larger crisis we will perform flawlessly.

    Sooner or later our chickens will come home to roost unless by pure luck that miracle happens. What are the chances?