Sydney Homer, a superb historian of interest rates and the bond market, once said in a marvelous conceptual sweep: interest rates are the fever chart of any country.
In any country, throughout the centuries, the average rate of interest has been close to 5%-6%. The greater is the difference from this ideal level, the greater are the problems facing the country. Credit issues and slow unstable growth are the typical problems.
The 1970s were an example of high interest rates and inflationary times. The 1990s were the “right” times with interest rates close to 5%. 2000-2002 and now are examples of times when interest rates are close to 1%-2% associated with huge wealth destruction. You do not need to be an economist to know what is happening.
Yes, you might ask, but what about the Fed? The Fed is a powerless and overrated actor. They cannot control or anticipate the markets because they are powerless. They just print money once they recognize there is a problem. And when they recognize it, more often than not it is too late.
I used to meet regularly with Fed officials and economists. A Fed official used to remind us that the problems were very familiar to the Fed and all their PhDs knew what had to be done. He was so pompous to be almost intimidating.
Without going back too far in time, the lesson of the 2000s is an example of how powerless a central bank can be. Lesson: low interest rates reflect huge problems.
The level of interest rates relative to inflation is also an important measure. Inflation is under control when short-term interest rates (rate on 13-week Treasury bills) are greater than 1.4 times inflation.
When interest rates (now 1.42%) are much lower than 1.4 times inflation (1.4 times 4.4% = 6.2%), economic conditions become unstable and favor hard asset investments as the dollar sinks.
Right now the markets have driven interest rates down because this is the level needed for the credit issues to mend. Meanwhile we will be facing an inflationary bias because rates are well below the safety zone of 6.2%.
More on https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
1 comment:
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