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Long Term Interest Rates

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  • Long Term Interest Rates

    Iflyjetzz has made a BOLD COMMENT about long term interest rates.

    Originally posted by 4/22 Lounge
    While interest rates are lower than the longer term average, I think that they can stay down there for quite a while - another decade of extremely low interest rates wouldn't surprise me.
    If Ifly is right, the consequences are profound, such as NO STOCK MKT CRASH that most people are expecting eventually.

    Conventional wisdom holds that the Fed's easy money policies have inflated a stock market bubble. When they take away the punch bowl of low interest rates, the stock market will crash correct to long-term average valuations.[/B]

    And also, the destruction of middle class SAVERS!

    Low interest rates actually hurt the middle class

    SeattleSun examined this issue pretty thoroughly in his thread in Equities and Stocks and he felt interest rates were going to RISE, along with most everybody else.

    But they have actually dropped.

    The conventional wisdom is that long term interest rates are bound to RISE.

    The current low interest rate environment is likely to end in the coming years because developing economies are embarking on one of the biggest investment booms in history, financed partly by capital inflows. Total inflows to Emerging Asia over the past four quarters quadrupled relative to 2008 levels and the five Latin America economies also experienced a resurgence in capital inflows.

    This coming investment boom will put sustained upward pressure on real interest rates as the demand for capital will exceed the supply of savings.

    And most people believe the government controls interest rates through the Fed but not this article from Investopedia.

    This article agrees with Ifly i.e. it's all supply and demand.

    Central banks do not control long-term interest rates. Market forces (supply and demand) determine equilibrium pricing for long-term bonds,

    Most people would point to the $18 TRILLION national debt for a reason Interest rates will RISE i.e. supply and demand.

    But we've had about an $18 TRiLLION debt for several years and the interest rates have been about ZERO the whole time.

    Why not another ten years?

    And everybody always points to WEIMAR GERMANY for a reason rates will rise i.e. HYPER INFLATION.

    But I think the consensus is that the WEIMAR GOVERNMENT intentionally caused the HYPERINFLATION to wipe out the war debt.

    So the WEIMAR rise in interest rates was the result of INTENTIONAL GOVERNMENT POLICY (and not SUPPLY AND DEMAND.)

    Hyperinflation in the Weimar Republic

    In order to pay the large costs of the First World War, Germany suspended the convertibility of its currency into gold when that war broke out. Unlike France, which imposed its first income tax to pay for the war, the German Kaiser and Parliament decided without opposition to fund the war entirely by borrowing,

    One thing is for sure.

    A rise in interest rates would make it more difficult to finance the $18 TRILLION national debt.

    Mr. Blinder assumes the Fed will be able to raise interest rates. The federal government itself can hardly afford to roll over existing low-interest debt or issue new debt into a rising interest-rate environment. The resulting higher interest payments on the accumulated $18 trillion currently outstanding, plus borrowing for new deficits, will crowd out many other budget items—not to mention the impact of rising rates on bloated state, county and municipal borrowings. Profligate government spending has put the Fed in a low-interest-rate box from which there is no escape.

    Edit: Ifly's full comment.

    I know that this is going to sound semi-insane, but I'd be careful to not fall into a recency bias trap with respect to bond yields. A longer term chart:
    Observations: 100 Years of Treasury Bond Interest Rate History

    I've looked at long term interest rates for a while and if you look at the period from mid-60s to 2000, you can see the massive influence of baby boomers. As boomers borrowed money in their youth (18-40), rates shot up. When boomers entered their saving years (40+), rates moved down.

    While interest rates are lower than the longer term average, I think that they can stay down there for quite a while - another decade of extremely low interest rates wouldn't surprise me.

    If you look at extremely long term rates going back hundreds of years, you can see rate spikes due to wars and government instability, but it appears to me that a static long term interest rate should be 2-5%. I don't think that rates can get to 5% for quite a while because boomers are still saving money and aren't borrowing money. It's all supply and demand.
    This guy agrees with Ifly.

    For the United States government, on the other hand, a 5% increase in interest rates on the national debt would raise the annual deficit by about $900 billion per year. Because the government borrows the money to make interest payments, this could set off a chain reaction of paying interest on money borrowed to pay interest, leading to a national debt increase of $67 trillion in 20 years (absent major tax increases).
    For some years now, very low interest rates have been reducing the earnings of retirement investors as well as the lifestyles of many of those already retired. To understand why this has been happening – and why it may continue for a very long time – one must recognize that there is a direct relationship between the interest rates that are paid to savers, and the interest payments made by a heavily indebted federal government.

    But he contends the rates are controlled by the government, not supply and demand.

    In doing so, the Fed has taken control of interest rates in the short, medium and long term in the United States.

    Thus there is nothing fortuitous or "lucky" about the current very low interest rates – but rather they are a direct result of governmental policies.
    Last edited by Grodon; 04-23-2015, 04:11 PM.

  • #2
    Interest rate increase bound to happen since rates are essentially ZERO?



    Jeremy Warner: Negative interest rates put world on course for biggest mass default in history - Telegraph

    Negative interest rates put world on course for biggest mass default in history

    More than €2 trillion-worth of eurozone government bonds trade on a negative interest rate. It's a bubble that is bound to end badly..

    With the advent of European Central Bank quantitative easing, what began four months ago...

    Here’s an astonishing statistic; more than 30pc of all government debt in the eurozone – around €2 trillion of securities in total – is trading on a negative interest rate.....

    some 70pc of all German bunds now trade on a negative yield. In France, it's 50pc, and even in Spain, which was widely thought insolvent only a few years ago, it's 17pc. ...

    Many would contend that it is central bank money printing itself which is the primary cause of today’s low interest rate environment. Up to a point, it’s a view that is hard to argue with, for that is indeed the whole purpose of QE – to depress the yield on government bonds to the point where investors are forced to seek higher risk alternatives.
    But here is the question:

    Is the GOVERNMENT causing low interest rates by QE or is the MKT causing low interest rates by SUPPLY and DEMAND?

    Yet it also raises a deeper question, which is whether central banks are the primary cause of the collapse in interest rates, or whether they are merely accommodating wider forces in the global economy that they are powerless to influence - persistent sluggishness in demand and productivity growth.
    This guy says it's the MKT.

    What’s cause, and what’s effect? In a speech last year, Ben Broadbent, deputy governor of the Bank of England, argued cogently that central banks are merely responding to these deeper forces. The natural, or equilibrium, rate of interest required to keep growth and inflation at a particular level is simply a lot lower than it used to be, he insisted. To judge by the markets, it may even have turned negative.

    There is some support for this view in the way markets have responded to QE. Analysis by Longview Economics found that bond yields actually rose during periods of QE by the US Federal Reserve, and fell when it stopped, the reverse of what you might expect if you think it is the unlimited buying power of the central bank that is causing the interest rate to fall.
    But, regardless of the cause, the END RESULT is always SUPPOSED to be a...................COLLAPSE!

    The flip side of the cheap money story is soaring asset prices. The bond market bubble is just the half of it; since most other assets are priced relative to bonds, just about everything else has been going up as well. Eventually, there will be a massive correction, in which creditors will suffer sickening losses.
    WHY does there have to be an INEVITABLE COLLAPSE?

    The only reason a PONZI SCHEME collapses is because it RUNS OUT OF MONEY.

    If Ponzi had an unlimited amount of money, his SCHEME NEVER WOULD COLLAPSE!

    The government MAKES all the money and it can always produce MORE.

    So there will never be a COLLAPSE unless the government decides to QUIT PRODUCING..............MONEY!

    I compare it to running out of AMMUNITION.

    You will never run out of ammunition.........IF YOU MAKE ALL THE BULLETS!

    Edit: It is pretty clear to me that Ifly is right: It's all about SUPPLY AND DEMAND!

    But since the GOVERNMENT controls the SUPPLY, it's the GOV'T that controls interest rates, short term and LONG TERM!
    Last edited by Grodon; 04-29-2015, 12:42 PM.


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