Interesting NY Times article on interest rates

I found this article interesting, eye-opening, thought provoking, and reassuring.



I found this article interesting, eye-opening, thought provoking, and reassuring.

From the article:

But the lessons of history do offer this guidance: Whether rates will be high or low a few years from now has very little to do with what the Fed does this week. It has quite a lot to do with what happens to forces deep inside the economy that are poorly understood and extremely hard to forecast. And just because many people are old enough to remember the high inflation and high rates of the 1970s and 1980s doesn’t mean that is the normal to which the economy will inevitably revert.

Why do you think this is reassuring?
The way I am reading it is that we lack inflation (maybe even deflation). That reminds me of the Japaneses economy which is been stagnating for over a decade. Of course as the article points out we may be entering an era like in the US in 1950’s which was a good period.


I guess what I liked was:

But if you look at the longer arc of history, a much different possibility emerges. Investors have often talked about the global economy since the crisis as reflecting a “new normal” of slow growth and low inflation. But, just maybe, we’ve really returned to the Old Normal. Very low rates have often persisted for decades upon decades, pretty much whenever inflation is quiescent, as it is now… The record is even clearer in Britain, where long-term rates were under 4 percent for nearly a century straight, from 1820 until the onset of World War I.

Low interest rates, low inflation, and slow growth “for decades” would be good for stocks as it removes the competition from fixed rate instruments, but I’m too old to be around for many of those “decades.”



Low interest rates, low inflation, , and slow growth “for decades” would be good for stocks as it removes the competition from fixed rate instruments, but I’m too old to be around for many of those “decades.”

Yes, slow growth for decades is a Goldilocks situation for us investors.
Also wishing you a lot of decades of health and successful investing.

Modern economists seem convinced that inflation is needed and a good thing, as long as it is “controlled”

But history of Great Briton seems to suggest otherwise

The graph also shows the impact of war. During conflicts, resource shortages and massive increases in money supply led to sharp price rises. However the graph shows that after the Napoleonic Wars and World War I, there followed a period during which prices to a certain extent came back down again.

But inflation did not come down after World War II

Following the Napoleonic Wars, productivity increased massively in Victorian times, as did the population

Economists , the modern versions of Alchemists ?

Most interesting to me is that interest rates have been one of the strongest long term trends in markets for the past 30+ years. That trend has also been decidedly down as you can see in the graph on that article.

I think that the uncertainty of whether or not they will raise and the fact that they keep kicking the can down the road has caused more trouble for markets than whatever their rate targets actually are.

Also remember that the Fed doesn’t set the longer term rates, the markets do based on the prices of the underlying paper. I’d also hope a raise at the short end doesn’t go towards inverting the yield curve, as it’s getting close, and that would be bad.

I do think that them raising will finally let the market break into the next leg up, but I worry that they may not raise and and that it will lead to more of the back and forth trading that has happened. They best thing is to give the markets some clarity.


I was trying to find the inflation-adjusted data for those charts, but no luck.

Allow me to ask a dumb question … why is a 2% inflationary rate a target to achieve … why 2% ? I sincerely appreciate this economic education.


Allow me to ask a dumb question … why is a 2% inflationary rate a target to achieve …

I believe that the thinking is that with 2% inflation, people spend money instead of keeping it in the bank. For example, you buy a house because prices will be higher next year. You buy a car for the same reason. With 2% deflation you get a 25-year recession like what happened in Japan since 1990, because everyone holds their money, feeling prices will be lower next year.

But that’s just my understanding of it.


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2% is considered the level which acts as a growth driver to the economy and removes the threat of deflation without overheating the supply/demand balance that stokes higher and higher inflation that could lead to rampant and hyper inflation, is affordable for index linked inflation proof cost of finances and acceptable to the population from a cost of living vs earnings growth etc and is also a reasonable target that can balance monetary and fiscal policy tools and is aligned with conditions that achieve a broader set of goals surrounding growth and stability.

There are some powerful economic studies behind it but suffice it to say it is the adopted target of the Fed and the Bank of England (although they keep playing around with what inflation measure to use for the target).

Fed’s explanation:-

The BoE’s explanation:-…

The economist’s explanation:-…

Apparently Keynes first advocated inflation targeting…

There are other views though:-…



Inversion of the yield curve may be the only semi reliable indicator that a stock market crash isn’t far off. There are plenty of other technical indicators (mostly momentum) but they only work after the decline is well under way.

But the Fed has been messing around with interest rates so long this cycle that I don’t know if it is valid anymore. Usually the Fed raises rates to fight inflation, this time I think they are doing it so they will have some arrows in the quiver when inflation really does come back. Because there is little inflation (unless you are sending kids to college) , and because “recovery” sounds dubious to me . The unemployment rate doesn’t count lots of unemployed and median income for the middle class continues to shrink.

An interesting article from a post on ScottTrade today:

Ip: The Tide Is Coming Out On Low-Rate Era

The Federal Reserve always knew its unprecedented campaign to boost employment could have unsavory side effects. As that campaign comes to an end, those side effects are making themselves felt.
Seven years of near-zero interest rates caused investors to pour money into corporate debt, emerging-market bonds and commercial real estate, all in search of higher returns. Now that money has started to leave, borrowing costs are climbing, and markets have turned treacherous.
The big question is whether this is a transitory disruption, of consequence mostly to Wall Street, or the tip of a more dangerous iceberg.
Right now, the odds are it’s transitory. But history counsels caution: The scale and nature of the distortions brought on by easy monetary policy can take time to show up.
Historically, inflation was the risk the Fed worried about when it held interest rates low. This time, the Fed would actually welcome a rise in inflation, which has consistently undershot its 2% target. Its greater concern in recent years has been that low interest rates would fuel unsustainable asset bubbles. It has concluded that the boost to employment it achieved with easy policy now would outweigh the potential harm of a bursting bubble later.
It’s a calculated bet. The harm from financial disruptions is much less predictable than from inflation, because it involves linkages that are apparent only under stress.
Two precedents offer lessons. In early 1994, the Fed began to raise interest rates after holding them at 3% for more than a year. That soon triggered a big selloff in the bond market that bloodied Wall Street and, by year-end, bankrupted Orange County in California. Yet the broader economy barely noticed.
In 2004, the Fed began to raise interest rates after holding them at 1% for a year. Three years later, the subprime mortgage crisis began, and the economy tumbled into its worst recession since the 1930s.
Both times, the Fed was only one of many factors at work. The 1994 selloff was compounded by a surge in Japanese bond yields and U.S. mortgage hedging that amplified the Fed’s effect on Treasury bonds. In the 2000s, foreign savings, in particular from China, flooded into the U.S., holding down interest rates. The force of lower rates touched off a home-price bubble. Wall Street engineers then went to work making subprime mortgages to ever-riskier borrowers seem safe. The economic consequences didn’t show up until 2007, when the Fed had already finished tightening.
This time, not only is the Fed tightening, but a slowing Chinese economy and unrestrained oil production from the Organization of Petroleum Exporting Countries have also sent commodity prices plunging, hammering emerging economies and U.S. companies that borrowed heavily to pump oil from shale rock in the U.S. No one knows how these factors may interact with whatever imbalances have accumulated over seven years of near-zero rates.
“You can never say a bubble or a mania has a single cause,” says Jim Bianco of Bianco Research, a 30-year veteran of Wall Street’s booms and busts. “But one common theme is a green light for risk taking, and one way you get that green light is the central bank giving you ultra cheap money and encouraging you to do something with it.”
The Fed lowers rates to encourage borrowing and, in turn, to boost employment and prices. But it has little say in who borrows. The flow of credit to less-creditworthy home buyers and small businesses has been hampered by weak demand, increased caution by banks, and new regulations.
By contrast, a gusher of credit has flowed to companies in the U.S. and in emerging markets. Banks’ loans to leveraged companies have been pooled into “collateralized loan obligations.” A large chunk of the leveraged loans held in CLOs are rated just above CCC, at which companies are considered vulnerable to default. If even a fraction is downgraded, the CLOs’ demand for new loans will contract sharply, a report by Ellington Management Group, a hedge-fund manager, recently warned. “Access to credit for weaker companies would be significantly diminished,” says Rob Kinderman of Ellington.
Between 2009 and 2014 investors poured $973 billion into corporate bond mutual funds and $219 billion into exchange-traded funds that hold corporate debt, according to Thomson Reuters. Those flows are now reversing.
Companies have for the most part used the money not to expand their business operations, but to buy one another and their own stock. This year alone, U.S. companies have borrowed $327 billion to finance mergers and acquisitions, according to Thomson Reuters, more than double the previous full-year high in 2012. Business debt now equals 70% of annual gross domestic product, surpassing its pre-recession peak.
This alarms regulators. The Treasury, in its annual financial-stability report released Dec. 15, warned higher rates and widening spreads between corporate and Treasury rates “may create refinancing risks, expose weaknesses in heavily leveraged entities, and potentially precipitate a broader default cycle.” The extent of borrowing since the crisis means “even a modest default rate could lead to larger absolute losses than in previous default cycles.”
Leverage is often fueled by savers’ confidence that their money is safe. A decade ago, they thought triple-A rated securities and secured, overnight “repo” loans would never default, and shares in money market mutual funds would always be worth one dollar. In fact, many of the securities defaulted, there was a run on the repo loans, and a money fund “broke the buck.”
This time, the illusion has been fed by promises from mutual funds and exchange-traded funds that investors can redeem their shares daily or during the day at close to the funds’ underlying value. But those funds hold bonds that are increasingly difficult to trade as dealers become less willing to take such bonds onto their books.
Low rates have had an even bigger impact in emerging markets than the U.S.; their companies have racked up $3.4 trillion of U.S. dollar-denominated debt, more than double the pre-crisis level, according to the Bank for International Settlements. As those countries’ currencies fall, those debts become harder to repay.
These warning signs need to be taken in context. Most violent market gyrations don’t lead to crises. The global financial crisis reflected a rare confluence of factors: not just low rates and financial engineering but also weak regulation and highly leveraged financial institutions. Banks today have much more capital, fickle short-term borrowing is less prevalent and regulators are more vigilant – arguably too vigilant in some cases.

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