Were low rates "meant to last"?

The markets have such a short memory! For decades before 2000 the 10 year Treasury yield was always 2% to 2.5% over the inflation rate. And even that would have been considered a low real yield during earlier times.

Walter Bagehot, a 19th-century British journalist and editor of The Economist, wrote, "‘John Bull can stand many things, but he cannot stand two per cent.’ When interest rates fell to such a low level, investors reacted to the loss of income by taking greater risks.

The excellent book, " The Price of Time: The Real Story of Interest," by Edward Chancellor, shows how repression of yields by the Federal Reserve has caused real damage to the U.S. economy by encouraging the build-up of unproductive debt.

But financial repression has continued for 20+ years. The markets are so accustomed to low yields – addicted to low yields – that they expected them to last indefinitely. Even the “emergency” QE from the Covid years.

Low Rates Were Meant to Last. Without Them, Finance Is In for a Rough Ride.

Economists expected inflation and rates to stay low for years. With Silicon Valley Bank’s implosion, Wall Street is starting to reckon with how wrong that prediction has proved.

Jeanna Smialek

By Jeanna Smialek, The New York Times, March 16, 2023

If a number defined the 2010s, it was 2 percent. Inflation, annual economic growth, and interest rates at their highest all hovered around that level — so persistently that economists, the Federal Reserve and Wall Street began to bet that the era of low-everything would last.

That bet has gone bad. And with the implosion of Silicon Valley Bank, America is beginning to reckon with the consequences…

Many banks are holding big portfolios of long-term bonds that are worth a lot less than their original value. U.S. banks were sitting on $620 billion in unrealized losses from securities that had dropped in price at the end of 2022, based on Federal Deposit Insurance Corporation data, with many regional banks facing big hits.

Adding in other potential losses, including on mortgages that were extended when rates were low, economists at New York University have estimated that the total may be more like $1.75 trillion. Banks can offset that with higher earnings on deposits — but that doesn’t work if depositors pull their money out, as in Silicon Valley Bank’s case…

Everyone, policymakers included, spent years assuming that rates would not go back up…

Central bankers had previously hinted that they might raise interest rates even higher than the roughly 5 percent that they had previously forecast this year as inflation shows staying power and the job market remains strong. Whether they will be able to stick with that plan in a world colored by financial upheaval is unclear. Officials may want to tread lightly at a time of uncertainty and the threat of financial chaos… [end quote]

When I read “meant to last” I actually chuckled. Books like “Manias, Panics and Crashes” and “This Time is Different” clearly show the past cycles that resemble the extreme imbalances that can build up in markets and the bubbles that burst.

No, low rates were never “meant to last.” They were forced and had negative impacts that will unwind in the coming years.

The Fed will have to raise rates or inflation will increase again. It’s already way too high.



Since 2008 we have had 15 years too much supply side economics. I mean in the worst of ways. We are caught with some major industries in China, communications gear and machine tooling tap and dye. We refused to reinvest in America for an extra 15 years. Sickening and cheap. Ejits.

Our taxes on the wealthy have been low because of economic ignorance among the baby boomers.

This does spell opportunity.

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What’s your basis for this? Backward looking inflation indices (CPI, PCE, PPI) have been trending down for 6+ months.

And many indicators also point to downward pressure on inflation going forward, as been posted several times.
For example:

I know your favorite bird is the rare and elusive Rate Hawk, but…


There is nothing magical about 2% inflation.

It might seem odd, then, that this ostensibly carefully crafted rule of monetary policy, the goal of arguably the most powerful technocrats in the world, is sort of … arbitrary. In fact, there’s little empirical evidence to suggest that a long-run inflation target of 2 percent is the platonic ideal for balancing the Fed’s “dual mandate” of price stability and maximum employment.

But in keeping with the theme of arbitrariness, New Zealand’s initial target range of 0 to 2 percent wasn’t carefully engineered either; rather, it was the result of an offhand comment made by the head of the central bank in an interview, which he called “almost a chance remark.” Not long after New Zealand adopted its target, so did Canada, and then Australia. As Ball put it, the practice then went “viral,” and eventually the U.S. joined the party — albeit secretly.

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Actually Buffett sees the 2% as an ideal target because fiscal policy can then echo it in debt growth. Meaning the ideal is balanced against a healthy economy. The EU with more experience in targeting 2% through the ECB actually treats it as a range.

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Appeal to Authority.

There is a lack of data supporting 2% as anything ideal. In fact, there is data supporting a higher rate of inflation because it results in less severe economic downturns.

Then conclusion may be true, but I question the premise. That is, there have been many periods of “unproductive debt” across our history, often at times where interest rates were not surpressed as they have been the last decade.

Here is a chart going back to the 19th century:

(I add the link from which the chart derives. I also note that there is missing a crucial fact from the 19th century: that Britain had a “usury limit” of 5% in the last half of the century, and at that time Britain was the economic powerhouse of the world, able to influence interest rates globally.)

That is doubtless true. One take (I echo a piece from today’s WSJ) is that the banks are not facing an equity crisis but a liquidity shortfall. The Fed, for instance, could simply trade those long bonds for the face value - wait, wait- hear me out! The banks, if they have to sell the bonds must realize the loss, and during a bank panic must sell to provide depositors’ withdrawals, but doing so actually makes the problem worse. It’s an ever deepening whirlpool which ends with everyone drowned.

OTOH The Fed could simply exchange those bonds for cash, hold the bonds to term, then cash them out without any loss whatsoever. The Fed, obviously, doesn’t need to “cash in” the bonds at any time until maturity. This MC Escher solution seems too clever by half, but I don’t really see the big flaw, except for the addition of even more moral hazard. The Fed is supposed to be the lender of last resort, no? Maybe this is it, when the situation calls for it.

On another note, is anyone concerned about money funds “breaking the buck” as happened briefly in 2008?


If the fund’s assets are safe (Treasury bills) and the duration is short I don’t think there will be a problem. I think the Fed would step in if a money market fund “broke the buck” as they did in 2008.



Maybe not but people love magic numbers! In stock prices, in lab tests, in government reports, in school grades, in IQs, in financial statements, in bank reserves, in temperatures, even in the minimum number of characters in Foolish posts!

The Captain


For which of these periods 1949 to 1980 or 1981 to 2020? If you are talking the latter it has nothing to do with the current conditions going forward. Plus by 2035 you would get your higher inflation rates. If you are talking 1965 to 1980 that would be interesting and align with what I am saying after 2035.

If you are talking countries other than the US that is problematic data because the US dominates the economic cycle. Using other countries’ data are not aligned with our outcomes.

Note I mentioned the EU using a range around 2% as my conclusion or ending statement.