Interest Rates Cannot Rise and Here’s Why…

First Rebuttal ^ | 11/4/2014 | Thad Beversdorf

[SeekAndFind]

I wrote an article recently over at Voices of Liberty that lays out the very dire picture for those of us who have yet to retire. The gist of the article is that the Fed has effectively robbed the retired class of any hope for having enough of a nest egg to live off through the end of their lives if they want to retire at 65. Some may argue well this past 10 years has just been an anomaly of low interest rates but they will come back i.e. normalize to higher levels here in the next couple years. Well let me show you why that is simply wrong. Here is why interest rates will be perpetually low for the rest of our lives, why the inflation calculation has been changed to a dynamic formula (meaning they now change the inputs each quarter) and why those of us yet to retire are screwed.

What I have laid out here is a green line that represents our total debt as a percentage of GDP. The purple line is the historic 10 yr Treasury Note rate which we are using as a proxy for the average interest rate on total debt (AIR). And the blue line is the interest payment on our total debt as a percentage of GDP (again using the 10 yr rate as a proxy for average interest rate on total debt) let’s call it DSGDP.

Do note that total debt as a percentage of GDP (green line) recently exceeded 100%. Also note that as the green line increases the spread between the purple and blue lines gets smaller. This is really just an algebraic principle. Historically the blue line is essentially a fixed rate (within a range) and so as the green line moves up the purple line (AIR) must move down so the DSGDP stays within the fixed range. As total debt became a higher percentage of GDP the average interest rate on debt must move down toward that 2.5% line that we’ve held for 15 years. As the total debt to GDP moves above 100% we should start to see the average interest rate on total debt (the purple line) move below 2.5% in order to keep the DSGDP around the 2.5% 15 year average. As a side, I did regress these relationships and found both statistical significance and good explanatory properties.

Now even the CBO is forecasting debt to GDP to continue rising for as far as the eye can see and so there must be a negative slope on interest rates. If average interest rates on debt were to move back to let’s say the 20 yr average of 7.5% our interest payments would take up 7.5% to 10% of our GDP. And that is something we simply cannot afford. The most our average interest on total debt can move in the near term is to around 4% which would take us to the high end of the historic DSGDP range. Fortunately I suppose that would also crush what little demand is left in the economy and so there is much incentive to do so. In 5 or 10 years time total debt will be sufficiently more than GDP that even 4% will be unsustainably high.

You will see from the chart above we’ve had a fairly steady decline in interest rates since the late 1970′s about the same time that total debt began rising as a percentage of GDP. The inverse relationship between these two metrics is not coincidence, but of necessity. So you start to understand that interest rates are locked into a very low range forever or at least until total debt gets paid down, which none of us expect to ever happen. So with total debt greater than GDP and rising it’s SOL for future retirees and all other savers. Next stop will be negative interest rates which of course will need to be monetized. In chess they have a term called Zugzwang; a situation in which no matter what move you make you will be worse off than you are currently. I believe we may be in a Zugzwang now.

[556x45]

for later

[Resolute Conservative]

I have already come to terms with working until I drop or start slobbering too much to be in public.

[KarlInOhio]

The problem with this theory is that the Fed only controls short term rates. Long term rates are set by the market. One of these days bond investors will reject 3%, 4% or even 5% rates on 10 year bonds and there is nothing the Fed can do about that. Maybe the government can keep the economy down to keep rates low, but a loose money Fed with a government trying to keep the economy stunned is the path to 1970s stagflation.

[Triple]

At some point lenders (buyers of debt) will step up and say they need a better return for the risk of default they are taking.

The government buying its own debt is unsustainable.

[sr4402]

Yep, I've seen it in Bank Savings Rates. Who can retire at those miserable rates? Billionaires?

Bank interest rates are never coming back because they now borrow their guaranteed money from the Fed. If the loan goes bad the government (we) pay for it. What bank is ever going to go back to the old ways?

Inflation is screwing us badly right now. The governments inflation figures are bogus. Food inflation is terrible so even peanut butter and jelly is vastly more expensive.

I have no choice but to have some investments still at risk or inflation will take everything.

[PGR88]

This chart is from 2012, but it would look about the same for 2014. nearly EVERY PENNY of Government tax revenue goes to pay entitlements. In other words, defense and every other operation of the government is paid for out of borrowed money. America is screwed!

[Buckeye McFrog]

Nearly every other government in the world is in as bad or worse shape. They have every incentive to keep the game of three-card monte going.

[jonose]

The already retired are screwed more:
a)If they have a pension plan, most will file bankruptcy and
the payments will either stop or be a small fraction of the expected payment.
b)If they have a fixed income the printing of money will be expanded to pay for unfunded entitlements, and the lying about inflation will continue to keep the COL adjustments low.

If you are yet to retire, invest in assets that will keep pace with inflation. Invest in marketable skills/activities that generate income.

[Buckeye McFrog]

Your chart will be exploited by Leftists to make the case that those EEEEEEEVIL Corporations are not paying their FAIR SHARE!

[safetysign]

You underestimate Obama.

[pierrem15]

Then they will have to paper their walls with bonds: in that kind of market, no one will be capable of redeeming their T-Bills except with other T-Bills offering a low rate.

So if they force a default, they'll have eat probably 80%-100% losses on investment.

What they can do is slowly ease out of T-Bills. The Fed mainly has to pay only itself back, which they can simply do by rolling over T-Bills.

In essence, the debt held by the Fed will be rolled over eternally.

[PGR88]

The problem with this theory is that the Fed only controls short term rates.

Only partly true. Yes, the FOMC controls short-term rates, but with past QE practices and the period of 2011-2013, the Fed has attempted to drive down long-term interest rates buy buying long-dated bonds and selling medium terms ones. The Fed has absolutely become the "Central Planner" of the US economy. You can be assured they will try everything to keep long-term rates low as well.

It will be a currency crisis that lays this bare - the point when foreigners (and Americans) don't want to hold US Dollars any longer. Expect capital and travel controls as well as gold/silver confiscation as the US tries to prevent money from leaving the country.

[cuban leaf]

In chess they have a term called Zugzwang; a situation in which no matter what move you make you will be worse off than you are currently. I believe we may be in a Zugzwang now.

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Duh.

It’s why I moved from seattle to central KY in 2011. Every year I am more confident I did the right thing. The evidence of where we are going is overwhelming. And it matters not which party captains the titanic after it has hit the iceberg.

[cuban leaf]

The government buying its own debt is unsustainable.

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And the logical conclusion to that statement is why it is smart to buy guns and ammo.

[cuban leaf]

They have every incentive to keep the game of three-card monte going.

---

Exactly! The doom and gloomers are absolutely right. It’s just that their timing is off. And it is off because we are seeing the most epic case of can kicking ever to be attempted. But when the can kicking can not save us, watch out.

[M-cubed]

Bank interest rates are never coming back because they now borrow their guaranteed money from the Fed. If the loan goes bad the government (we) pay for it. What bank is ever going to go back to the old ways? <<<

and there u have it!!!....until the fed quits feeding the beasts

[ziravan]

It doesn’t mean you can’t retire. It means you can’t retire based on savings.

Your retirement needs to be based on an inflation/deflation adjustable return on investment. For example, rental income turned over to a management company at retirement. Maybe a small business where the day to day is hired out, like washateria or car wash. Or, best example, seek out and buy mineral rights.

Anybody with a six figure 401k and at 59.5 years should be figuring out how to turn a good chunk of that money into ROI income.

[Hugin]

One of these days bond investors will reject 3%, 4% or even 5% rates on 10 year bonds and there is nothing the Fed can do about that.

The Fed is already doing it, by buying back those bonds with fiat money. That's why QE won't stop, and real inflation will continue.

[nascarnation]

Doesn’t this theory presume that the folks in charge will be able to control the markets?

And doesn’t every historical instance of fake money eventually turn out badly?