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.

[nascarnation]

Thanks for stating concisely what I was trying to put down in words.

[JAKraig]

I have warned people for years, the only safe or wise investments are commodities. People have to eat, stay warm and have shelter. You can still make money if you provide any of those things.

The government will not admit that they caused this on purpose to steal from those who had enough to save. The Government redistribution is simply a means of Leftist to steal from the “rich” and give to the poor. Their idea is have everybody in the same boat and all dependent on the government for sustenance.

Some people spent all their money just like the grasshopper wasted all his time. When the winter comes, and it will come soon, the savers will have to save all the grasshoppers who wasted their money on fun.

I have said it is wise to have precious metals squirreled away, I believe it more than ever now.

Silver is cheap right now, stock up.

[TomGuy]

During the Carter years and later, we were told house interest rates would never be below 8%.

Rates are being held low artifically to help save the government from drowning in interest on the national debt.

It is similar with the artificial inflation rate. It is showing at about 1.5%. Anyone who does grocery shopping on a regular basis knows that is a lie. Many grocery prices have increased 30 to 100% over what they were just a couple of years ago. The ‘real’ inflation rate is hidden.

[Organic Panic]

If only we taxed the rich a little bit more.

[aMorePerfectUnion]

“the Fed only controls short term rates. Long term rates are set by the market.”

As long as the Fed can continue quantitative easing by buying bills, notes and bonds, there is not market to set rates. The Fed finances the debt by purchasing them privately.

How long can they pretend to create money, hand it to the gov’t to overspend and not have the system collapse? Only as long as people think the emperor has clothes.

Other nations are already circumventing the dollar as reserve currency.

[TomGuy]

In 1998, interest on my money market account was 8%. That was considered moderately low.

I also took out an IRA annuity through an insurance company. By contract, it cannot pay lower than 4%. The agent and I chuckled at the time — interest rates would never get that low. Now, that 4% looks pretty good when I get my annual statement.

In the early 2000s I took out some CDs. They were paying around 5%. A couple of years later, the renewal rates were 4%. Then, 3%. Next, 2%. I dropped them and converted the money back to the money market account, because the money market was actually paying a half-percent more than the CDs.

Interest rates for the last decade have devastated retirement funds.