Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20
China Recovered in Q2. Will the Red Dragon Sink Gold? - 23rd Jul 20
UK Covid19 MOT 6 Month Extensions Still Working Late July 2020? - 23rd Jul 20
How Did the Takeaway Apps Stocks Perform During the Lockdown? - 23rd Jul 20
US Stock Market Stalls Near A Double Peak - 23rd Jul 20
Parking at Lands End Car Park Cornwall - UK Holidays 2020 - 23rd Jul 20
Translating the Gold Index Signal into Gold Target - 23rd Jul 20
Weakness in commodity prices suggests a slowing economy - 23rd Jul 20
This Stock Market Stinks - But Not Why You May Think - 22nd Jul 20
Protracted G7 Economic Contraction – or Multiyear Global Depression - 22nd Jul 20
Gold and Oil: Be Aware of the "Spike" - 22nd Jul 20
US Online Casino Demographics: Who Plays Online For Money? - 22nd Jul 20
Machine Intelligence Quantum AI Stocks Mega-Trend Forecast 2020 to 2035! - 21st Jul 20
How to benefit from the big US Infrastructure push - 21st Jul 20
Gold and gold mining stocks are entering a strong seasonal phase - 21st Jul 20
Silver Eyes Key Breakout Levels as Inflation Heats Up - 21st Jul 20
Gold During Coronavirus Recession and Beyond - 21st Jul 20
US Election 2020: ‘A Major Bear Market of Political Decency’ - 21st Jul 20
Summertime Sizzle for Gold and Silver - 21st Jul 20
Overclockers UK Custom Built PC Review - Delivery and Unboxing (3) - 21st Jul 20
Will Coronavirus Vaccines Become a Bridge to Nowhere? - 20th Jul 20
Stock Market Time for Caution?  - 20th Jul 20
ClickTrades Review - The Importance of Dynamic Analysis and Educational Tools in Online Trading - 20th Jul 20
US Housing Market Collapse Second Phase Pending - 20th Jul 20
Capitalising on the AI Mega-trend - 20th Jul 20
Getting Started with Machine Learning - 20th Jul 20
Why Moores Law is NOT Dead! - 20th Jul 20
Help the Economy by Going Outside - 19th Jul 20
Stock Market Fantasy Finance: Follow the Money - 19th Jul 20
Did the Stock Market Bubble Just Pop? - 19th Jul 20
Quick Souring of the S&P 500 Stock Market Mood - 19th Jul 20
The Six-Year Jobs Recession - 19th Jul 20
Silver Demand Exploding! - 18th Jul 20
Tesco Scraps Covid Safe One Way Arrow Supermarket Shopping System - 18th Jul 20
The Rise of Online Pawnbroking - 17th Jul 20
Gold Rallies Together With U.S. Covid-19 Cases - 17th Jul 20
Gold & Silver Measured Moves - 17th Jul 20
The Bizarre Mathematics Of How Negative Interest Rates Create Stratospheric Profits - 17th Jul 20
From a Stocks Bull Market Far, Far Away, Virus Doomsday Scenerio! - 16th Jul 20
Fiscal Cliffs and the Self-destructing Treasury - 16th Jul 20
Dow Stock Market Crash Watch - Update - 16th Jul 20
Gold & Silver Gaining on US Dollar Weakness - 16th Jul 20
How to Find the Best Stocks to Invest In - 16th Jul 20
Overclockers UK Custom Build PC Review - 2. System Build Changes Communications - 16th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Real Interest Rates Hit Minus 12.55% As Inflation Explodes!

Economics / Articles Apr 18, 2008 - 10:41 AM GMT

By: Money_and_Markets

Economics Best Financial Markets Analysis ArticleMike Larson writes: If you've been following the news, you know the Federal Reserve has been cutting interest rates. The benchmark federal funds rate was 5.25% last summer. It's all the way down to 2.25% now, and chances are the Fed will cut that rate again when it concludes its next policy meeting on April 30. The only question is whether we'll get a quarter-point or half-point cut at this time.


Now, here's something to consider: 2.25% sounds low, and it is. But what if I told you that interest rates, by at least one measure, are really -4.65%? Or that by another measure, they've hit a stunning -12.55%? You'd probably think I need to have my head examined!

And yet, those numbers are accurate. Here's why ...

The Riddle of REAL Interest Rates And Where We Stand Today

Let's say you're holding a corporate bond that pays you 5.5% in interest per year. That rate seems decent and roughly in line with the typical interest rate on long-term, AAA industrial company debt over the past few years (using Moody's data).

But what if inflation is running at 5.5%? Then you're not really earning anything. The interest you earn matches the decline in the purchasing power of your dollars. Or in other words, you're simply running in place.

And if inflation is 10%? In this unhappy scenario, you're actually losing money — to the tune of 4.5 percentage points, or 450 basis points, if you prefer.

That's the concept of "REAL" interest rates versus "nominal" ones. You have to not only look at the current, nominal level of rates, but also what inflation is doing, to get an idea of whether monetary policy is easy or tight.

When real rates are negative, it's a sign that policy is easy. That can drive inflation pressures and inflation expectations higher. When real rates are positive, it means that monetary policy is restrictive. That, in turn, tends to keep a lid on inflation.

Now, let's circle back to today. The nominal federal funds rate may be 2.25%. But we just got some key inflation data over the past several days that showed ...

  • Import prices skyrocketed 14.8% from a year ago in the month of March. That was up from 13.4% a month earlier and the highest rate of import inflation since the government started tracking it in 1982.
  • Producer prices jumped 6.9% from March 2007. That year-over-year gain in the Producer Price Index is just shy of the 7.4% rate in January, which in turn was the biggest rise since 1981.
  • The Consumer Price Index, for its part, rose 4% from last March.

So if you compute the REAL funds rate using import prices, you get an eye-popping -12.55% rate (2.25% nominal funds rate - 14.8% import inflation rate). If you use the PPI, you get -4.65% (2.25% - 6.9%).

And even if you use the CPI, which many people (including me) believe doesn't accurately reflect the true inflation rate we're seeing in our everyday lives, real interest rates are still negative — to the tune of -1.75% (2.25% - 4%).

As you can see from the chart below, this is the most negative that interest rates have been in years and years.

What Negative Real Rates Mean To You and Your Portfolio

The Fed keeps shoving its head deeper into the sand, hoping this inflation problem will go away. We get a bunch of speeches about how policymakers are "watching inflation closely."

But when it comes down to doing anything about it, the policymakers fold. Actually, they do something worse than that — they keep cutting interest rates even lower, driving real rates more deeply into negative territory.

Is it any wonder, then, that crude oil hit a fresh, all-time high of $115 a barrel this week? Or that the prices of all kinds of commodities have gone through the roof? Or that the dollar has been falling like a rock?

It's not just strong demand. It's not just strong overseas economic growth. It's the fact that nominal rates are much lower here than elsewhere, and that real rates are hugely negative.

Federal Reserve Chairman Ben Bernanke has come under fire as real inflation continues to soar.
Federal Reserve Chairman Ben Bernanke has come under fire as real inflation continues to soar.

Investors are piling into commodities and fleeing dollar investments because they are desperately trying to maintain their purchasing power in the face of a Fed that appears dead-set on destroying it!

In other words, there is no such thing as a free lunch, despite what Wall Street would have you believe. Fed Chairman Ben Bernanke has abandoned any semblance of caring about inflation and decided that the real concern is fighting deflation by any means necessary, including slashing interest rates to as little as -12.55%.

For a while, Treasury bond investors were willing to just sit there and take it. But that started to change this week. Long bond futures suffered a critical technical breakdown in price, a troubling development that could point to higher long-term rates over time.

So in my opinion, you should put your money in investments that can protect you. That includes hard assets like gold and other commodities ... Treasury Inflation Protected Securities, or TIPS ... and foreign bonds, which rise in dollar terms when the greenback loses value.

Until next time,

Mike

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules