Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Rates are NOT Rising!

Interest-Rates / US Interest Rates Apr 22, 2014 - 12:20 PM GMT

By: Jonathan_Davis

Interest-Rates

Back in December our firm noted that ‘everyone’ was saying interest rates would soon rise.  After all, they said, The Governor of the Bank of England and the Federal Reserve of the US had all but announced it.

We also noted that rates had been falling for getting on for 40 years.

We wondered if those saying higher rates are coming were looking in the wrong places.


And sure enough, long term rates (as defined by the rate at which the government borrows) are not rising. Since the start of the year they have been falling.

30-40 years ago Western governments borrowed (over the long term) at 15-20% pa or so.  Now they borrow at 3-4% (as in UK, US etc).

Rates rose last year so, apparently, everyone jumped on the short term bandwagon and decided that the multi-decade trend had suddenly changed.

Somewhat prematurely in our view.

The above is the last 10 years’ history of the interest rates at which the US government has borrowed money.  It shows that the rate was c 5.5% (as shown by c 55) in 2004 and is currently c 3.5% (as shown by c 35).  US borrowing rates have been similar to that of the UK for a long time.

Note the rate has been down to c 2.5% twice in the last 10 years.

Note also, the rate has jumped up to the long term falling trend line (in faint brown) 7 times over the last 10 years.  Each time it fell back from that trend line.

So the rate rose last year and the media and City pundits went wild announcing the death of the 40 year fall in rates and so, they said, we must (!) expect higher and higher rates in the future.

I have news for you: if rates rise then the Western economy is – to put it highly technically – toast!

THERE IS TOO MUCH DEBT AROUND.

That may be obvious to many of you but to some it is not so clear.  Even that millions of households are up to their eyeballs in debt, or that the UK government owes £1,200,000,000,000 (£1.2 Trillions) and that is only the amount to which they admit.

This year alone the UK government will spend £52,000,000,000 (£52 Billions) just on debt interest.  This is a lot more than they will spend on Defense.  On Interest alone.

Not debt repayment.

Interest.

So, if the rate at which the government borrows was to rise from, say, 3.5% to 4% – a mere 0.5% rise – this would increase the Government’s interest bill by £7 Billions pa.  How would it pay for it?  £7Bns of cuts?

That would play well with the electorate just as we are entering the final year before the next General Election.

What if the rate were to rise 1% or 2%?

Actually, the one thing our country needs (the entire West in fact) is much much lower government spending.  However, under our current system the only way that will happen is when global markets (lenders, in other words) decide to take away the ball and lend less.

That is not currently on the horizon.  Thus, I cannot understand why, because of one year of rising interest rates, did ‘everyone’ decide that the multi-decade trend of falling interest rates had ended.  If they are right then it’s merely a lucky guess.  The facts are to the contrary.

1. The government will do everything it possibly can to ensure rates do not rise
2. The FACT is rates are falling. The chart above shows that the long term trend is still down. When it turns up we’ll see it.
3. If the rate falls much further that will strongly suggest we are entering into Japanese-style deflation – which they experienced through the 1990s until recently.

By the way, during this period their house prices fell 80%.  With effectively Zero interest rates for nearly 20 years…

But, you may say, that is impossible for us.  Don’t be ridiculous.  Well, they said the same thing in the early 1990s.  And Japan used to be the 2nd largest economy on the planet.

It is not for me to say this or that WILL happen.  All I am doing here is reporting what IS happening.  Rates are falling.  This used to be helpful to the economy.  But it may not be going forward, after racking up huge debts.

Remember, the next time we have a Recession – which will likely not be created internally to the UK, it will probably come from a global economic shock (did anyone say China?) – policy makers will NOT be able to slash the Base Rate.  They can reduce it and they probably will.  But it’s already at 0.5% in the UK.  Down to zero will not make the blindest bit of difference to the UK economy, in that aforesaid Recession.  Depression?

If you’re invested expecting inflation to return and interest rates to rise, may I suggest you look at what actually is happening to inflation (falling) and to interest rates (also falling)?

By Jonathan Davis

http://jonathandaviswm.wordpress.com/

25+ year veteran of the world of financial services, the last 10 doing the same thing under his own name.  We work with families all over the UK and in Switzerland and, indeed, on 2 other continents. If interested in our Wealth Management work, cast a glance at the firm’s website.

From time to time media folk call me and ask me to rant live or in the press.  JD in the media.

I don’t buy hype.  I don’t believe it’s the end of the world but I do believe, within a generation, the West will have no welfare state.  The maths don’t lie.  We’re toast.  It’s obvious if you think about it.

© 2014 Copyright Jonathan Davis - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 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