A New Interest Rates Record Is Set... And It Is Foreboding
Interest-Rates / ECB Interest Rates Aug 17, 2014 - 04:22 PM GMTBy: DailyWealth
Dr. Steve Sjuggerud writes: A new record was set in Germany yesterday...
The interest rate on a 10-year government bond in Germany fell below 1%.
This number is shocking... Interest rates have never been this low in German history.
What does it mean?
Why would people agree to lend money to a government for 10 years with almost no return on that money?
What is the message that we should take from this?
Aren't things supposed to be getting back to "normal"? And doesn't "normal" mean something like this: By 2020, the Federal Reserve has short-term interest rates at 4%, and 10-year government bonds pay 5%-6% interest?
This type of "return to normal" is the script on Wall Street and on Main Street.
But that script is just plain wrong if 10-year interest rates in Germany are below 1%...
What we're experiencing is the financial storm that nobody is expecting.
I'm talking about DEFLATION – every central banker's biggest fear.
The guy with the right script here is Jim Rickards...
In his excellent book The Death of Money, Jim says, "The world is witnessing a climactic battle between deflation and inflation."
"It is just a matter of time" before this battle comes to a head, he says. At some point, the U.S. economy will experience "an earthquake in the form of either a deeper depression [from deflation] or higher inflation, as one force rapidly and unexpectedly overwhelms the other."
I have always assumed that inflation would be the eventual winner, as governments can print money. But in his book, Jim makes the case that either one could win. With long-term interest rates now below 1% in Europe, it's looking like Europe is already in an epic battle with deflation.
Could it happen here in the States too?
It could.
Legendary bond investor Bill Gross has also recognized that the world is changing before Wall Street and Main Street have. Bill says we have to prepare for "The New Neutral" as he calls it. He expects interest rates in the U.S. will not soar by 2020 as everyone expects. Instead, Bill Gross (also known as The Bond King) sees the interest rates on 10-year government bonds as range-bound between 2.5% and 4.0%.
The message from the German bond market, from Jim Rickards, and from Bill Gross is the same: Long-term interest rates are likely NOT going back to "normal" anytime soon...
Good investing,
Steve
P.S. We still have a few free copies left of Jim's excellent book, The Death of Money. All we ask is that you cover the shipping and handling costs (less than $5). Jim was also kind enough to provide a special bonus chapter, free of charge, just for our readers. Learn more about the book and how to claim your copy right here.
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