Interest rates are NOT rising!!!

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.

US 30 year Treasury rate

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)?

 

All Rights Reserved.  Copyright Jonathan Davis

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18 Responses to Interest rates are NOT rising!!!

  1. Anonymous says:

    Hi Jonathan, totally agree we don’t yet have evidence of a change in trend. I think we might see 2013 having been the turning point but not confirmed yet.

    Have you considered disabling the anonymous comments on this blog? I’ve looked through quite a few of these posts now and many of the reader comments are bollocks

    • If they are insulting or pernicious I’ll delete the post. Otherwise I’m a proud #Libertarian

      • Anonymous says:

        Fair enough, you’re obviously more patient than me!
        Do you ever look at any Martin Armstrong stuff?
        He reckons 2013 was the turning point in rates: http://armstrongeconomics.com/2013/07/10/interest-rates-will-soar-into-2015-75-and-beyond/
        Some of his forecasts do seem remarkable (although I have no way of verifying they were put out at the time claimed)
        This from 1991 is looking good: http://i1.wp.com/armstrongeconomics.com/wp-content/uploads/2014/04/1998-Forecast.jpg
        He also reckons he called early 2007 as the top of the US property market (correct if you measure based on this IYR exchange traded fund) back in 1981: http://armstrongeconomics.com/wp-content/uploads/2012/03/a-forecast-for-real-estate-111509.pdf
        If this is right (given we seem to lag the US by about a year or so) then their snap-back rally into 2015.75 takes us to some time in 2016 and then we decline into 2033 in the Japanese-style deflation death spiral which you have discussed elsewhere.

      • Is that what he means by going from private to public? Never been able to understand. Mainly as his English is dreadful.

      • Anonymous says:

        No don’t think this is to do with his public/private waves, and yes he writes like a stream of consciousness

        He claims real estate is a 78-year wave, 52 years rising (broadly) and 26 years declining. He reckons the previous peak in Japan before 1989 was 1911. A 26-year downswing in Japan takes us to bottoming out nowish which appears reasonable.

        Specifically he reckons he put out in 1981 that the real estate cycle peak would be 2007.15 (ie something like 23rd Feb 2007) which you could argue it was based on IYR (the US real estate ETF). Smaller mini-peaks along the way are based on his 8.6 year economic confidence cycle and occur at 1964.15, 1972.75, 1981.35, 1989.95 and 1998.55. So the 1972.75 and 1989.95 ones look to be major. Then in the 26-year downswing there is a counter-trend rally 2012 to 2015.75 which we appear to be seeing.

        He believes he can identify these waves with 78-year peaks in 1695, 1773, 1851, 1929, 2007, (2085!) in the US. He comments in some detail but I have absolutely no data to check against.

        So basically he reckons it’s a long journey to the bottom (possibly more stagnation than crashtastic) in 2033, kicking off again after the current counter-trend rally. He specifically refers to this pattern in the previous cycle having been 1929 for the major high, intermediate low 1934 rising into 1937 then all the way down to the land price low of 1955.

        We seem to be something like nine months to a year behind the US so this would suggest our counter-trend rally could peak in 2016 Q3 perhaps.

        He also was predicting a “pi cycle” of 31.4 years from 1981 for rates to go down… so 2013 being the turning point.

        That slide of predictions from 1998 is pretty good:

        1998 Collapse of Russia
        1999 Low Gold and Oil
        2000 Technology Bubble
        2002 Bottom US Share Market
        2007 Real Estate Bubble
        2009 Start of Sovereign Debt Crisis
        2011-2015 Japan Economic Decline / Euro begins to crack due to debt crisis
        2015.75 Sovereign Debt Big Bang

        So you can put all these together, rising rates globally contributes to the sovereign debt crisis kicking off again in late 2015, hence real estate starts heading back down. Probably not the same public enthusiasm for real estate then or for measures to pump up the market which will by then have been accurately perceived as having made the whole problem worse.

        Sorry to go on at length but it would be fascinating to hear your thoughts

  2. Jonathan says:

    Interest rates won’t rise because it’s low interest rates that are keeping the government deficit at low interest rates and they can barley afford to pay the deficit as it is. The announcements that interest rates are probably going to rise by the central bank are just talk (in fact the announcements are a monetary policy in themselves) to keep the value of sterling high. If the markets know that QE is going to continue indefinitely then the value of Sterling would plummet.
    To understand what’s happening all you need to do is imagine that the government want to keep QE going to fund the deficit and also keep the value of the pound high. To do this they have to keep printing money (QE) and also announce that they are not going to keep printing money (keeping the value of the pound high). This is why you get announcements that QE will be tapered but there is actually no action.

  3. jamesbarrow says:

    I agree with you on interest rates.

    On Japan, however, it’s culture is very different to the rest of the world. It does not have the same net immigration as the UK.

  4. Jonny says:

    Sorry I meant ‘finding a home’ Freudian slip

  5. Jonny says:

    There is no deflation. Money and credit ( however one defines the extension of purchasing opportunity afforded down through central banks) is increasing in supply. It is not paying down debt and hence it must be funding a home ( called expenditure) .

    Look at house prices and food ( the things people need) the rise in nominal prices is marked whatever the CPI rpi etc suggest.

    I agree rates will not rise whilst we have no currency crisis ,but eventually the forex markets will rise them for you regardless of base rate

  6. tonyh1975@hotmail.co.uk says:

    If there is too much debt around, then keeping interest rates at these low levels will just encourage more debt.

    So unless more debt is the answer then low interest rates arent the solution.

  7. Anonymous says:

    A rise in market rates has no impact whatsoever on the interest paid by the govt. on the stock of issued debt, only on new debt. Obviously the annual interest cost to the govt. will depend on the duration of new debt and the savings on interest of maturing debt, much of which will be higher than now as your chart shows.

  8. Donny says:

    Inflation not rising? That depends on your metrics. Interest rates are only one and they seem to be disconnected. We’re not in the seventies anymore Toto.

    Seen food lately. Coffee, soy, sugar, orange juice, cattle, pork, chocolate, eggs, milk etc, etc.

    London property. Tech start ups. New York property. Education. San Fran property. Rent. Etc, etc…

    You need to drill down and get more specific. Inflation today is like whack-a-mole.

    • Yup! All those things are going up. Hence why politicians exclude them from the stats.
      However, the stats are down. Many countries are experiencing record lows. Many others on multi year lows. Hence rates are falling.

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