Will interest rates rise if the biggest buyer of Treasury bonds leaves the market? and- Will inflation finally rear its ugly head?
It irritates me when people say that rates are definitely going to rise. This is not a cut-and-dried issue by any means. It amazes me that the financial markets are one of the few places–other than politics–where you can make huge sweeping statements about very complicated issues that turn out to be totally wrong, and no one calls you on the carpet. If you survey most investors and economists today and ask them if we are in for much higher interest rates, most of them go with the herd and say “rates are definitely going up,” but how much is another story.
Since the 2008 crash we have had QE1, QE2, Operation Twist, QE3, and now QEternity because this last one has no end date or dollar limit. With all of that stimulus, countless people on the financial entertainment channels guaranteed us that by now we would be in a high inflation environment because all of that printing was definitely going to devalue the dollar and decrease our buying power. Yet here we are with virtually no inflation, $18 trillion in debt, and over $5 trillion of new money printed into the economy. We also have the highest unemployment rate in history this long after a recovery. Fifty million people collect food stamps, up from 20 million five years ago and the only thing that seems to have recovered is a highly manipulated, government driven stock market. And let’s be honest, if the stock market had not gone from 6,600 to 16,000, would the talking heads in Washington have anything to justify their money printing party? The answer is definitely no.
So are higher interest rates inevitable? The answer depends on what this very fragile and unstable economy can handle. I certainly don’t think it’s inevitable that the Fed stops buying bonds all together and would not be surprised if they proceed very cautiously. After all, every other form of stimulus they have tried was followed by another program because things still looked bad, so they had to start another one. This time, given that QEternity has no end date or dollar limit, they can just keep it going forever, which is how long I think it will need to go. I don’t see the economics behind the curtain that can sustain this economy without help. Although we may see a bit more rise in interest rates, I think the market has mostly priced in a full exit by the government, which is unlikely to play all the way out. Meaning, rates may start to fall again if there is any sign of the government not fully exiting QEternity.
As for future inflation, consider this; after the largest money print in history and the largest debt accumulation in history, inflation barely has a heartbeat. The economic truth of the matter is that every day 10,000 baby boomers are retiring. This trend will continue for the next 18 years. Who will replace the buying power of that massive group? The reason we saw record inflation during the Jimmy Carter years was not because he was a terrible president, it was because boomers were just coming into their biggest spending years. Without that kind of demographic force, our biggest risk going forward is not inflation, its deflation! Stay safe, my friends.
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