Bonds and Interest Rates

Mortgage rates are near an all-time low. They haven’t been this low in at least 39 years. It is amazing that someone will loan me money for 30 years with a fixed interest rate of 4.5% and I can pay it back in depreciating money. With such a low rate, it is telling me that the market is not scared of inflation right now. It is just scared. People are willing to accept really low rates for the safety of their principal.

The bond market is probably a bubble. I would be surprised if rates did not rise dramatically in the coming years. But who knows for sure? Maybe we will end up like Japan. Japan has a debt-to-GDP ratio in the neighborhood of 200%. This makes Greece look fiscally responsible. But Japan’s rates have remained low for 2 decades. I don’t expect this to happen in the U.S., but I’m just pointing out that it’s possible. In other words, don’t short the bond market right now. If you have a mortgage and can refinance it at a really low fixed rate, do it if you aren’t planning to sell anytime soon.

My Experts

I don’t usually “listen” to the so-called experts on tv. Sometimes I pay attention to what they say. I am always curious to hear what Cramer (of Mad Money) will say on CNBC after a bad day for the stock market. You can even sometimes pick up good pieces of advice. But I would not model your portfolio around what any of them have to say.

I pay attention to people that understand economics. There aren’t many of them. Even some who understand economics get investment advice wrong. Remember what Austrian economics is all about. Just think of Mises’ most famous book. The name is Human Action. That is what Austrian economics is all about. Humans act freely. You should take this into account when making investment decisions. You may think of all of the reasons in the world why gold should go up or stocks should go down or whatever, but it all depends on the individual decisions of millions of people. You may think than interest rates should go up tomorrow, but if enough people make a decision to buy bonds on that day, your opinion doesn’t really matter.

With all of that said, the people that I trust most in economics and investments, all seem to come to one opinion. The economy is going to get much worse before it gets better. I couldn’t agree more. I just can’t believe the consensus. The opinions are more mixed in the mainstream media (although there is even some pessimism there), but the people that I read and listen to who know their economics all seem to agree that the economy is going to get really bad. There are some varying opinions (hyperinflation, massive inflation, depression), but they are all bad. Of course, it will depend on certain things, like what the Fed and the government decide to do. But with all of the previous malinvestment, there is little doubt that there has to be a severe correction. It is just a question of how much the government allows it to happen.

Social Security and Medicare

If you are under the age of 50, you are going to get the shaft. If you are over 50, it is not quite as clear, but you will probably get the shaft too. There are estimates that the unfunded liabilities of the U.S. government (primarily Medicare and Social Security) are over $100 trillion. That is over 6 times the annual GDP. The number is staggering. While it is important, you may as well ignore it. The government can’t make good on it. It can’t even make good on half of it. There will be changes down the road. The only question is when and what those changes will be.

There will be “benefit” cuts. This could come in various forms. One way is to raise the retirement age. This is likely. Another way is to decrease benefits (less Medicare coverage, higher deductibles, and smaller checks from Social Security). Still another way is through inflation. This will be like decreasing benefits, but in a more devious way. But if the problem is “resolved” through inflation, then the government will have to change how it calculates its cost of living increases or it will have to lie about inflation by understating the CPI. Both are possible.

Perhaps it will be a combination of all of these things. But for senior citizens already collecting Social Security, you should worry about inflation more than anything. If you are a senior citizen, you should be advocating for the Fed to raise rates and put on the monetary brakes. If you are a senior, you want deflation. Deflation means that prices will go down and you will be able to buy more with the money you have. You would rather have a deflationary depression than inflation.

The same goes for younger people, but to a lesser extent. One way or another, we will eventually get a depression to cleanse out all of the malinvestment that the government has caused. It is better to do it now than do more damage still. But for a younger person, if we have a period of high price inflation, at least the younger person can eventually recover by earning more money. It is much harder for someone in retirement on a fixed income.

If you are younger than 50 (maybe this should even be 60), then don’t plan on getting anything out of Social Security. If you are over 60, pray for a depression quickly. Better now than later when your money is nearly worthless.

China and the Yuan

The Chinese government announced that it will drop the yuan’s peg to the dollar. Overall, I think this is good. This shows further liberalization of markets by the Chinese. At the same time, I haven’t understood for the longest time why nearly everyone thinks the yuan will rise rapidly against the dollar. While I have a lot of positive things to say about the Chinese economy for the long run, the Chinese central bank has been inflating like crazy. China’s monetary inflation has exceeded the Fed’s inflation of the last few years.

Regardless of what happens to the yuan, the Chinese people are going to experience a deep recession/depression. This will be its first, since I guess you can’t really have a recession when you are living in total poverty as most of the people were before. The Chinese have made great progress over the last couple of decades. Unfortunately, some of what seems to be progress in the last few years has been artificial. There will be a real estate crash. China has a lot going for it, but don’t invest your money there in the short-term.

Gold and Silver

Gold has been setting record highs (in nominal terms) this past week. Gold and silver tend to move in the same direction. Silver also tends to be more volatile than gold. When there is a bear market in metals, silver usually does worse than gold. But in a bull market, silver often goes higher in percentage terms than gold.

This has not been the case lately. Silver has done well, but not as well as gold. While silver does have a history of being used as money, gold does even more so. Central banks around the world store gold, but not silver (at least that we are aware). The U.S. dollar has been strong lately compared to other currencies, particularly the Euro. But gold in terms of U.S. dollars has still done well. With uncertainty in the world, with massive debts, and with all of the other problems created by governments, some people are turning to gold. Central banks are also putting a floor under it. While there may be a pullback in the short-term, gold and gold related investments are still a good bet even at current prices.

House Hunters

There is a show on HGTV called House Hunters. Sometimes this show does another version called House Hunters International where someone shops for a house outside of the U.S. This may be where the person(s) lives or it may be a second home they are shopping for. The person or family will look at 3 homes and at the end of the show it is revealed which house they choose to buy.

It is always interesting to look at the real estate and the prices outside of the U.S. When someone is looking at beachfront property in the Caribbean, it is understandably expensive. But it is really amazing when they look in places like Western Europe. I’ve seen shows where they show places in Japan, Israel, and several countries in Western Europe. The prices are astronomical. This makes a couple of points for me. First, the standard of living is far lower in other places of the world. Of course we expect this in third world countries, but it is surprising looking at Europe. You will see these apartment/condos that are about 1,000 square feet going for 400,000 or 500,000 American dollars. It would be sub-standard living to most Americans.

The other relevant point is how expensive real estate is in a welfare state. If the U.S. is headed towards being a welfare state like much of Europe, then perhaps we can expect real estate prices to go up drastically in the long-term too.


Interest rates are at or near historic lows, whether we are talking about the Fed Funds rate or the rate on treasury bonds. The question is, is this a bubble? The answer is probably “yes”, but it doesn’t mean you should be shorting bonds right now either. If and when it becomes more evident that the economy is in bad shape, there might continue to be a flight to safety. For many people, that means bonds. I am not saying that this is logically correct, but who can argue with the market?

If the stock market goes into free fall, there is a good chance that bonds will continue to do well in the short-term and may even increase significantly in value. An additional reason to not short bonds is because you will be fighting against the Fed. The Fed creates inflation which can ultimately hurt bonds, but the Fed creates inflation by buying assets, the biggest asset being bonds. I would not fight against the trend at this point. Interest rates will finally go up some day in the future, but I wouldn’t gamble a lot of money on that day being soon.


It seems there is a struggle in the economy between inflation and deflation. The Fed has created massive amounts of money, but most of that is sitting as excessive reserves with the banks. It is keeping us from massive price inflation. The economy is trying to get rid of all of the bad investments that happened during the previous boom, but the government is not letting it happen. There is a struggle between recession/depression and high price inflation (say 10% or more). The Fed can choose the latter at any time. It can essentially force the banks to stop holding excess reserves. The Fed can also buy any assets of its choosing.

In a speech that Bernanke made several years ago that earned him the nickname “Helicopter Ben”, he said that the Fed can prevent deflation/depression at any time by credibly threatening to create massive amounts of money. He is correct on this point. The Fed can cause massive inflation (monetary or price) at any time. Right now it is trying to walk a tight rope, but they are running out of room. We will eventually get a depression. Hopefully the Fed will choose that course soon. If not, we will get really high price inflation, and then we will get a depression.