The most significant financial story of the last week, and perhaps of the last month, is the rising interest rates. The 10-year yield went up significantly on Friday, closing at about 2.71%.
To put this in perspective, this is still very low by historical standards. It is still lower than it was just a few years ago. It is far higher than its recent lows (around 1.5%).
I think the most relevant part of this story is largely symbolic up to this point. Sure, interest rates have an effect on investments and savings and they certainly affect the mortgage rates. But it is not as if we have seen a crash of the bond market or something else big. I think the reaction (or lack of) by the defenders of the establishment is the biggest story right now.
I am not sure if the people at the Federal Reserve and their defenders understand how vulnerable the economy is right now. I think those at the very top do understand, at least to some degree, that something isn’t right in the world.
When defenders of the free market warn about the extremely loose monetary policy of the last 5 years (at least in terms of the monetary base), defenders of the establishment will point to various things. They will say that price inflation is low. They will say that growth is picking up, but we just need more Fed stimulus to ensure a full recovery. They will also cite statistics. They will also say that the debt doesn’t matter, as long as we continue to grow.
When establishment economists make predictions, they often use certain assumptions for their predictions. This includes a certain rate of growth for the economy, when in actuality they have no idea what it will be. They also make assumptions about future interest rates. The assumptions are typically that they will stay low.
The last few weeks have disrupted these assumptions. If interest rates go up, it all of a sudden changes a lot of variables. The Fed’s balance sheet goes down in value. Interest payments on government debt will start to go up, particularly on newly issued debt.
I think the short-term upswing in interest rates will slow down. It is not surprising that rates would go up after being at near all-time lows. I don’t think we will see much higher rates until we see a pick up in price inflation. Perhaps the rising interest rates are indicating a coming change in price inflation, but we can’t be certain.
The one thing that the last few weeks has shown with the rise in interest rates, is that there really is no free lunch here. Defenders of the establishment think that we can just create trillions of dollars out of thin air and have interest rates near zero and not suffer any major consequences. They promote the idea that there is a free lunch in the form of low interest rates. But aside from the fact that this hurts savers and discourages savings, it also can’t last forever.
There is a giant misallocation of resources that needs to be corrected. I would suspect that part of this correction would mean higher interest rates, although it is quite possible that it could be the opposite, depending on how long the Fed continues to inflate. But the Fed should stop the digital printing presses and interest rates should be set by the marketplace. As long as there is major interference from the Fed (and the government), then resources will continue to be used in ways that are not in accordance with consumer demand. This means less productivity and an overall lower standard of living.