In a Bloomberg Interview, former Fed chairman Alan Greenspan says “fairly soon” we could see a shift away from excessively low interest rates.
Greenspan Quotes
- We could see a shift away from excessively low interest rates “fairly soon”.
- “I think up in the area of 3 to 4, or 5 percent, eventually. That’s what rates have been historically, not only for hundreds of years, but thousands of years.”
- “We’re moving into the very early stages of inflation acceleration. That could be the trigger. There is only one long-term direction in interest rates and that is up.”
- “It’s a problem, as in going from where we are now to 4 or 5 percent. There’s a whole structure of adjustments which have taken place, basically since 2008, which have to be unwound, and that’s not going to be done without a problem.”
- If you listen to the debates and the primaries, nobody is addressing the fundamental issues that need to be addressed. Entitlements are rising and choking off gross domestic savings, and ultimately gross, domestic investment. And it’s the major cause of the reason why output per hour and productivity were so flat, not only in the United States, but throughout the developed world.”
Greenspan Video
Click on the above link for an excellent video.
No Savings Glut
Points five above is key. It’s really about socialism and free handouts.
In contrast to the widely-held “saving glut” thesis of Ben Bernanke, Larry Summers, and others, Greenspan, for all his faults, understands savings are both necessary and have been crowded out.
Math for Greenspan
I rather doubt we get to 5% rates or even 2% rates “fairly soon”. At an interest rate of 4%, interest on the national debt will soar as noted by Q&A: Everything You Need to Know About the National Debt.
The Congressional Budget Office projects the interest rate on ten-year Treasury bonds will climb from slightly over 2 percent today to over 4 percent by 2019. As a result, interest payments will more than triple from $250 billion in 2016 to more than $800 billion in 2026. By 2030, interest will represent over 14 percent of the federal budget and continue to climb. This represents money that cannot be spent on other government priorities such as education, national defense, research or infrastructure.
Interest Rate and Growth Projections
We are already crowding out savings at a mere 0.50% interest rate. That problem will more than triple by 2026 according to the CBO. Unfortunately, that is an extremely optimistic projection.
It’s equally save to presume GDP will grow much slower than projected over the next 10 years.
Lacy Hunt at Hoisington Investment Management also understands the effect of debt on the economy and interest rates. For discussion, please see Negative Multiplier of Government Debt.
I suspect we may be in a bit of an inflation scare. For details, please see Is the Rise in Price Inflation Transitory?
Mike “Mish” Shedlock
Long term rates up? Thank you Jesus. Now I can plan on a fat and happy retirement and spend a lot of everything I want. I really hope he’s not full of sh*t. this time.
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Deja Vu
Here we ago again… now that there is another housing bubble.
The Fed lowering interest rates to historic lows, then turning around and repeatedly raising interest rates in record time was the catalyst that burst the housing bubble last time around.
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Raising the interest rate to 5% will collapse all government spending. The interest payment alone on the debt swamps everything else out. What am I missing?
Can someone explain the whole Austrian “savings” thing to me? “Savings have been crowded out”? What does that mean? What number would we look at to see that savings have been “crowded out”?
I say that because I personally have more in savings today than ever in my life. I’m far more inclined to save today than ever. But I assume others aren’t like me.
Good point. It is like sideline cash etc,, in reality everything gets placed somewhere, unless under a matress, even sight deposits get worked.
What they are talking, to my view, is the push pull of credit. Credit ( hence monetary) expansion ( through low interest for example ) means competition with existing stock of money, and that means, all else being equal ©, that the increased flow of money will pay for existing stock of goods, whereas without that, new activity would have to occur to obtain the means of purchase.
Alternatively also, price deflation could occur to meet existing destimulated demand due to credit supplied (easy) money shrinking.
In both cases, the power of previously saved money would increase, not effectively decrease ( or be crowded out) in real terms.
So in effect monetary policy is playing with the incentives of the individual, that does not mean that people will not save – as noted all this new money will be sitting in someone’s name somewhere, an accountant might net out private/public debt and savings to give a clearer picture of the ‘average’ person… my ( lay) impression is that people are becoming more endebted as a whole.
Debt is not a saving in accounting terms.
“as noted all this new money will be sitting in someone’s name somewhere”.
And that gets to how I see the world. If I were to take money out of “savings” and give it to Mish to buy a car from him, and Mish puts the money in his “savings” account, are we losing savings? Doesn’t all money (ok except gold) live in the banking system at all times? Isn’t all of it loanable at all times?
If banks didn’t have enough money to loan out, wouldn’t that show up as higher interest rates for depositors?
I know there is some secret sauce in here somewhere.
If you look at how rates are set, the fed takes on existing debt to banks (loans a bank has made – an asset in accounting terms) in return for funding the bank at the set rate.. In other words it can create new money at will and artificially set the desired rate.
Purposefully trying to keep the explanation simple… this link is quite direct:
https://beyondmoney.net/2014/05/09/how-do-central-banks-control-interest-rates/
So what does it mean? It means that my savings have been degraded due to continuous pumping of real estate and stocks. Those who were on the right side of this central banking fraud sit on a nice profit which they can realize if they sell now. So why not move into those assets? Because no one in his right mind would have thought that these jackasses will take it this far.
Given the ridiculously low rates that have been forced onto an economy that with increased uncertainly has been screaming for above norm rates for at least a decade, it will take several decades of 5%,or perhaps a decade of Volker like 10-15%, to come close to remedy recent ultralow rates’ ill effects. The massive, systematic looting of the producing class by the banksters still won’t be reversed, but at least some of the institutions that have been built to facilitate it, may fall if hit with a decade of 12+% nominals.
Dude, we’re drafting on Japan
I see nothing but erudite Duncie-ness all around. If we don’t do the integrative monetary and economic policy thing increased interest rates will backfire. Destructive creativity is what must be avoided. Creative and WISE destruction….and the ability to discern the difference between those two can get us through this mess.
“Lacy Hunt at Hoisington Investment Management also understands the effect of debt on the economy and interest rates.”
Preach It, Mr Hunt.
Greenspan wrong — as he is so many times before.
Not a mention of the $trillions in debt that will blow up.
Not a mention that housing sector will crater.
Not a mention that Federal Reserve will be seriously underwater on assets held.
Not a mention that the bankster refinance business will blow up.
I could go on and on … but any (substantial) rise in rates will lead US into (bad) recession where yields will tank organically (deflation) or inorganically (massive QE to try and jump start economy).
10 yr yield will hit 1% before it ever sees 2.5% (doubt it will even see 2.0% … and if so, not for long).
The only reasons I can think of of rates being set higher are :
Someone (thinks they are) in a position to take advantage of a major restructuring of the country.
There is an international perspective that looks to attract foreign capital or damage/control foreign markets in some way.
People protest at easy credit… actually no.
And I translated “structural adjustment… unwinding ,” as Fed speak for ” prepare yourself for a baseball bat being shoved up happy land.”
“We’re moving into the very early stages of inflation acceleration. That could be the trigger. There is only one long-term direction in interest rates and that is up.”
What are you smoking, Alan?
J6p broke and heavily in debt + rising $US = inflation?
Try — DEFLATION
“understands savings are both necessary and have been crowded out.”
In the US, yes, absolutely. In China we have excess savings that the Chinese export through the huge trade surplus they have with the rest of the world thus importing foreign demand. The other side of this coin is that since the demand is being exported to China to be satisfied by the use of the Chinese productive resources, the American productive resources are being underutilized.
Sure, double today’s mortgage rates and see what happens to Housing prices/values.
90% of people with a mortgage will be 25%-50% under-water.
Inflationary, r i i i i g h t….
I have to admit, for a 90 year old he is pretty sharp.
But mostly wrong – as usual.
The US economy so hummingly going along that …
Total Receipts: Up by Less Than 1 Percent in Fiscal Year 2016
Despite
Total Outlays: Up by About 5 Percent in Fiscal Year 2016
https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/52152-mbr.pdf
Much like a bicycle, the economy cannot stand upright by itself. It needs energy and balance and (some) steering to make it move.
We had the US economy on training wheels for eight years while some community organizer kept telling us things like “you didn’t build that”.
Even if interest rates rise to 5% because inflation jumps, that wouldn’t make the government any worse off because real interest rates would hardly move (interest rates minus the inflation rate) and the government would still have trillions in bonds it has already sold at far less than the inflation rate meaning that debt simply devalues.
This guy is a jerk. He caused a major bubble and now has the answers. The problem is not entitlements (a loaded political word) but defense spending which is out of control. Over 1 trillion dollars per year for the national security state. We would have more freedom and fewer angry foreigners who want to blow us up if we cut that sharply and ended the imperial wars.
Creative entrepreneurs in the private sector employ lots of Americans at good wages making things that kill foreigners. These people are our heroes and keeping us safe. The unemployed elderly need to stop sponging off our creative entrepreneurs.
Be careful what you wish for in terms of an increase in long term rates. It is quite possible that rates could go up, but the US Gubment could also mandate that some or all of 401K, IRA and other retirement plan balances be held in Treasury bonds. So, returns would be somewhat higher than at present, but there could also be an enormous opportunity cost for any portion of retirement savings impacted by this relative to returns that would otherwise have been had from equity investments.
Another possibility also exists. During WWII the Federal Reserve and until 1951, the Fed set rates on T-Bonds at an artificially low rate to facilitate the financing of Federal debt http://www.federalreservehistory.org/Events/DetailView/71 The same scenario is equally plausible now, given the burgeoning debt level.
So, interest rates may rise, but I doubt that the Fed will allow much of an increase for reasons cited above, and beware moves to force savings to be held in debt instruments.
Nominal rates will climb even as real rates move more negative. There will be increasing inflation because the burden of servicing private debt is killing GDP growth. Unfortunately the printing will go to cronies instead of individual citizens and thus we return to trickle down status quo which does not work. We are so screwed.
Yes, we are screwed. Maybe Summers can save the world again.
A war that wipes out half the productive capacity of the global economy might work, too.
Now we find out just how smart DT is. I hope he’s amazing.
Sooo… this is going to happen in my lifetime with the dollar still as out currency? How does that happen?
Yeah, Alan knows the interest rate ‘r’ but not the time period ‘t’.
thinks he’s halfway there
It is not true, as Greenspan maintains, that rates have moved around 4-5% for thousands of years. In the Ancient Near East, 20% was a common interest rate for agricultural loans. In Rome 12% was common. Interest rates are determined by the chances of default, chance of social upheaval, chances of debt forgiveness and sovereign interference, financial continuity, monetary dilution, creditworthiness and incomes of the borrowers, legal status of loans and asking usury, etc. Rates in the modern era are lower than they have been over the millenia.
It is true there is a dearth of investment. Not because there are no savings (more money than ever sloshing around in the financial world), but because the returns are poor. Why are the returns poor. Not enough people have the means to buy more stuff. Why? Obviously because the powers of production are stronger than those of consumption? Why? Because we can produce more stuff than ever, often by dialing up without hiring a lot of people who are scarce and expensive? It’s called technology and efficiency. At present increases in production do not automatically create demand for workers, and the benefits of those improvements tend to accrue to the owners.
In an agricultural society with a few land owners and many poorly paid peasants, the demand function is very low, so low that production itself is also weak. In a more equitable society, in which a higher percentage of the peasants own the land (the means of production), everyone will be more prosperous, and both production and consumption will be higher. As long as consumers do not benefit from owning the means of production, demand will be weak. The more the powers of production overwhelm the need for extra workers, the more sluggisch will be the economy. Since these relationships are not anchored only in policy or economic management, but in the technique of production itself, there cannot be any simple fixes.
Consider that a company who hires a human has to pay social security and medicare taxes on the human’s pay, along with providing said human with health insurance.
A company actually reduces its taxes by purchasing capital items (technology) for production.
Switch that and see what happens. Why not tax asset values and let companies write off a portion of its labor costs?
may be i missunderstand something, but interest expenses 2016 seem to be much higher.
https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm
There’s not enough cheap energy now to fuel a return to growth like it was in the post WW2 era. That is gone forever. We may be seeing higher levels of production etc but the energy used is much greater than back then. Returns are smaller. Spending is off, as many are paying down debts. Richard Koo calls it a balance sheet recession. Raising interest rates “soon” will just make the issues worse as debt levels will get worse and spending will decline further. No spending = no growth. Funny how the debt scolds cannot link the two. If you want to raise interest rates you need to be sure the economy is not in deflation, let alone recession as now. Those anti government spending are reinforcing this trap. If the government started to ramp up its spending on the many options at its disposal the economy would turn around. Spending has zero relation to taxation. Spending relates to production capacity at full employment. The output gap between that level and today is the space for fiscal intervention. In 2012 it was estimated to be $1.8 Trillion, so if that was injected into the economy there might be some grounds fo a rise in interest rates
$20 trillion X 5%/yr = $1 trillion/yr interest
with a tax take of ~$2 trillion/yr, that’s ~50% of federal taxes.
seems legit…
Let the market set interest rates. Bank central planning is inefficient. Just give us an honest dollar that maintains consistent value over time. Divers weights and measures are counter productive in the long run.