Sunday, October 19, 2014

Our Economy Can't Tolerate Exponentially Decaying Interest Rates

As hard as this may be to believe, I would argue that our economy requires interest rates to decay even faster than exponentially.

The following chart shows the natural log of the M2 money supply interest rate. When using natural logs, constant exponential growth (or in this case, decay) can be seen as a straight line.

Click to enlarge.

I have added a linear trend line in blue that represents the interest rate ceiling. Note that it is a nearly perfect fit of the data. At the high end, interest rates have therefore been decaying exponentially. There is little doubt of that. If we reach the blue line, very bad things happen (see 2000 and 2007 in the chart). Further, each visit to the blue line created more pain than the previous visit. The last visit gave us the Great Recession. Nice job Bernanke!

Time Magazine: Ben Bernanke: Person of the Year 2009

His creative leadership helped ensure that 2009 was a period of weak recovery rather than catastrophic depression, and he still wields unrivaled power over our money, our jobs, our savings and our national future.

I have no doubts that his creative leadership helped ensure that 2009 was a weak period. As seen in the chart, some might even argue that his creative leadership gave us the Great Recession. It might have even inspired some to create Illusion of Prosperity blogs in 2007. Who knows!

I have also added a parabolic trend line in red that represents the interest rate floor. Note that it too is a nearly perfect fit of the data. At the low end, interest rates have therefore been decaying more than just exponentially. The description of it is something to behold. Parabolically decaying exponential decay? Two decays for the price of one! Woohoo! Further, note that our last visit to the red trend line is acting a bit like a Roach Motel. We can't seem to free ourselves from the stickiness.

SNL: Bug Off Ad

Roaches are attracted to Bug-Off by a chemical message that says, "Come on in, it's warm and safe in here." Once inside, the roach is held fast by a powerful adhesive, while three pairs of tiny tweezers grab the roach's legs and stretch them in opposite directions, until eventually they snap off. Meanwhile, a red-hot metal coil burns off the roach's reproductive organs, as the roach's own legs are used to beat it senseless. And with the patented clear-view window, you can be sure it's working. Finally, wads of turpentine silk cotton are stuffed into the roach's orifices, while a delicious piece of food is dangled just out of its reach.

True, none of this will actually kill the roach, but it will give it plenty to think about. So stop coddling your roaches. They've had it too good for too long.

Roaches? Savers? Long-term prosperity? It's all good.

Source Data:
St. Louis Fed: Custom Chart


Joseph Constable said...

Roaches. Savers. Too good.

Joseph Constable said...

I one doesn't see how rates can be raised and doesn't see how rates can't be raised then there will be a new paradigm coming along.

Stagflationary Mark said...

Joseph Constable,

Here is the saver and/or roach outlook. D'oh!

Fritz_O said...

Saver: One with a deep chronic sense of uncertainty and dissatisfaction arising from unresolved problems and unfulfilled needs.

Also known as frustrated.

Stagflationary Mark said...


The Fed has saved the whirled!

Oops, frustratean slip!