The following chart shows the natural log of the 10-Year Treasury Yield.
Click to enlarge.
When using natural logs, constant exponential growth (or in this case, decay) can be seen as a straight line. As such, I have added a straight trend line in red. Note the very high 0.90 correlation. That's the declining path we're on (and we are currently right on it).
On the right scale, I show what the actual yield would be for a given natural log value. Note the declining yields over time. Also note that the scale (in blue) would never reach absolute zero no matter how far out I look. We simply approach it.
Unlike exponential growth, exponential decay can go on forever. There is no mathematical reason it cannot.
As seen in the chart, the 10-Year Treasury Yield as been exponentially decaying for more than 30 years. In theory, it can continue decay for many, many more years (just as it did in Japan after their housing bust in the early 1990s). In my opinion, those who argue that interest rates have nowhere to go but up over the long-term simply do not understand the process.
Let me describe the process by offering an example.
Borrow $100 at a 16% rate. You would pay $16 per year in interest.
Borrow $200 at an 8% rate. You would pay $16 per year in interest.
Borrow $400 at a 4% rate. You would pay $16 per year in interest.
Borrow $800 at a 2% rate. You would pay $16 per year in interest.
Borrow $1600 at a 1% rate. You would pay $16 per year in interest.
If your goal (or the Fed's goal) is to pay $16 per year in interest, then how much could you borrow at a 0% rate? An infinite amount! Those arguing that we're at our limit must not understand this. Zero is hardly a limit, as it would allow infinite leverage!
There are plenty of valid reasons to think that interest rates could rise, but The Zero-Bound Myth certainly isn't one of them. At 0%, an infinite amount of leverage could be applied, and infinity is a very, very big number.
So what does this mean? They can pry the long-term treasuries (mostly TIPS for inflation protection) and I-Bonds from my cold dead fingers. That's what. As I have stated many times on this blog, it is and has been growing increasingly difficult to make money off of money (exponentially decaying interest rates are not good for long-term savers). For what it is worth, I do not see that changing in my lifetime. I say this because I believe that our economy has been decaying over the long-term under what amounts to an illusion of prosperity. Decaying interest rates reflect that decay. What is the answer to every economic mishap? Declining interest rates! All eyes on the Fed!
The video is long. It will require patience to watch it. May it provide a calming moment in an age of instant satisfaction (think Mad Money and Fast Money).
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