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Why are interest rates so low? - Ben Bernanke
Interest rates around the world, both short-term and long-term, are exceptionally low these days.
Is that the quote of the day? No. You'd have to just now be coming out of a decade long coma to think that is it.
Low interest rates are not a short-term aberration, but part of a long-term trend.
Getting warmer! But it is still not the quote of the day. High standards must be met.
The state of the economy, not the Fed, is the ultimate determinant of the sustainable level of real returns.
Bingo! That's the quote of the day! Well done Ben Bernanke. Had no idea you had it in you!! When it comes to real interest rates, the Fed is impotent compared to the state of the economy!!
It would therefore stand to reason that if the sustainable level of real returns was falling over the long-term, then the state of the economy must be deteriorating over the long-term. Right?
August 15, 2013
The Long-Term Death of Real Yields
Click to enlarge.
Have I mentioned lately that it is getting harder and harder to make money off of money?
When there is a glut of anything, it is difficult to make money off of it. It should therefore not surprise us that it is difficult to make money off of a money glut.
41 comments:
Bernanke's quote of the day fully explains why I did not care in the slightest what the Fed had done, was doing, or would be doing when it came to making long-term inflation protected treasury and I-bond purchases.
I see/saw a deteriorating economy over the long-term. I hope that I am wrong, but I put my money where my mouth is.
i don't see a bond bubble. I see excess money and it has to go somewhere. Much of it sits in short-term treasuries and bank deposits anxiously salivating over the perpetually predicted higher long-term interest rate environment that's coming. Good luck on that.
This is not investment advice.
Decades of extractive, unproductive and counterproductive debt creation has CONsequences.
The Greenanke Feds failed to follow there actual mandate.
The "dual" mandate an outright lie - yet another historical example of how a lie repeated often enough comes to be accepted as truth.
Decades of criminal and treasonous behavior at the Fed imo. All done under the "oversight" of a bought off Congress.
Krugman quote of the day:
"First, the image of the little old lady living hand to mouth off the interest on her bank account is basically a fiction. Most retired Americans depend on Social Security for the majority of their income, and have very little in interest earnings; the decline in rates has primarily hurt a small minority of very well-off seniors."
Only "very well off seniors" are hurt by low interest rates! If they had just put all their money in casino markets they'd be really rich!!!!
mab,
This is all good!
I mean, letting it all out is good for your heart. Too often we see people bottle it up inside without realizing what all that pressure does.
Here, let me help. It's a technique that has worked for me in the past.
Cramer
Dykstra is one of the great ones! Winners of the New World! Mad Money! Booyah!
That went okay. I expected better though. I felt the blood pressure rise and then begin to fall. I may need to include profanity to get it all out and call it a net victory, lol. Sigh.
Hahaha!
Oh, the laughing did a lot of good. Need more of that! Perhaps picturing Monster Zero's three heads being Greenspan's, Bernanke's, and Yellen's. Yes, almost there. Now I'm picturing Monster Zero's body wearing a pink tutu.
Have no fear! Currency is our Godzilla now! Oh, no. There goes Tokyo. Godzilla!!
dd,
Good grief. Talk about living in an ivory tower. I had no idea that only the very well-off seniors have interest income.
It must be very frustrating and lonely for bank tellers to interact with so few depositors. Also explains why they don't give out free toasters any more. The very well-off seniors already have toasters. And those who don't never will.
Most retired Americans depend on Social Security for the majority of their income, and have very little in interest earnings;
Retirees have very little in interest earnings because rates are so low. For example, you can't earn *any* interest on money if the interest rate is zero. Go figure.
Sources of Income for Older Americans, 2012
The share of asset income (interest, dividends, and rent) declined from
24 percent to 10.6 percent from 1990
to 2012, about 13 percentage points. This trend largely reflects the decline
in market interest rates over this time. Since 2007, the share of asset income has decreased about 5 percentage points, reflecting the effects of the financial crisis and slow economic recovery.
No individual drop in interest rates thinks it is responsible for the senior retirement income flood.
I mean, letting it all out is good for your heart.
Mark,
You falsely misunderstood me. I was being ironical. Just like CR, "I come to praise Bernanke"!
Seriously. And I'm being seriously, serious here. Greenspan and Bernanke created the ideal environment for the best and the brightest at the likes of Goldman Sachs to do g_ds work!
A fed chairperson can't do better than that. Just ask a Wall St. banker. Or better yet, ask Cramer!
mab,
My astrologer warned me 6 years ago that I would misunderstand the use of irony on the Internet someday. That was shortly before being locked up in this asylum for the ironically gifted.
If only I had not scoffed and switched to the reading FOMC minutes. What hubris I had! That's not quite true. I did more than read them. I asked my caregivers to print them in the tiniest font possible and then, with the help of common glue, I applied them to the walls of my cell.
That's right. I applied the godly protection ward to this mental ward for my own protection.
Is it working? Of course it is. I have not been plagued by the demonic incantations that high real interest rates can bring. Not once.
The Fed is my german shepherd, and I shall not want. He makes me lie when the market is down. He leads me to billed water. He chews my shoes. He leads me on long walks for goodness sake. Yes, though I walk through the valley of interest rate death, I will fear no zeroes. For he is with me, his barks and his bites comfort me.
Dog damn it! He just comforted this true believer right on his @&$ again. I'll probably need stitches. Dog sure works in mysterious ways. If not for my complete faith, i'd.... oh, crap. That's not my dog! That's apparently a police dog. They're ordering me to put the phone down. Hey! This is a free country and I will type whatev...
Sticking with the real long term yields mirror the real economy meme, what happened between 1972 and 1982 to make the economy 12% better (from -2% to +10%)?
Why was it so easy in 1982 to make money off of money?
Dog sure works in mysterious ways.
Ohhhhh! Now it makes more sense. I didn't realize Goldman Sachs was doing d_ogs work.
Dogspeed
Mr. Slippery,
I hear ya!
As usual, Bernanke is only telling part of the story. Not an accident imo.
I'm supposed to believe long term interest rates are low primarily because the economy is bad? Then why is the stock market at record highs????
How can you tell a Fed Head is lying? He's moving his lips!
As a fan of Georgism, it's common for me to see grannies wheeled out to defend the interests of the predatorily wealthy. Same thing as in Churchill's day, too:
"The "Poor Widow" Bogey
But when we seek to rectify this system, to break down this unnatural and vicious circle, to interrupt this sequence of unsatisfactory reactions, what happens? We are not confronted with any great argument on behalf of the owner. Something else is put forward, and it is always put forward in these cases to shield the actual landowner or the actual capitalist from the logic of the argument or from the force of a Parliamentary movement.
Sometimes it is the widow. But that personality has been used to exhaustion. It would be sweating in the cruellest sense of the word, overtime of the grossest description, to bring the widow out again so soon. She must have a rest for a bit; so instead of the widow we have the market-gardener - the market-gardener liable to be disturbed on the outskirts of great cities, if the population of those cities expands, if the area which they require for their health and daily life should become larger than it is at present."
http://homepage.ntlworld.com/janusg/chrchl.htm
There's many more people in debt than that have substantial savings in this county.
As of 2010 the bottom 4 quintiles had 4.7% of the financial asset ownership here.
http://www2.ucsc.edu/whorulesamerica/power/wealth.html
As for the non-appearance of inflation, that is a choice. Give everyone a $500/mo basic income funded by new Fed printing, and we'd see rip-roaring inflation.
The funny thing is the Fed *was* printing $400+/mo per capita in 2010 and almost that in 2013:
http://research.stlouisfed.org/fred2/graph/?g=15WA
monthly Fed printing per-capita age 16+
but it was more of an extra sugaring of the donut rather than a direct and sustained regime-changing monetary injection.
For the latter we have the experience of the Japanese:
http://research.stlouisfed.org/fred2/graph/?g=15WC
blue is per-capita US Fed balance sheet, red is per-capita (15-64) Japan BOJ holdings.
Kuroda was just getting started in 2013, too . . .
Krugman quote of the day:
"First, the image of the little old lady living hand to mouth off the interest on her bank account is basically a fiction. Most retired Americans ... have very little in interest earnings; the decline in rates has primarily hurt a small minority of very well-off seniors."
I wonder why the US differs from so many other countries in that regard? American Exceptionalism!
I'm supposed to believe long term interest rates are low primarily because the economy is bad? Then why is the stock market at record highs????
The economy isn't bad per se, it's different.
http://research.stlouisfed.org/fred2/graph/?g=15WE
shows credit expansion is at postwar low levels.
We've got fiscal terrorism controlling DC's spending (which has been going down on a real per-capita basis since ARRA petered out)
http://research.stlouisfed.org/fred2/graph/?g=15WH
but the real problem is going back to the first graph and looking at where we're at in the global picture:
http://research.stlouisfed.org/fred2/graph/?g=15WF
Don't look down!
Basically an immense amount of wealth has been shifted from the general population to the 1%, and we call this 'debt'.
If DC expanded spending 30% like it did in the 1980s or 25% it it did 2000-2008 we'd have a very nice economy now.
I suspect the GOP is saving that fiscal boost frown they can reap the political benefits of it.
They're no dummies and have been around this block more than once.
Mr Slippery,
In the 1970s, investors couldn't even know what real rates were on long bonds. Had to wait and find out what inflation did. Some guessed well, others not so well.
Don't have that problem now. Know the real rate on long-term TIPS just by looking at them. And those rates are for the dogs!
Fortunately, I'm okay with dogs. A dog in the hand is worth two in the...
mab,
Then why is the stock market at record highs????
Because the economy is so bad that it is good!!
It uses the same rating system I use when watching comedies.
**** - Great Movie
*** - Good Movie
** - Poor Movie
* - Great Movie
The difference between a 4 star comedy and a 1 star comedy? Not much. One you can really laugh with and one you really laugh at! Either way, you're laughing! Ends justifies the means. ;)
Troy,
Basically an immense amount of wealth has been shifted from the general population to the 1%, and we call this 'debt'.
It sure doesn't generate much canned goods inflation. I guess the 1% just can't eat that much. Sigh.
dearieme,
American Exceptionalism indeed! Nothing can stop us from "trickle up" wealth economics!!
The economy isn't bad per se, it's different.
Troy,
I was paraphrasing Bernanke from Mark's post.
And I was attempting to point out what appears to be some flawed logic on Bernanke's part.
On the one hand Bernanke claims long term interest rates are low because the economy's prospects are grim. But at other times, I've seen Bernanke claim that the stock market is soaring because investors are optimistic about the long term prospects of our economy. Complete CONtradiction by a master propagandist.
And I disagree with you. The economy isn't just different. For far too many, the economy is bad.
I read Bernanke's blog post and don't find anything to object to.
Note that he ends it with:
"What features of the economic landscape are the ultimate sources of today’s low real rates? I’ll tackle that in later posts."
so it's important to wait for what he says before rejecting it.
His:
"Government spending and taxation policies also affect the equilibrium real rate: Large deficits will tend to increase the equilibrium real rate (again, all else equal), because government borrowing diverts savings away from private investment."
comes with an important caveat ("ll else equal") . . . the way I see things, government spending doesn't really choke private investment because every dollar government takes ends up right back in the private economy that quarter.
They key "crowding out" is simply what that spending is consuming, like taking all the concrete that can be made and whatnot.
Our economy is no longer so capital-constrained, this is no longer the 19th century and we've really got to stop thinking that the economy operates now like it did then.
Troy,
For what it is worth, I quoted Bernanke three times and agree with all three.
That's pretty rare for me because I'm so used to calling him Ben "There's no housing bubble to go bust" Bernanke, lol. Sigh,
Mark, Troy,
Again, how do you square Bernanke's statement about low long term interest rates with his statements about historically rich stock market valuations?
At best, Bernanke is telling half truths - or no truth at all in my book.
mab,
This is how how I would square it.
1. Low real yields are a sign of a sick economy.
2. Sick economies "need" more cash.
3. More cash buys bonds. Real yields fall.
4. More cash buys stocks. Prices go up.
5. So don't blame the central banks! Makin' prosperity!!
6. Go to step 1.
"how do you square Bernanke's statement about low long term interest rates with his statements about historically rich stock market valuations"
He's saying stay tuned for Part II!
But my guess is the record corporate profits are part of the low-inflation story, since no wage inflation == no price inflation, and with no price inflation, there's nothing to push up yields.
http://research.stlouisfed.org/fred2/graph/?g=15YY
compares labor's share of the production pie (wages / wage + profits) blue vs. treasury rates in red (right axis)
The 1980-83 was purging labor's power to borrow and constitutes a singularity to some extent, but the trend from 1990 to now is clear -- labor is losing earning power and rates are falling in step.
Then again, I've yet to get a check from the Fed that I can convert to cash, nor have I actually seen the helicopter drops of money in my neighborhood that were supposed to be coming.
This could just be an elaborate hoax!
Hey, you don't suppose all that money we sent to China is pouring back into our bond and/or stock markets do you? I thought for sure they'd just bury it and call it good!!
Troy,
Too much cash. That's what is pushing real yields lower. There is SO much money sitting in bank deposits. Banks do not feel the need to raise rates to attract more, at least not yet.
Gone are the days of Washington Mutual offering 4% on checking accounts so they can help fuel the housing bubble. They wanted my money real bad and got it. I took it back at the first sign of trouble though. They don't call me Bank Runner Mark for nothing. ;)
China is also a part of our low-inflation story since 1990.
So little of what we buy is manufactured here, we are literally exporting our inflation to them!
And they're running with it, since their economy is tracking like Japan's did in their recovery from destruction, only with 10X the potential!
http://research.stlouisfed.org/fred2/graph/?g=15Z7
The 'dark matter' in this analysis is http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm
we've gone from ~$1T in the hole in 2007 to $6T as of 3Q14, and the end of that print is big-U Ugly.
There is SO much money sitting in bank deposits. Banks do not feel the need to raise rates to attract more, at least not yet.
https://research.stlouisfed.org/fred2/series/EXCSRESNS
yeah, that's a graph that my brain can't process, it just rejects that image completely
There Really Was A Massive Run On WaMu
Nonetheless, according to a new, investigative report in the Seattle Business Journal (via Rolfe Winkler) it's clear that WaMu really did experience a straight up run. We know this news will disappoint longsuffering WaMu investors who still believe their bank was gifted to JPMorgan (JPM), but it's not true. The customers panicked and the bank failed.
I did not panic. I had a temporary checking account at Washington Mutual to capture 4% interest. When the housing bubbke began to pop, I transferred the money back to my permanent bank's checking account. Easy peasy. No panic.
Perhaps Washington Mutual should have factored that in to their greedy behavior model. It was far simpler transferring it out of Washington Mutual than transferring it in. Transferring it in required filling out forms for setting up a new checking account. Moving it out simply required writing a check.
I was FDIC insured at just under the limit at the time. I had no desire to rely on it or go through a potential hassle unnecessarily though.
Troy,
China is also a part of our low-inflation story since 1990.
They are also a player in our falling real yield story. We send them cash and they buy our bonds. Buying bonds lowers yields.
They could dump their bonds for cash of course, but then somebody else would have less cash and more bonds. I'm not sure his that would change things much.
That said, if nobody wanted our bonds then we'd have a problem. Good thing we have relatively high interest rates compared to much of the world, not that many here seem to think they are high.
We send them cash and they buy our bonds
https://www.treasury.gov/ticdata/Publish/mfh.txt
China's had enough apparently, down $35B YOY, but overall the world is up $400B YOY on their UST position. Thanks, world!
Ah, yes, "Global Saving Glut"
http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/
I'm not going to read that, but it's BB again talking about the GSG . . .
Troy,
How does one get tif of a global savings glut I wonder.
If I instantly convert from saver to spender then I guess I'd have to sell my bonds to someone else. I'd be kess of a saver but they'd be more of a saver.
And am I really a saver now? I don't have any income to save, except interest. From here on out I am a spender with intent to die broke. It's all in the timing.
It sure would be helpful to know my true lifespan. And somewhat terrifying perhaps. Not sure I really want to know the exact time and method of my passing. Could be good news or bad news.
Two Worst Case Scenarios:
1. I pass away 15 minutes from now in a house fire. Very painful.
2. I never pass away. I live forever. Could be a very miserable eternity once the sun becomes a red giant.
As bad as worst case scenario #1 serms, it is still "infinitely" better than scenario #2 in my opinion. Be careful what you wish for! Immortality could easily become a worst nightmare, eventually.
That said, it would be interesting to see how many years it takes before we have a currency crisis. I have little doubt that one will eventually come, assuming there isn't a mass extinction event first.
I think the odds are very low that we'll have a currency crisis in my lifetime, but that's mostly just a gut opinion.
All I can say for sure is that we thankfully haven't had a currency crisis since I became a permabear 11 years ago. Not even close. Where does the time go?
I easily see a USD crisis coming.
I don't know what it looks like, but it would revolve around the ROW not needing our USD as much as we need people to keep buying them.
And it would probably mean parity with the yuan, a six-fold strengthening.
The yen went from 360 to 80 from Nixon to Obama, which is in the ballpark.
Yuan parity is very different regime than what we have now. For one, 1.3T Chinese could afford to buy out our entire food production, which is not deflationary here at home, lemme tell ya that!
Troy,
I'm not sure what China csn afford. I certsinly don't trust their banking system or their economic miracle story.
This is how how I would square it.
Fine, that's how you would explain it. But that's not Bernanke's explanation(s). He contradicts himself. Or worse, he lies.
Recap. Bernanke claims low long term yields are the result of grim prospects for the economy. At the same time, he claims high stock prices are due to an optimistic outlook for the economy. Those statements don't square especially if one understands how our interest rate system works.
Actually, Bernanke is being deceptive in both cases. Low rates are a choice! And he made that choice.
Interest rates are set (benched) by the Fed. In fact, I could argue that the purpose of "reserves" is to give the Fed greater control over interest rates.
Heck, I watched Bernanke testify before Congress on the need for the Fed to pay interest on reserve balances. And he never gave Congress the true reason for this "need".
I know better than most how our reserve banking system works. Bernanke is purposefully evasive! And those are kind words!
As for the alleged abundance of "cash" where did it come from?
Bernanke could clear up all this confusion with a two page paper! But he won't. Even Hussman (a very clever dude) is confused. he lumps currency in with reserves! As a non-bank person, I can get my hands on curreny but not reserves!
mab,
My squaring it was at least partly tongue in cheek of course.
Here's what I would really love to know.
Why do do many people spend so much time parsing every last word of any Fed statement?
And why does the Fed spend so much time carefully crafting such statements?
The Fed is going to tell people whatever it wants, which is not necessarily even what the Fed believes.
It's like parsing political campaign promises in the hopes of discovering great insight.
"Read my lips: No new taxes."
After parsing the data and processing it with an advanced political campaign promise algorithm it becomes:
"You should vote for me."
Big shocker.
I hear you on parsing Fed language. What a waste of time. I'm not joking when I say it's all just a show to keep mainstreet's belief in the importance of Wall Street. don't look behind the curtain!
From Bernanke's post:
Large deficits will tend to increase the equilibrium real rate (again, all else equal), because government borrowing diverts savings away from private investment.
Really? During WW2 and post 2008 financial crisis the U.S. had enormous deficit spending. Did the real rate increase as Bernanke claims???
Let's look at Japan. After their 1990s real estate and equity bubbles, Japan ran huge Gov't deficits. Did the real rate increase as Bernanke claims??
And Gov't spending doesn't divert savings away from private investment. The Gov't doesn't borrow at all! The Gov't spends money into existence! Period! That's where the savings glut came from.
That deceitful Bernanke claimed we had a global saving glut during the housing bubble. Bah! That was an epic and fraudulently based credit bubble. After it ended we got the ramp up in deposits!!!!!
I could go on and on about Fed lies.
Lastly. And importantly, in an unpegged currency (floating exchange rate regime), interest rates are a policy choice no matter what Bernanke and the outdated gold standard text books say. WW2, Japan and the recent post 2008 U.S. economy should make this abundantly clear.
In a free market, overleverage leads to high rates. This was apparent during the 2008 financial crisis. But we don't have a free market for short or long term interest rates. As our system is set up, overleverage leads to low rates.
mab,
"It may simply reflect our overleveraged society and the fact that people are carrying more debt on everything and it doesn't take a lot to affect a small percentage of them in terms of moving them from homeownership to not." - Bob Curran, Fitch Rating Analyst, April 7, 2005
That's my favorite quote ftom the housing bust. He was trying to explain why the jump in foreclosures wasn't a problem.
Forehead. Desk. Rapid whacking.
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