This chart shows money with zero maturity as a fraction of GDP.
1. Over the long-term, I fully expect to see this ratio continue to climb. We know that MZM will continue to climb. The only real question is how fast GDP climbs relative to it. Over the short-term (Q3 2020), GDP is currently winning, as some parts of our economy are rebounding from the pandemic. Over the long-term, I don’t think GDP has any hope of winning though. It’s competing with, in Ben Bernanke’s words, "a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost."
2. Will more dollars mean more consumer price inflation? Over the short-term, maybe. Pent-up demand may need to work through the system. Over the long-term, I doubt it. And when I say long-term, I only mean in my lifetime. And I’m getting old.
3. As seen in the chart, the rising interest rate problem of the 1970s wasn’t due to too many dollars relative to GDP. Quite the contrary. Those expecting a return to the 1970s need to understand this. I can sympathize with the theory, since I do have stagflationary in my name. However, banks only pay higher interest when they need to attract more deposits. Banks are not charities. Expecting banks to pay much higher interest rates when they are already flooded with money makes little sense to me.
4. Flooding banks with money isn’t just happening in the United States. It’s happening all over the world. As a saver, other than a modest investment in savings bonds each year, there’s nowhere relatively safe left to hide. Think of it as a monetary pandemic. The first outbreak was in Japan. None of us were immune. We’re all infected now. There is no cure. It is way too late for monetary vaccinations.
5. So, cash is trash. Right? Not so fast. It is my belief that the monetary leaders of every country know that we are all spending above our means. No monetary leader wants the inevitable collapse to happen on their watch. There’s no way out for them either. So, what do they need in order to delay the eventual outcome? ZIRP and low inflation. In theory, ZIRP allows nearly infinite borrowing for everyone at essentially no cost, especially for loans that have interest only payments. Low inflation stops people from hoarding goods. Need both, just like Japan. That’s the only solution there seems to be. When in a hole, dig deeper. A deeper hole is a horrible solution for future generations, of course.
6. Will we see 40 year mortgages in my lifetime? Yes. We’ve seen the duration of auto loans increase. Why not loans on homes? Anything is possible in a world with century bonds. Pretend and extend!
7. I kind of joke. 40-year mortgages are already available. I’m still alive. Yes!
8. This is why I have embraced interest rate sensitive utilities, even as some believe that utilities are in a bubble. If I’m wrong on interest rates, then I’ll be wrong on utilities. It mostly comes down to where interest rates are headed over the next decade or so. I’m sleeping okay since the decision to buy utilities in December. At the very least, ignorance is bliss.
9. Anyone who knows with certainty where we are headed is a fool. We’ve never been in this situation before. Historical data isn’t much more useful than tea leaves. That’s especially true of historical data before we fell off the gold standard. What should the P/E of the stock market be in a world potentially trapped in ZIRP long-term? Perhaps we’ll find out in hindsight. After all, today’s data is tomorrow’s historical data. And so on.
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