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Si1

Interest Rates 10 Years From Now

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This is wholly main forum material since it is central to the house crisis question.

The economy will remain soft due to oldies rentierism. Interest rates will remain low. Govt will continue to compensate the oldies. This will keep the economy soft as it is a disincentive to proper economic functioning.

So interest rates will stay on the floor.

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I personally think the government, or future ones will be forced to raise interest rates, regardless of the consequences. What it will be that triggers them is any ones guess, but something will.

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What Si1 said, but I'd add the additional reason that they will stay on the floor because its kind of embedded into the way fiat money systems operate. The way I have paraphrased this in the past is simply to say that you can't expect to get any kind of yield from an asset which is both entirely safe and at the same time is just a number in a bank computer.

Equities may also exist as numbers in computers but they come with the additional feature of a legal claim on a real world entity. A bit of fiat scrip doesn't give you a claim on anything except the scrip itself.

Of course this says nothing about real yields, spreads etc, which is perhaps where we should focus in terms of what is going on 10 years form now. The bank rate is a red herring.

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That is probably a 10 trillion dollar question. If we knew the answer the derivatives world would not be needed. Based on my understanding of how things are working right now I go back and forwards on both up and down arguments. There are many arguements you can play out, some of which I have laid out below but ultimately I think there will be a joint political decision by elites in multiple governments to reset the system in some way. The poor will never notice, the rich will remain rich and the middle classes with sharp elbows and contacts will find it harder to push forward.

Rates Stay Down

1. Western governments control capitalist markets through political control of central banks' action. I know the central banks are "independent" but honestly who actually believes this except plebs. If humans are involved, there is always a politcal angle. The governments are all heavily indebted. If you control your interest rates and you're heavily indebted your going to want to keep them down or negative until you can get inflation going and pay back your debts with increasingly cheap money.

2. Career politicians can never admit they are wrong or they lose their whole career on one mistake (sad but true). In business, if you're wrong you are incentivised to admit it fast and adapt. Heavy debts with no growth mean that we can only keep the status quo with very low rates. Can't have middle class people not having food and shelter (even though its super expensive!); we will just muddle through with lower living standards and our young will not really notice until they start having kids (or more likely they'll stop having kids and we'll import labour for the ponzi to continue, who better to fill up the rabbit warren flats than thankful war torn refugees pleased to have anything at all after losing it all because of the wars we started in their homelands)

3. Have we entered a strange new world where we have bred compliant individuals who accept their lot and don't protest or complain against fundementally unfair sharing of resources between the 1% and the 99% (this is the basic argument that humanity has had since tribes first existed). If we have bred a type of idiocracy, distracted and full of fructose calories perhaps only a small minority care and the rest are effectively loving the matrix so much they don't want to leave. Ignorance is bliss as they say. Maybe sending them to university for a "knowledge workforce" was the best thing the elite ever did...they actually removed real life experiences from young men aged between 18-23 - the angry young people who, in history, have the energy to start revolutions.

4. A decade of low interest rates continue until the bulge of the baby boomers is removed from the Western human pyramid of life (i.e debt/work slavery). Once this happens, our healthcare systems are overwhelmed and we need a new economy of young helpers for the aged. The young then extract the housing wealth from the old via these services - after all you can't take it with you, but what price would you pay to be comfortable as you waited to die. This would create a new service economy and use for money which could be large enough to kick start the intergenerational money flow that has been missing. But this would take another decade so interest rates remain low for a while and house price growth falls below inflation.

Rates Go Up

5. With low interest rates and high indebtedness, repayment mortgages pay down more capital on an exponential basis, so consumer debt will decrease (as long as people keep their jobs and they aren't on poverty wages etc. which I know is a big IF). This could leave more room for interest rate hikes within a short timeframe, dropping house prices etc. But it would quickly end up with more of the same, house props and bad lending as the system hasn't changed.

6. Central banks don't actually control rates, they can only influence them for a period (no one knows if that can be a lifetime!) but once the market acknowledges that government debt is not triple AAA; that it is not accepted as fungible for cash as it is negative yielding and not backed by orderly taxation of the masses; markets would do what they do best - find a new level and put governing classes out of work. This would be extremely painful in the short term but ultimately create a level playing field again allowing for real valuation transparency and growth. Again, if goverments can control laws and they decide what is legal tender, it would be hard for the market to do this but you can see with blockchain developments that the market is gearing up to settle transactions in non-central bank currencies.

7. Like the 70s removal of the gold standard by Nixon, the G5/G8/G10 will conspire together to essentially rewrite the valuation system for money overnight. This will lead to winners who are politically connected and losers in the general population, but the net result will be a re-setting of the system to enable debts to be eroded and spending to continue on the backs of increasing productivity of the masses. Only global travellers will notice what has occurred i.e the US devaluation in the 70s, most people living in their own little hamlets/towns and countries will have a few less imports and a bit less choice in the shops until local economies rebuild with cheaper labour or we exploit cheap African labour like we did with the Chinese for the last three decades.

8. Africa - the last bastian of non-conformist non-capitalism. There are massive opportunites to exploit a young population with loans/debt in order to build their infrastructure and give them the consumerist dream -who doesn't need 5 different colours of mobile phones and 32000 different types of paint for their newly built rabbit warren flat . This would mean that money finds a new source of yield and interest rates would start to rise as monetary policy would tighten and growth would begin giving central banks the ability to offload the equity and deby mountain they own (or the simply extinguish their liabilities in the blink of a pen and never mention it to anyone).

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There were low interest rates for a long time through World War 2 and governments had a lot of debt but interest rates went up eventually. Some say that we are at war now but not such an overt war so despite the massive debt it's not inconceivable that rates could start to go up.

Mind you WW2 low rates period lasted nearly 20 years and so far this one is only about 9 years long. Incidentally although it looks like an inflation spurt upto nearly 10% initiated the rate rises it doesn't seem to be the justification to continue with the rate rises at least not until the late 60s (according to the link below) so maybe it was wages.

So on that basis in 10 years from now (2026) they might be the same as now but really (really - not just pretend like now) just about to start rising.

Mind you currently the base rate well below the WW2 level and is at levels not seen since maybe at least neolithic times so there's a chance that rate rises back to say around 1 or 2% could happen earlier than 2026.

So say 2% - but who knows. The way they run the economy it could just as easily be 10% or 20% or even higher - from the chart below a massive inflation spike seems due if not overdue (bearing in mind the chart below stops at 2008).

inflation-interest-rates-1900-2011.png

Another point to note from the chart is that massive inflation doesn't always result in a significant or even any rate rise - see 1914/1918 (WW1) and 1940 (just after the start of WW2).

Edited by billybong

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I honestly don't know why anyone would think low interest rates benefit "the oldies".

The oldies want high interest rates to get a return on their pensions and savings.

The only pensioners to benefit are the ones who have gone BTL as their pension investment. That is still a small minority. The vast majority have been well stuffed by low interest rates.

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I personally think the government, or future ones will be forced to raise interest rates, regardless of the consequences. What it will be that triggers them is any ones guess, but something will.

Your comment is already wrong about Japan.

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Your comment is already wrong about Japan.

All countries with low rates seem to have the same causes ie. debt/ government borrowing related, and seem to have the same cure (low interest rates ,money printing) which doesn't seem to be working any more. When one country goes down a different path, perhaps America raising rates and achieves a better result, perhaps that will be followed by other countries marking a change in direction for monetary policy and hence back to rising interest rates all be it gradually.

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There were low interest rates for a long time through World War 2 and governments had a lot of debt but interest rates went up eventually. Some say that we are at war now but not such an overt war so despite the massive debt it's not inconceivable that rates could start to go up.

Mind you WW2 low rates period lasted nearly 20 years and so far this one is only about 9 years long. Incidentally although it looks like an inflation spurt upto nearly 10% initiated the rate rises it doesn't seem to be the justification to continue with the rate rises at least not until the late 60s (according to the link below) so maybe it was wages.

So on that basis in 10 years from now (2026) they might be the same as now but really (really - not just pretend like now) just about to start rising.

Mind you currently the base rate well below the WW2 level and is at levels not seen since maybe at least neolithic times so there's a chance that rate rises back to say around 1 or 2% could happen earlier than 2026.

So say 2% - but who knows. The way they run the economy it could just as easily be 10% or 20% or even higher - from the chart below a massive inflation spike seems due if not overdue (bearing in mind the chart below stops at 2008).

inflation-interest-rates-1900-2011.png

Another point to note from the chart is that massive inflation doesn't always result in a significant or even any rate rise - see 1914/1918 (WW1) and 1940 (just after the start of WW2).

Nice chart. It took ww2 to get rates as low as what the banker scum are manipulating now. Looking at that chart low rates for 20 years doesn't look !ike an outside chance more like a certainty.

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What Si1 said, but I'd add the additional reason that they will stay on the floor because its kind of embedded into the way fiat money systems operate. The way I have paraphrased this in the past is simply to say that you can't expect to get any kind of yield from an asset which is both entirely safe and at the same time is just a number in a bank computer.

Equities may also exist as numbers in computers but they come with the additional feature of a legal claim on a real world entity. A bit of fiat scrip doesn't give you a claim on anything except the scrip itself.

Of course this says nothing about real yields, spreads etc, which is perhaps where we should focus in terms of what is going on 10 years form now. The bank rate is a red herring.

Sorry if I am late too the party or missing a detail, but is it not the case that people are presently enjoying a negative yield as a consequence of avoiding credit risk (as well as other kinds of risk)?

The idea that being in possession of credit money entitles you to a real return is getting pretty thoroughly beasted by reality. Fair enough.

The idea that credit money cannot act as a store of value is of course also par for the course. That's inflation, red in tooth and claw.

What strikes me as interesting is that there has been a change in how we tell ourselves stories about reality.

It used to be the case that we explained how high interest rates compensated those who held money from the predation of inflation on the value of their money (setting aside the implicit tautology in that sentence - if it cannot hold its value, then it is not money).

Punters mostly save money to buy houses. Presently these punters (I am one) receive no interest and the nominal price of the asset to be purchased inflates.

Hence money isn't money and thus the fabric of society frays.

In order for money to fulfil its intended purpose (being the transaction of promises) the masters of money must be evidently determined to ensure that promises made are kept. The chronic crisis in our banking system is that its functionaries have disregarded their role in the administration of our system of money. The people who maintain our banking system use the system to enrich themselves with no regard to the health of the system in terms of its role as judge of whose promises are worth the value of the scrip issued in exchange for those promises. This is the heart of the 2008 financial crisis. The question of whether or not a given banker should issue the scrip to a willing borrower has been replaced with the question, "Can I issue this scrip?"

At its heart the error is absolutely trivial, being in its essential character the act of failing to see the wood for the trees. Money is broken because the banks broke it.

Edited by Bland Unsight

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So if rates can't be used to defend currencies does that not leave us vulnerable to speculators.

At some point banks starved due to the interest environment will turn on sovereigns to survive. Only when that larger threat emerges will rates lift as a race to avoid being the slowest starts. The twenty year period in the last century can be ignored as at that time the banking sector was a tiny fraction of its size compared today.

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I don't know, and neither do you! :blink:

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It is not the interest rate that matters it is the debt required to buy the basics.......give me a nice home for cost of £50k and higher interest rates any day.......better than £400k to buy exactly the same asset and low interest rates. ;)

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A company may issue bonds or borrow from a bank to invest in projects whereby the return is greater than the cost. Even better for the lender you typically don't just get a claim on the project but on the entire enterprise I.e. on the borrower.

The project the company has borrowed to fund is not risk free, hence there is a possibility of a good positive return.

Saving money in a deposit insured bank account is risk free, thus over the long run any moderately efficient market will find a way of making sure you can't get a return via this route.

Note that both the return on the company's investment, and the savings deposit are subject to the risks of inflation. So the fact that there is a risk of the real yield differing from the nominal one is not sufficient for the latter to qualify as being risky.

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The project the company has borrowed to fund is not risk free, hence there is a possibility of a good positive return.

In Other people's money John Kay argues at length that to an ever increasing extent corporate debt is not issued to fund anything. The companies can fund all the investments that they want to make out of cash they already have on hand and that much debt issuance is driven by other factors (like tarting up the EPS with buy-backs) or adjusting the capital structure to reduce the tax bill.

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Sorry if I am late too the party or missing a detail, but is it not the case that people are presently enjoying a negative yield as a consequence of avoiding credit risk (as well as other kinds of risk)?

The idea that being in possession of credit money entitles you to a real return is getting pretty thoroughly beasted by reality. Fair enough.

The idea that credit money cannot act as a store of value is of course also par for the course. That's inflation, red in tooth and claw.

What strikes me as interesting is that there has been a change in how we tell ourselves stories about reality.

It used to be the case that we explained how high interest rates compensated those who held money from the predation of inflation on the value of their money (setting aside the implicit tautology in that sentence - if it cannot hold its value, then it is not money).

Punters mostly save money to buy houses. Presently these punters (I am one) receive no interest and the nominal price of the asset to be purchased inflates.

Hence money isn't money and thus the fabric of society frays.

In order for money to fulfil its intended purpose (being the transaction of promises) the masters of money must be evidently determined to ensure that promises made are kept. The chronic crisis in our banking system is that its functionaries have disregarded their role in the administration of our system of money. The people who maintain our banking system use the system to enrich themselves with no regard to the health of the system in terms of its role as judge of whose promises are worth the value of the scrip issued in exchange for those promises. This is the heart of the 2008 financial crisis. The question of whether or not a given banker should issue the scrip to a willing borrower has been replaced with the question, "Can I issue this scrip?"

At its heart the error is absolutely trivial, being in its essential character the act of failing to see the wood for the trees. Money is broken because the banks broke it.

Money, especially modern electronic money is just information. That is its only role within our system and this point applies I think whether considering a unit of account, medium of exchange etc. After all, who has what assets and claims is just information that passes between entities in the system. We should not expect that in the general case that there is a particular place reserved in social information systems for what we call money; any system of records enabling legal claims with a temporal nature is potentially sufficient. It makes some kind of sense to me in an information age that something money like can only be found in some aggregate of claims and metrics that includes but is not limited to base money and credit money.

We'll just have to figure it out rather than expect to be able to simulate commodity money reliably using numbers, rules and laws.

Commodity money is essentially 'outside money', which is not backed by the promises of any specific participant. Its not really possible IMO to simulate outside money for any length of time before folks figure out they are living in a simulation and find profitable ways to arbitrage the simulation until the simulation is broken.

My view of the failures in the monetary system is that they are circulatory problems analogous to a blocked artery rather than problems with the stock or quantity. Furthermore, it may not be possible to force money to flow in a given direction and with a particular rate of flow, rather I think that the direction of flow and the rate are determined by the topology of the plumbing in place and the tendency for the plumbing to adopt particular topologies in preference to others. We need to understand these phenomena better before we can hope to build Xanadu.

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In Other people's money John Kay argues at length that to an ever increasing extent corporate debt is not issued to fund anything. The companies can fund all the investments that they want to make out of cash they already have on hand and that much debt issuance is driven by other factors (like tarting up the EPS with buy-backs) or adjusting the capital structure to reduce the tax bill.

I agree and that would make sense if high quality corporate debt is assuming a safe asset status.

A society with advanced information systems and developed markets ought not to need money, it could just use a basket of diverse nearly-safe assets. Sure some might go bad but with a sufficiently diverse basket that might not matter, as long as the overall system has not been tuned to the limits of efficiency at which point it becomes fragile.

I think we have seen over the past couple of decades exactly this phenomenon, albeit without having developed the tools and language to understand at which point additional increases in capital efficiency become harmful due to increased fragility.

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My view of the failures in the monetary system is that they are circulatory problems analogous to a blocked artery rather than problems with the stock or quantity. Furthermore, it may not be possible to force money to flow in a given direction and with a particular rate of flow, rather I think that the direction of flow and the rate are determined by the topology of the plumbing in place and the tendency for the plumbing to adopt particular topologies in preference to others. We need to understand these phenomena better before we can hope to build Xanadu.

I think that there is an issue with the stock. Just finished Why aren't they shouting which touches on some of the themes in Dunbar's The Devil's Derivatives. The private banks create credit money but they settle claims between them through the central bank with base money. However, in a crisis it becomes clear that the credit money and the base money are fungible and that the lender of last resort must offer liquidity to shadow banks who are also manufacturing credit money (and the offsetting loan assets) because of the creditor/debtor links between the licensed banks and the shadow banks.

I totally buy the analysis in Adair Turner's Between Debt and the Devil. When money creation is turned over to the private sector money is created essentially without limit You end up with a society trying to carry more and more debt. However, all the way down the food chain that debt is carried by households and individual households do not exist in perpetuity. In the long run they are dead and thus they must pay their debts.

A key aspect of our present chronic crisis is how housing ports debts between unrelated parties. Some herbert with a massive interest-only mortgage on his house cannot pay the debt with this own earnings, but he proposes that somebody else will buy the house off him. Hence he's really borrowing against somebody else's ability to pay.

Into this shit storm of idiocy enters the buy-to-let interest-only mortgage. Now nobody will ever pay down the debt, it will just be serviced forever. When the household 'holding' the debt face the "undiscover'd country" (dead parrot time) they simply sell up and are replaced with another willing debtor who again has no ability or intention to pay off the debt.

The introduction of a large volume of interest-only lending is a genuine transformation of the nature of money (given that so much of our debt money is ultimately backed by mortgages).

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I guess I'm seeing this the other way around. Instead of interest rates reflecting the demand for money, an excessive supply of money is crushing interest rates. I'm deeply sceptical of attempts to explain why we have the amount of money we have. We have the amount of money we have because we have the money creation system that we have and the money creation system that we have is the private banks and the shadow banks all over the world. They don't strike me as part of an orderly equilibrium-seeking system, they strike me as an unruly psychopath. Of course the debtor/creditor relationships the psychopath generates are information but maybe we shouldn't be trying to understand what the psychopath is doing now that they have taken control of money. Maybe we need to take the control of money away from the psychopath?

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I think that there is an issue with the stock. Just finished Why aren't they shouting which touches on some of the themes in Dunbar's The Devil's Derivatives. The private banks create credit money but they settle claims between them through the central bank with base money. However, in a crisis it becomes clear that the credit money and the base money are fungible and that the lender of last resort must offer liquidity to shadow banks who are also manufacturing credit money (and the offsetting loan assets) because of the creditor/debtor links between the licensed banks and the shadow banks.

I totally buy the analysis in Adair Turner's Between Debt and the Devil. When money creation is turned over to the private sector money is created essentially without limit You end up with a society trying to carry more and more debt. However, all the way down the food chain that debt is carried by households and individual households do not exist in perpetuity. In the long run they are dead and thus they must pay their debts.

A key aspect of our present chronic crisis is how housing ports debts between unrelated parties. Some herbert with a massive interest-only mortgage on his house cannot pay the debt with this own earnings, but he proposes that somebody else will buy the house off him. Hence he's really borrowing against somebody else's ability to pay.

Into this shit storm of idiocy enters the buy-to-let interest-only mortgage. Now nobody will ever pay down the debt, it will just be serviced forever. When the household 'holding' the debt face the "undiscover'd country" (dead parrot time) they simply sell up and are replaced with another willing debtor who again has no ability or intention to pay off the debt.

The introduction of a large volume of interest-only lending is a genuine transformation of the nature of money (given that so much of our debt money is ultimately backed by mortgages).

I don't see that a society which prefers to essentially rent assets rather than own them outright, which is what you describe, is necessarily worse. It might be worse, or it might be better. Other factors could derail either.

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I guess I'm seeing this the other way around. Instead of interest rates reflecting the demand for money, an excessive supply of money is crushing interest rates. I'm deeply sceptical of attempts to explain why we have the amount of money we have. We have the amount of money we have because we have the money creation system that we have and the money creation system that we have is the private banks and the shadow banks all over the world. They don't strike me as part of an orderly equilibrium-seeking system, they strike me as an unruly psychopath. Of course the debtor/creditor relationships the psychopath generates are information but maybe we shouldn't be trying to understand what the psychopath is doing now that they have taken control of money. Maybe we need to take the control of money away from the psychopath?

In whom do you propose to vest the control taken from the psycho?

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I guess I'm seeing this the other way around. Instead of interest rates reflecting the demand for money, an excessive supply of money is crushing interest rates.

The point I have been making and will always make, is that the appropriate real world return to risk free investments is something less than zero.

What I observe is that over the past decades the stock has risen until conditions have arisen in which my assertion above is fulfilled.

There will have been many other paths to the same outcome, possibly many preferable ones, but this is the one we have ended up following.

This is not to say then that the stock cannot rise further - beyond that which is required to fulfil my assertion, and in fact that is also what I observe, and yes that is dangerous.

However, in any system involving feedbacks, transitions are never smooth but involve overshoot and ringing, and all such phenomena arise from the fact information takes finite time to propagate.

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In whom do you propose to vest the control taken from the psycho?

A tamer psycho with more of his own skin in the game, as per the suggestions in The Banker's New Clothes.

Not suggesting for a moment that you were leaning towards the hoary canard that is buried in Turner's book title, but this does appear to me to be a context where the 'There is no alternative' plea of the banking lobby is at its least convincing. An extremely high-leverage model for bank balance sheets that we presently tolerate (even with matters slightly improved post-crisis) appears to have little if anything to recommend it.

The banking sector could be constructed in all kinds of different ways and has the potential to evolve in all kinds of different ways too.

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