The further a society drifts from the truth, the more it will hate those who speak it. ... In a time of deceit, telling the truth is a revolutionary act. George Orwell

Saturday, July 25, 2015

Myth of increasing interest rates


A recent news headline "US Fed data leak shows staff expect interest rate to increase"


Data accidentally published on the US Federal Reserve website shows that staff economists at the central bank expect an about 25 basis point increase in interest rates in 2015.

I think they are probably lying!

1) It was not an accidental leak but an intentionally planted disinformation like many times before.

2) Interest rates will not significantly increase any time soon, under the present monetary system, because neither the government, central banks nor large corporations can afford the consequences of such a move! There is only one way the interest rates can go at the moment: down!

(see this graph)


Many times in the last couple of years I have witnessed various banking or governmental officials, here in Canada and elsewhere, talking of some imminent interest rate increases - which never seem to materialize!

 Why are they misleading the people? My guess is that they are trying to cool off the property market and preempt the speculative bubbles. If the investors would suddenly rush to buy bonds believing the yields (and interest rates) to go down, then the yields and interest rate would come down faster than anticipated prior to the actual announcement, which would deprive the central banks and the governments of an advantage of being the prime movers.

Interest rates cannot go up, under the current monetary system, because it would probably bankrupt all government (addicted to cheap financing at low interests), most large corporations (ditto) and would instantaneously devalue almost all banking collateral (note: bonds and property go down in value if interest rates go up!).

added 2/07/2015 - There is a better way of putting it:
Lowering of interest rates is inflationary (short term), while increasing them is deflationary (also short term).  Governments and banks cannot afford to initiate a deflationary move (of increasing the rates) under an already deflationary and stagnating economy, given a risk of recession!

I think that the authorities – governments, public sector institutions, large corporations and banks, cannot allow the capital market system to naturally correct towards the higher yields while at the same time obliterating the total value of their personal wealth, value of the entire banking collateral and devaluing most paper "assets"! This process (towards the higher yields) will certainly be opposed by the authorities as hard as they can, because it would render them poorer and less powerful!

The establishment have a very tight control over the system and will not allow that! Not unless they have an alternative. I don’t think they have an alternative at the moment - thus, the interest rates have only one way to go – down, asymptotically to zero!  [or become negative!]

This is the scenario similar to a classical deflationary spiral with decreasing yields (and profit margins), with diminishing velocity of money counteracted by an expansion of monetary mass. Deflationary trend caused by diminishing yields seems to be masked by an expansion of monetary mass (through credit and debt expansion i.e. "Quantitative Easing") that mitigates the deflationary effects and keeps the average prices more stable than they would have been otherwise.

The biggest drawback of this system, in my opinion, lies in the fact that the benefits of the monetary mass expansion apply to governments, large centralized institutions and large corporations, where as the recessionary hardship of the diminishing velocity of money is being felt on the lower and local market level. The current system is unbalanced and I think it will probably not improve much until an additional local multiple-currency system is introduced, that will balance that out and will reverse a recessionary pressure felt by the local markets.

I also suspect that the presence of the local currencies (at the township level, not countries!) may alter the entire dynamics of the central banks and the governments, but we won't know for sure until it is tried and tested.

Update 28-Oct-2015


The Federal Reserve is keeping its key short-term interest rate at a record low in light of a weak global economy, slower U.S. hiring and subpar inflation. But it signaled the possibility of a rate hike in December.

Yeah, right! They can't even lie intelligently! [singing the same old tune lalalalalalala...]

Update 22-Nov-2015

Is this the future of service based non-manufacturing type of economy?  Isn't there something fake about t?

Swiss bank breaks negative interest rates taboo