My prognostications are built on a simple science; the predictability of cause and effect which, for me, has proven to be an effective analytical tool whether applied to economic inquiry, calibrations relating to interest rates, politics, head-on collisions, addictive and adaptive behavior and even the laws of gravity.
First of all, and for purposes of shrinking the narrative down to a manageable level, we’ll confine the scope of our review to that of Governmental and Private rate structures and the influences that affect/control each: (1) Governmental are those instruments directly associated with Legislateable Funding mechanisms (Gov’t Funding, Fed Liquidity, Treasuries, Mortgages). And then, (2) Private which consists of pretty much everything else.
“I believe it’s fair to say that we’ve reached a point along the economic path a plus one percent FED rate is unsustainable; it is the new normal.”
The following is the summary of my essay which, in the shortest possible way, concludes that it was and remains predictable that Governmental rates, over time, would trend downward to a static level, a form of equilibrium, at or near .05-.75 basis/rate. The reasonings, in no particular order, supporting this prognostication are as follows:
- The Central Bank approach to maintaining liquidity, both domestic and international, across the economy/economic system as proven disastrous. Inflation, which seems to have become the systems principal, if not only, tool for funding economic expansion, has not only created an exponential growth in debt it has suspended the creation of wealth, in real-terms, for nearly 50 years (circa on par with the early 1970’s).
- With the Government’s abandonment of any attachment to sound fiscal policies, one example being the vaporizing of the Glass Steagall Act of 1933, Banks/Financial Institutions are once again freely engaged in unrestricted speculating in the financial markets. Using a variety of highly volatile instruments, one being derivative instruments, by the end of 2018 the notional value of the global derivative market was 945 Trillion Dollars and yet the market value of the very same bundle-of-paper (derivatives) was a mere $12.7 Trillion. Not only is this dangerously close to a 100:1 leveraging the at-risk loss factor is a whopping $932 Trillion.
- Lastly, be aware that like the U.S., Communist China’s own central bank debt-funds the entire nations spending apparatus including the entirety of its State-owned enterprise system. Based on what can be documented, China’s sovereign debt, excluding their un-funded liabilities, is at 350% of their 2018 GDP or approximately $60 Trillion. China has mastered the Western Central Banking Model and forced-fed it with a reckless abandon the likes of which even the Predator-Elite, include that of old-world Europe, would never dare approach.
To assist one in grasping the blisteringly ferocious risk this all represents consider the following three points of contrasting as a further reference for illustrating my point:
- Total global GDP for 2019 is projected to be a mere $86 Trillion; when you consider that of this global GDP amount nearly 58% of which consists of government spending and, for the moment let’s set aside the $100 Trillion in unfunded liabilities (just for the U.S.) and you can see there’s no way the Global Economy can produce its way out of this debt scenario, not a chance.
- Total cost of the 2008 Bailout is estimated to have cost $13-$14 Trillion ($7 Trillion of which went to off-shore U.S. & E.U. Banks) though given that U.S. based Banks are/were not required to report their “Shadow Banking” (off-shore) operations the true number is likely larger; when you consider the devastating effects of the 2007-08 collapse I shudder to the core when I consider what the damage would have been if the derivative component of the market had not been contained.
- Private rates are a much different factor and operate within a market condition that is far more sensitive and perhaps better stated as an “equilibrium-centric” driven market. Perhaps a better way to explain this markets dynamics as beings somewhere between the free-market conditions of supply & demand on one hand and on the other the usurious extremes of what the market will/can endure until special interest spiffs can no longer keep Congress from acting to restrict the abuses; in the case of a Central Bank collapse the concepts of lending, as we’ve become accustomed to will abruptly end and paper currencies will be used as rolling-paper.Merchantable commodities will become key at least until some form of replacement mechanism comes into acceptance the most likely being some form of digital currency operating outside of the Central Banking System and where Governments, with the means, return to leveraging sovereign bullion stores although I’d never recommend a direct link between a nations bullion stores and it currency valuation.
Now then, with the above information in mind, how then do we conclude that being at or near negative interest rates offers a more favorable condition? Answer: This is where the simple science of cause and effect matures, the above points being some of the more conspicuous articles of cause while the following could be considered as their most predictable effect(s):
- Government spending (both domestically and globally) has become the single greatest producer and consumer of debt-funding so much so that it now relies on and openly licensed the banking/financial system to be the mechanism thru which government debt is cycled (laundered).
- The debt load is now so massive that efforts to check federal debt-serving costs require suppression of interest rate while the cycling of debt, with no end in sight, is so heavily controlled for the express purpose of (attempting) preventing a system-wide free-fall. The quid-pro-quo for all of this is:
- The Banking System no longer need lend money in the conventional way (principally from its reserves) as it now been granted direct access to the Feds (Open Market) Discount Window. This gift, the equivalent of placing the fox in charge of the hen house, is a liquidity pay-back to the Banks which allows them to keep the Central Banking System operational (at least for now), be a ready funding source for Federal Spending, operate as a reserve-relief with the hope of keeping Banking System fluid, a ready and open funding source for mortgages and so on. This rarely if ever spoken of agreement also accommodates funding for the Banking Systems speculative activities outside of their once traditional role consequently, the system can’t allow the Central Bank to factor a rate of interest that even remotely approximates market forces or as a tool for metering inflationary pressures.
- Leveraged-equity capital is also a funding mechanism that sidesteps the Banking system the resource of which is far more profitable and is yet another reason for why interest rates have trended toward “flat-lining”; with so much liquidity (faux as it is) chasing returns it is highly appropriate to expect that rates for Government “paper” would plunge; the inverse “effect” of the supply/demand narrative is now in full affect due to the near total erosion of rational fiscal/economic policy.
- Moreover, as an extension of the previous comment, as the equities market continue to plow on toward the inevitable correction folks are increasingly looking for secure instruments and Government “paper” has always been a favored destination. Given the alternatives, for preservation purposes, the idea of surrendering yield as the price paid for protecting against capital losses the downward pressures (on rates) is inevitable.
I conclude that we are, at present, in a bizarre form of stasis; folks who study understand what’s at risk and yet they’re so vested in the systems preservation they also understand that any attempt at making proactive corrections insures a black swan event occurring. The Public, deluded with any number of politically-induced fantasies from man-cause global warming, to the ever-sacred and yet total specious illusion of the “green new deal” to the incarnation of Satan they believe Donald J. Trump to be. They all seem to sense that something is amiss and yet the Public continues to believe that the Government is the answer to every tragic effect even though we’ve come to learn that Government is all too frequently the cause of a tragic outcome.
How long and how far? I believe it’s fair to say that we’ve reached a point along the economic path a plus one percent FED rate is unsustainable; it is the new normal. How I arrive at this conclusion is seen from my comments above however there is factor, a clinical explanation, for why I feel certain that my conclusion is accurate and this topic, “Physio-Socio Economics” was thoroughly discussed in my book “Value Give, Value Received.” The principal describes the condition, that occurs over time, of how Business Enterprises become unsustainable because of how their practices are altered by/from government interactions. I have history as a proven advocate and for this reason I have a very high degree of probability that my perspectives are quite reliable and for this reason entirely probable.
Curtis C. Greco, Founder