Why Rising Interest Rates Will Cripple The Economy

Source: Diviantart

Dear Diary,

The Dow fell 238 points yesterday. And Treasury debt rallied. The yield on the 10-year T-note fell the most in nine months – to 2.4%.

News reports blamed “geopolitical challenges” in Hong Kong, the Middle East, Ukraine and elsewhere.

That may be part of it. But this is also October – the month QE is expected to end.

Between 2009 and 2014, the Fed bought $3.6 trillion of US government and mortgage-related notes and bonds. During that time $5 trillion has been added to the value of the US stock market. And the price of the average house has risen by $60,000.

This was achieved largely by holding Mr. Market’s head underwater until he stopped squirming.

Broken Legs

We don’t know what the natural real interest rate should be. Only Mr. Market, if he were among the living, could tell us.

But yesterday’s action suggests it is lower than almost anyone thought (something Chris warned about here.)

But whatever the interest rate “should” be… if it isn’t a very low number, the economy will soon be in deep trouble. And if it is a very low number, the economy already is in deep trouble.

In other words, there is no yield above, say, 3% on the 10-year T-note that won’t cripple the economy. And there is no yield below, say, 2% that doesn’t mean it has already had both its legs broken.

Does that make sense, dear reader?

A naturally low interest rate signals that there are few willing borrowers – perhaps because the economy is creaking to a halt… or perhaps because foreigners are afraid to put their money anywhere else.

A naturally high interest rate signals that business is picking up. Borrowers need money to finance expansion. Interest rates might be expected to return to “normal.”

What?

Today’s debt-soaked institutions couldn’t stand it. Businesses and government have added trillions of dollars in debt since 2008.