Dear Diary,
Not much action in the markets yesterday.
So, let us return to the economy. That’s where the excitement is. According to leading economists – notably those paid by the US government to forecast the future – interest rates are going to stay low for a long time.
Perhaps we should pause and say an Ave Maria… or whatever you say when you put a market cycle into the grave.
Maybe we should proclaim a day of mourning. Or at least raise a glass or two.
Yes, the feds have pronounced our old friend dead. Dead… dead… stiff dead… cold dead. Immobile. They denied responsibility for the death of the credit cycle, but admit that it was in their custody when it expired.
A Permanent Low?
Ever since there were markets there was credit, too. And like all things available in a market, it was subject to rhythms – usually related to harvests. Its price varied according to the rules of supply and demand.
The credit cycle seemed permanent. But like so many things in this transitory life, it has now been taken from us by the central planners at the Fed, the Bank of England, the ECB, the Bank of Japan, etc.
Exeunt omnes. Hallelujah!
Specifically, the Congressional Budget Office (CBO) tells us Washington’s interest rate expense on its debt for the next 25 years will bear a striking resemblance to what have seen over the last few years.
It projects a financing cost of 4.1%. That’s close to the average of the last 10 years – and substantially lower than the long term average of 6.59% since 1962.
The CBO’s estimate – if we are to believe it – tells us interest rates are locked in a permanently low range, like the brain waves of a patient in a coma.
Gone, they say, is the excitement of the 1970s and early 1980s up-cycle, which led to the yield on the 10-year Treasury note peaking at over 14% in 1982.
This is not an inconsequential outlook. If interest rates were to rise appreciably, the “borrow, borrow, borrow… spend, spend, spend†economy would disappear.
