Why Interest Rates Are Never Going Back to Normal

Businessman analyzing investment charts at his workplace

Let’s see… US corporate earnings have been going down for three quarters in a row.

The median household income is lower than it was 10 years ago.

And now JPMorgan Chase has increased its estimated risk of a recession to about one in three.

These things might make sober investors wonder: is this a good time to pay some of the highest prices in history for US stocks?

Apparently, they don’t think about it…

On Friday, US stocks rose again, after the Fed announced that it would go easy on ‘normalizing’ interest rates.

The Dow rose 156 points, putting it in positive territory for 2016.

Hooray! Investors — at least those who passively track the index — are even for the year. And with more central bank fixes, maybe they’ll be able to keep their heads above water for the rest of 2016. Good luck with that!

You may recall our prediction: The Fed will NEVER return to a ‘normal’ interest rate.

Why not?

Many Wall Street analysts say the Fed’s move to bring interest rates to a more normal level — after seven years of ZIRP (zero-interest-rate policy) — was ‘too early’.

We think it was too late. The Fed has already distorted too much for too long.

Its easy money policies have created a hothouse of speculation, mistakes, and misallocation of resources.

The financial plants that grew up in that environment — grotesque mutants that require huge doses of liquidity — cannot survive a change of seasons.

But these plants are big. And powerful.

Washington…the health care industry…housing…Wall Street… They control the US government, the bureaucracy, and major economic sectors — notably the US$1 trillion-a-year security industry.

What they need — what the entire economy needs — is a correction. Excess debt must be purged. That’s what credit cycles, bankruptcies, and depressions are for.

‘Normal’ includes corrections. But the feds can’t let it happen.

They’ve staked their careers — and their fortunes — on the myth that they can tame the credit cycle…and prevent serious setbacks. They’re not going to give up now and admit defeat. They’re not going to let their major crony friends — or their campaign contributors — go broke.

Freaky finances

Yes, the feds created this freakish financial world. They cannot fix it because they want it to stay broken. So what if it doesn’t make the typical family better off? It makes THEM — the feds and their cronies in the Deep State — better off. And that’s what really matters.

In these Diary entries, we have shown how the system has become ‘extractive’ rather than productive.

In a normal, healthy economy, people work, save, invest, and build real wealth one dollar at a time. But today’s dollar is different. And the economy is different, too. It runs on credit, not real savings, and builds debt — not wealth.

Instead of encouraging savings — which is what you need to make progress — it penalizes thrift. Over the past 10 years, US savers have lost nearly $8 trillion, extracted from them by the Fed’s ZIRP.

While savers were punished, borrowers were rewarded.

Since 1980, the US economy has added about $50 trillion in excess debt — above and beyond the real output that can comfortably sustain it.

This $50 trillion came not from honest work and saving. Instead, it was conjured up by banks — out of thin air.

And now, the productive Main Street economy must pay interest…and principle…on that debt — effectively extracting real wealth from the real economy and sending it to Wall Street and other favoured industries.

The scam is so elegant that not one person in 1,000 understands how it works. We’ve been studying it for years, and we’re still in awe. But the result is obvious: honest working people struggle to stay in the same place, as real wealth goes to the elite.

Scammy policies

The plain people may not understand it, but they don’t like it. And they count on Donald J Trump to do something about it.

Alas, even the best swindle runs into trouble. The debt burden crushes the life out of the real economy. Productive sectors sink into the mud. Manufacturing disappears. Business slows. Trade slows. Borrowing slows.

And, soon, the feds are paying people to borrow! As Chris Lowe reported in last Wednesday’s Market Insight, about one-third of developed country government debt — worth roughly $7 trillion — is now trading at negative yields.

And then, even more elegance…

With the world economy slowing down, central banks adapt to the world they created.


With more scammy policies.

‘Global risks bring Fed into line…’ reads a headline in Friday’s Financial Times

The Federal Reserve has scaled back its forecasts for lifting interest rates this year, coming closer into line with market expectations for two quarter-point rises as it flagged up risks to the US outlook from global, financial, and economic developments.

See how it works?

Central banks destroy the real economy with cheap money and extractive policies. Then, as the economy slumps, they need to bring their policies in line with the slumping economy. They need to swear off raising rates back to normal.

And, since their policies can never produce real prosperity, they can never produce an economy that can support normal interest rates.


Forget it.

Eventually, normal will make a comeback. But not because the Fed wants it. Instead, the markets will normalize — brutally — over the Fed’s dead body…

Which is just the way we’d like it.


Bill Bonner,

For The Daily Reckoning, Australia

From the Archives…

Central Banks are Nothing More than Illusionists

By Vern Gowdie | Mar 19, 2016

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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