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100% of Mainstream Interest Rate Theory is Wrong
by Keith Weiner
An interesting article on MarketWatch today caught my attention. The subhead is the money quote, “Back in April every economist in a survey thought yields would rise. Guess what they did next.”
Every? The article refers to 67 economists polled by Bloomberg, all of whom would seem to believe in the quantity theory of money. This means they believe a rising money supply causes rising prices. That means they think the bond market expects inflation. Which means they expect the interest rate to rise, because investors will somehow demand more.
It didn’t happen because every assumption in that chain is false.
Many people also expect interest rates to rise after the Fed’s bond buying program—quantitative easing—ends. Let’s take a look at the yield on the 10-year US Treasury bond from 1981 through today. This graph is courtesy of Yahoo Finance, though I have labeled it as carefully as I could for the three rounds of QE so far.
By zooming out to capture the entire time period of the bull market in bonds—i.e. the period of the falling interest rate—we can put QE in perspective.
The 10-year US Treasury bond now yields 2.21%. For reference, the 10-year German bund is 0.87% and the 10-year Japanese government bond is 0.48%.
It’s obvious from the chart, that QE is not the cause of today’s interest rate near 2%.
MarketWatch implicitly acknowledges that the conventional theory is 100% wrong. I have published an alternative, The Theory of Interest and Prices in a Paper Currency. It’s a long read in seven parts, but I have tried to keep it accessible to the layman.
Spoiler alert: I think interest rates will keep falling to zero, though of course there can be corrections.
The interest rate is pathological. It’s like an object that gets too close to a black hole. Once it falls below the event horizon, then a crash into the singularity of zero is inevitable.
You are cordially invited to The Gold Standard: Both Good and Necessary, in New York on Nov 1. There hasn’t been a real recovery from the crisis of 2008, and there won’t be until we return to the use of gold as money. Please come to this event to hear Andy Bernstein present the moral case for capitalism, and Keith Weiner present the case for the gold standard as the monetary system of capitalism.
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This is a great discussion, thanks to all of you. Let's not forget that the incipient economic collapse we are witnessing is not the disease, but a symptom of the accelerating global social collapse caused by the growth of the Internet and unlimited information making everybody crazy... <<< a pretty short trip for most of us... Unfortunately, as Keith Weiner has pointed out, we are past the event horizon and backing out is impossible. Therefore, the only way out is through.
Humanity is walking a razor's edge. The next few years will in many ways, decide our fate as a species. The population and technology curves are exponential and superimpose perfectly. We are now on the vertical part of the graph and this can only be sustained for a short time more.
Batten the hatches, reef the sails and prepare for heavy weather. I have a plaque above the nav station on my boat and it reads thus: "Where we go one, we go all."
Prepare accordingly,,,
the fed changes the way they gauge inflation almost on a daily basis the latest one I like . going out side to measure the growth of the moss on the side of the fed buiding and then multiplying that by a factor of 1000 and then moving the decimal point, and thus there will never be a interest rate hike
Is it just me or does Keith Weiner look like Austin Powers brother
Mis-direction. At a neighborhood party, a Morgan Stanley guy in the neighborhood said that he thought rates would fall.
He had to hear it somewhere ... he is not too bright.
shalom
"noboby knows what will happen?"
that's fully retarded. it will be like that justin timberlake movie, in time, i think. economists and bankers and economic theorists are the reason we are in so much trouble. i know what will happen. we will get more of their smoke blown up are arses. the same they have been blowing for thousands of years.
sorry your transactions were not processed in time and youre overdrawn so we just scammed you out of $150 in overdraft fees. how is it my problem you didn't process my transactions in time??? isn't that your fiduciary responsibility to make sure that doesn't happen? I mean i try to make damn sure that doesn't happen but then .gov passes dodd-dingleberry frank and now the banks are out for blood cuz they can't charge me $20 at the ATM, right?
"nobody knows what will happen?"... the jew banker who said he had your gold in his vault for safe keeping just realized he leveraged what you had and the vault is EMPTY!!!
"nobody knows what will happen?"... neo feudalism will continue and the 99% will be not eating cake but will be taking "borg" juice up the hoo hoo with google glass imbedded in their face and ipods permanently implanted to their cooch and ball sack!
im making the argument right here and right now that electronic money IS NOT MONEY. money is tangible, unlike all this ivory tower bullshit talk about economics.
what a bunch of fully retard pre-programmed robots! "I want to win the race." LET ME WIN. the race is sofa king rigged! U CAN"T WIN. so n-joy while it lasts cuz tomorrow you will be working for the time on your arm, electronically tattooed there like a WWII jew.
Many bankers are not Jewish - anti-semitic much?
Tyler, please consider to promote this article to your front page - with the valuable comments that follow - and keep it there for a day!
This long term perspective is critical. The graph makes clear that QE represents a desperate and evidently futile struggle to reverse a long term trend, as it fast approaches a singularity. MarketWatch's answers? I don't know. I doubt I'll fully agree but I'll slog through it. But this challenge to monetary theory is important, with or without a good-enough alternative.
The weakness of investors as analysts is y'all are fascinated by the noise, trying to tease a meaning out of it. I get it. As an experimental scientist that was a big part of my job too. But it's easy to miss the big picture that way. ZH's greatest strength lies in pulling back to see that big picture.
These blog entries at the top of the page come and go quickly. This one should sit out there a little longer.
Okay... I've read most of the stuff above this post... except what may be posted after this post... and it occurs to me that y'all are missing a VERY big factor in your understanding of the current economic paradigm.
We currently are operating not ONE money tree… but TWO. The Federal Reserve has split the issue of “money” into TWO classes – each operating independently of the other.
Class 1 is the USD, as represented by the wrinkly paper in your pocket (and the “account balances” in your bank accounts and debt instruments, etc). You know… the stuff with all the “security” features that supposedly prevent counterfeiting? (ROTFLMBO!!! Tell that joke to N Korea!). This is what most people, including Nobel winning Ivy Tower Economists, think of when they postulate their “theories” of monetary systems.
When dealing with Class 1 money, it is permissible to use such words as “velocity”, and to postulate grand economic theories about how such money works in an economy.
Class 2 – “the other money” – the “keystrokes” of the FED that don’t ever see the inside of a working person’s paycheck or pocket, that never cross a grocery store counter. This “money” exists ONLY in the books (a second set of books?) of the FED and is completely and wholly IMMAGINARY in any real sense of the concepts involved.
But it’s “real” in the world it lives in. Grand Economic Theories do not apply, and will not work with this class, and the existence of this class of “secret money” is possibly one of the reasons that none of the current economic theories can drill down and figure out how to make reliable projections of economic activity and the causes of various effects that we see are possibly a result of the existence of this “money”.
So the FED “keystroking” a couple of trillion dollars into existence (as in the “purchase” of the bank created MBS currency* from the banks, and the “funding” of the current US Govt excesses) has no effect on the “greater economy” (class 1) and class 2 money will NEVER see circulation in the “greater economy.” Thus it CANNOT BE INFLATIONARY or contribute to “velocity” because it never “turns over”.
Which leads me to wonder why the US Government requires the people to pay taxes since the amounts “keyboarded” will never be paid back, because it’s wholly immaginary money. There is absolutely NO real world connection between tax collection and govt spending levels. In a Dual Money Regime, the two monetary spheres operate competely independently.
Of course, in such a world there would have to be, but to my knowledge is not currently, an equitable way to recompense people who get caught at the junctures of the two systems. For example – how would the government pay the salaries of those it “employs”? How would the Obamanauts pay for their extensive and expensive travel when part of the expenses overlap into the “people’s economy/money”?? (Like the purchase of ice cream cones in Hawaii.)
The closest I’ve come to figuring out how the interfaces work is that the “taxes” “pay” for these overlaps… but it’s possible that the FED has a method of balancing them out of existence – ie subtract “out-of-bounds” class 2 money from class 1 money using the “reserve accounts” of the banking system as a clearing house, or vice-versa? Or possibly just making an “adjusting entry” to clear them through the FRB?
* When you consider that “currency” is really nothing more than “non-specific debt”, when the banks and MERS separated the RE titles from the derivative securities, it became non-specific debt. So by definition, MBSs were in fact currency created by the banks, and like all good fiat, the MBS’ had absolutely nothing of value backing them up. Unless you’re very astute, or an accountant, you’d have missed the great comic theater of the “Stress Tests” – staged by the FRB. ;-D
true but consider the reasons why the fog about this should be there. post your first thoughts on that
These two money trees are in no way independent.
If I take part of my salary and go out and buy t-bills, I've just turned class one money into class two money. When an IRS clerk cashes his paycheck from Uncle Sam, he's just turned class two money into class one money. The payment of taxes maintains the illusion that government debt can be paid off and that class two money is worth something. Without that illusion, the exchange rate between class one and class two money explodes. We call this process hyper-inflation.
If interest expense were to eclipse tax receipts, that would 'expose' the fraud. Counting new debt created, $1 Trillion last year, it's not that far off.
Thanks, nofluer, for a great comment.
There is clearly a disconnect between the financial system and the real economy. But the accumulation of electronic money includes not just the Fed's balance sheets but $3/4 Quadrillion of derivatives and hundreds of trillions in debts. And it accumulates in the portfolios not just of the Fed, but of the banks, the corporations and billionaires, represents real power to them, can be spent on real assets like land and the water system of Detroit, and mediates real flows of real money into their pockets.
This is an important issue you raise all the same. The connection between financial wealth and real wealth grows ever more tenuous. When - or rather as - the system finally crashes, we need the perspective to see how easy it could be to cast the whole phantasimigorical financial edifice overboard, free the real productive economy from its stranglehold, and start over.
The issue of course comes down to power. It will take a struggle for power, as the masters of finance pull out all stops to parlay their current control of their system into control over whatever comes next, while they still can.
If Rep's take the Senate, it won't be six months before the first 'scandal' involving one of the Rep's emerges in MSM. I'd say, they already have the scripts prepared. They must do this to preserve their 'theft factory'.
The chart makes a strong argument.
It may keep going to zero. But I think the author is being facetious.
At some point, you can't print enough money to avoid the quantity theory of money being wrong. It's only 'wrong' right now because they have been lucky and they are soaking up excess in their buybacks. But at some point, that all ends. At least the ability to soak up excess will.
It's also false to think we're not in a massive inflation right now. The market for goods and services should be in a deflation. It's not because the Fed has created an illusion of inflation, and with interest rates so low there is no incentive to save, only to spend and invest. This is a classic misallocation of resources, and the resource being misallocated is money.
"It's also false to think we're not in a massive inflation right now. The market for goods and services should be in a deflation."
Great point!
I would go further. As money represents time and work, it is time and work that is being wasted. So I stopped working and started saving time instead.
Release the hounds! Debt slave off the plantation!!!
What happens when TPTB send nominal interest rates negative in a last desperate maneuver to avoid deflation and keep the banks alive? Can velocity ever go below 1.0? How would a global pandemic factor into currency velocity? Can the system implode like a collapsing star that crossed the event horizon? I don't think there is any historical precedent for the endgame we are rapidly approaching. No one knows what will happen.
A lot depends on who gets the printed money. If it doesn't go to users who will spend it on goods, no quantity could be enough to prevent implosion. QE sends the printed money to Primary Dealers, not to the Public. If their debts on derivatives rise faster than their QE allocations, they could implode, and the new money disappears with them.
I'm looking forward to seeing the chart six months after QE4 is officially announced
I contend the primary reason that inflation has not raised its ugly head or become a major economic issue is because we are pouring such a large percentage of wealth into intangible products or goods. This includes currencies. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.
The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas.
It is important to remember that debts can go unpaid and promises be left unfilled. If this happens where does it leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years. More in the article below.
http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos..
It is important to remember that debts can go unpaid and promises be left unfilled. If this happens where does it leave us?
Deflation...
As all money is lent into existence, and has to be paid back with interest, the only way un-encumbered money can enter the economy is through bankruptcy.
And that was eliminated, or postponed, starting in '09. They expect to to steal from the future for ever! So did the Soviets.
From Part VI,
'Here is my prediction of the end: permanent gold backwardation[3]. The lower the rate of interest falls, the more it destabilizes the system because it makes the debtors more brittle. The dollar system has, to borrow a phrase from Ayn Rand, blackmailed people not by their vices, but by their virtues. People want to participate in the economy and benefit from the division of labor. Subsisting on one’s own efforts alone provides a very low quality of life. The government forces people to choose between using bogus Fed paper vs. dropping out of the economy. People naturally choose the lesser of these two evils.'
He gets some things right, but spends a lot typing to get there. Gold shortages are guaranteed, if rates aren't allowed to normalize. Probably, at lower prices, thanks to rate suppression and money destruction.Simple .
They can't run fast enough .
The velocity of money will overtake a middleaged economist halfway round the trac.
Hence the weak knees.
https://www.academia.edu/8899526/How_to_run_faster_and_why_
Hobble in this case .
Economists are like weather forecasters as if one of them started getting it right he or she would make all the others redundant. This means they have a vested interest in being wrong. As to the economics the fractional reserve scheme is, according to numerous sources, a giant ponzi scheme. As these schemes near their end they reach a point where they cannot be tapered without collapsing the whole house of cards....and that is where we are and that is why interest rates will not rise.
I'll read the good doctor's paper and give a synopsis later. Hey, it beats doing p&l statements today, lol.
Hey, it beats doing p&l statements today, lol.
ZH needs to modify the awarding of points to allow for more than one when a really great (and especially true) post is posted... like thie above... OUT Effing STANDING!
Keith weiner is a *edited* (maybe that was a little harsh).
Thanks for wasting my time on your 'theory'
I read part 1 and it's so full of holes and misdirection it was a complete waste of time. This guy is not a PhD, maybe in Origami, but not economics.
edit: Not trying to be too harsh, but I am always looking for insight from a different angle. When someone comes out proclaiming they KNOW it all then they are open to harsh criticism.
For this article, it gets a 1 because he takes a survey for the SHORT TERM effects of QE's effect on interest rates and then tries to extrapolate that opinion to the past 30 years. Of course there are other factors for the 30 year decline, but it is undeniable that QE did affect rates both lower and higher based on their purchases, jawboning, and the effect it had on other participants in the market.
Just because rates did not rise is not an indication at all that QE had nothing to do with rates in the short term but that there are other factors that affect rates as well and that once QE ends/ed those factors take on more importance.
This is exactly the same type of argrument in part 1 of his theory where he uses 1 statement that nobody every thought represented what happens in the real world and then 'disproves' it by pointing out discrepancies in the real world. Trust me, not one economist, even Paul Krugman thinks that doubling the money supply doubles the price of everything evenly and consistently. But all you have to do is look at the last 100 years and see that increasing the money supply does increase prices paid for everything.
"Every? The article refers to 67 economists polled by Bloomberg, all of whom would seem to believe in the quantity theory of money. This means they believe a rising money supply causes rising prices. That means they think the bond market expects inflation. Which means they expect the interest rate to rise, because investors will somehow demand more."
I don't think that this articles proves either the title or the contention that every assumption in the above paragraph is wrong.
Prices rise when there is an interim greater demand than supply for a good or service. To increase demand suddenly, one has to only make cheap or 'free' money available for that good or service (car leases, sub-prime loans, student loans [snicker]) - and prices are pretty much guaranteed to rise given human behaviour.
Interest rates rise in response to an economy overheating where demand for money in the form of credit (I know credit is not money but the world is acting as if it is - so it is for now) exceeds supply (investment opportunities are exceeding productive growth at the margin). If however, one can effectively <CTL><P> as much credit as can be stuffed down the throat of the malinvested economic world, then interest rates will not rise.
Revove the Central bankers, outlaw Keynsianism, tame .gov spending, and let the money and credit market stand on its own, and you will see that relationship hold. Economists lost me when the first prof said "Assume full employment....."
Cheers.
I'm inclined to think that the 'money' markets will fail before the interest rate on the long bonds reaches zero, but maybe it will get close.
If it turns out the long bond can trade par, or 'money good', who knows what crazyness awaits.
Money Market destruction planned two years in advance. See http://www.schwab.com/public/schwab/nn/articles/SEC-s-Money-Market-Fund-Reforms-Would-Let-Some-Share-Prices-Float
You might be right, it depends on what the real endgame is.....
The singularity strikes again !
Too much wealth , too little money .
.
And a mechanism to distribute the money from wealth creation to others .
More QE id needed . Much more .
See http://andreswhy.blogspot.com/2013/11/creating-and-destroying-money_9208...
And get rid of the bankers .
Anal-retension excarbates .
Anyone care to provide a TL;DR?
TL;DR - Fiat currency and Fed policy interfere with the free market and cause extremes in interest rates that lead to economic havoc.
Exactly what all of us already knew is happening. Some logical inconsistencies, but overall it's an interesting and thought-provoking (if extremely lengthy) explanation of why it is happening.