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November 8, 2016 | Greenspan Foresees 5% Interest Rates: “Only One Long-Term Direction and That is Up”

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

In a Bloomberg Interview, former Fed chairman Alan Greenspan says “fairly soon” we could see a shift away from excessively low interest rates.

greensopan-on-interest-rates

Greenspan Quotes

  1. We could see a shift away from excessively low interest rates “fairly soon”.
  2. “I think up in the area of 3 to 4, or 5 percent, eventually. That’s what rates have been historically, not only for hundreds of years, but thousands of years.”
  3. “We’re moving into the very early stages of inflation acceleration. That could be the trigger. There is only one long-term direction in interest rates and that is up.”
  4. “It’s a problem, as in going from where we are now to 4 or 5 percent. There’s a whole structure of adjustments which have taken place, basically since 2008, which have to be unwound, and that’s not going to be done without a problem.”
  5. If you listen to the debates and the primaries, nobody is addressing the fundamental issues that need to be addressed. Entitlements are rising and choking off gross domestic savings, and ultimately gross, domestic investment. And it’s the major cause of the reason why output per hour and productivity were so flat, not only in the United States, but throughout the developed world.”

Greenspan Video

Click on the above link for an excellent video.

No Savings Glut

Points five above is key. It’s really about socialism and free handouts.

In contrast to the widely-held “saving glut” thesis of Ben Bernanke, Larry Summers, and others, Greenspan, for all his faults, understands savings are both necessary and have been crowded out.

Math for Greenspan

I rather doubt we get to 5% rates or even 2% rates “fairly soon”. At an interest rate of 4%, interest on the national debt will soar as noted by Q&A: Everything You Need to Know About the National Debt.

The Congressional Budget Office projects the interest rate on ten-year Treasury bonds will climb from slightly over 2 percent today to over 4 percent by 2019. As a result, interest payments will more than triple from $250 billion in 2016 to more than $800 billion in 2026. By 2030, interest will represent over 14 percent of the federal budget and continue to climb. This represents money that cannot be spent on other government priorities such as education, national defense, research or infrastructure.

Interest Rate and Growth Projections

interest-on-national-debt

We are already crowding out savings at a mere 0.50% interest rate. That problem will more than triple by 2026 according to the CBO. Unfortunately, that is an extremely optimistic projection.

mish

It’s equally save to presume GDP will grow much slower than projected over the next 10 years.

Lacy Hunt at Hoisington Investment Management also understands the effect of debt on the economy and interest rates. For discussion, please see Negative Multiplier of Government Debt.

I suspect we may be in a bit of an inflation scare. For details, please see Is the Rise in Price Inflation Transitory?

Mike “Mish” Shedlock

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November 8th, 2016

Posted In: Mish Talk

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