With the GOP tax plan passed, giving most of America a nice tax cut, with the stock market continuing to soar to new heights, with President Trump creating a more favorable regulatory environment, and with consumer confidence near a 17-year high, the economy seems to be doing well and everyone seems to be optimistic about the future of the country. A lot of that truly is something to be optimistic and excited about, but everyone seems to have forgotten that interest rates in the US and around the world are still near all-time lows.
After keeping interest rates at 0% for 8 years, the Federal Reserve raised rates for the first time in 10 years at the end of 2015, to 0.25%. Since then, over the last 2 years, the Fed has slowly and gradually raised rates up to 1.5%.
Even at 1.5%, interest rates are still historically and unprecedentedly low. Interest rates have not been this low since World War II, when low rates were used to finance a world war, and before World War II they had never ever been this low.
Remember that three years of 1% interest rates gave us the housing bubble and financial crisis. Now we’ve had 0% interest rates for 8 years, and below 1.5% interest rates for another 2 years.
When you consider that rates have never been this low for this long, it just seems that this Trump economic euphoria, consumer confidence, and stock market rally are just feelings of excitement within a massive bubble that has found a little bit of room to grow for a little longer. Due to rates remaining historically low, even though not 0% low, they are still low enough to keep the United State’s bubble economy propped up.
What this means going forward is:
Central banks are going to have a hard time “fighting” recession by cutting rates since they are so low already. The last time the Fed began cutting rates, they started at a high of 5.5%.
Savers will continue to be punished and borrowers rewarded. Guess who is the biggest borrower on the planet? That’s right, the US government.
Because inflation will continue to tick higher and remain higher than nominal interest rates, real interest rates will be negative, which means that there will continue to be a wealth transfer from the working class to the political class.
The low, centrally planned rates will continue to distort the economy and mis-allocate resources.
Don’t take this to mean that apocalypse and economic disaster is right around the corner, but at the same time don’t fall for the hype and euphoria. Rather, remain wary that we live in unprecedented times, that we are the subjects of a never before attempted experiment in monetary central planning by the Federal Reserve, and that the degree of malinvestment in the economy and the economic restructuring that needs to take place is beyond anyone’s comprehension.