We printed the following chart in Money Morning last week. Or a version of it anyway. At that time of course, we only had the interest rate data for that week and the week prior.
It showed the increase in interest rates right across the yield curve. All the way from the 3-month bond through to those that mature in fifteen years time.
Well, one week later and, you’ve got it, interest rates have moved higher. I was going to write that they’d ‘crept’ higher, but they haven’t. It’s been a pretty hefty rise, especially towards the longer dated bonds.
Take a look at the chart for yourself…
The green line shows the bond yields from this morning. On the 15-year bond, the yield has increased from 5.04% two weeks ago to 5.64% today.
Yet this is all happening very quietly. We assume the economists at the major banks have seen this data, but so far they’ve been quiet on the subject.
We wonder why that is.
Could it be that the mainstream economists are confused? We think so. Their problem is they only seem capable of considering the present. They never seem to consider the impact of today’s actions on the future.
That’s probably why when your editor has been railing against excessive borrowing and the madness of printing money (‘quantitative easing’ the boffins call it), mainstream commentators and economists were labeling these policies as a masterstroke that would cure everything.
But they failed to consider the consequences. And it’s probably something as simple as not understanding inflation. As Mark Thompson wrote in a guest essay for Money Morning this week, and which we’ve also published on The Daily Reckoning website:
“In some newer dictionaries the term ‘Inflation’ is beginning to be revised as a phenomenon of rising prices. But I prefer the traditional meaning where ‘Inflation is the Increase in the money supply’.”
In fact, let me rephrase my statement above, it “IS something as simple as not understanding inflation.”
You’d think it would be obvious, the more you create of something the less valuable it becomes.
Anyway, we noticed a comment from ICAP Australia economist Adam Carr on the Business Spectator website:
“I’ve never been a fan of excessively low rates and QE is an outright fallacy – it’s a dangerous game and it can create more problems than it solves in my opinion. The massive amount of issuance is, of course, a problem and to be honest QE looked like it was working fine initially, but if the latest trend continues there are going to be problems, not least of which will be because I think the cowboys at the Fed will respond by printing faster and harder – which pressures the currency, inflation etc and helps lift rates even higher.”
“QE looked like it was working fine initially” – Can you believe that? Could anyone seriously believe that just printing money would make things right?
But at least he’s acknowledged it’s causing problems now. But it’s a shame he made this comment in an interview with the Australian Financial Review back in March:
“I think when you print money, it becomes very attractive [for investors] to take advantage of the fact that money is just given away for nothing.”
Why has it taken actual interest rates to rise before Mr. Carr – and every other mainstream economist – can see that increasing the money supply leads to problems?
But aside from that, Mr. Carr doesn’t even address the issue of rising Australian bond yields. In his Business Spectator column he only seems concerned that US interest rates have risen.
Why are they ignoring the rate rises here? It’s been just as dramatic. And it will only get worse as the Australian Office of Financial (mis)-Management sells off more and more government debt.
This means rising interest rates are inevitable. As long as more and more debt is being issued it creates a larger pool. And, like printing money, the more you have of something in circulation the less valuable it and others like it become.
That means investors will demand a higher yield. And they already have.
Interest rates are rising. But here’s the real problem. It becomes self perpetuating, because the more that is sold, the greater the supply of debt and the higher the interest rate demanded. Then if you add in higher inflation, investors will demand an even higher interest rate to offset the cost of inflation.
The next move we need to look out for is further increases by the banks in interest rates for housing and businesses.
There seems to be less talk now about the Reserve Bank of Australia lowering interest rates to 2%. That will be worrying news to the first home-buyers that have been suckered in by the bribe.
Now the odds are looking more likely for interest rates to be much higher next year. We’ll have more on the housing market tomorrow, including a couple of interesting emails from readers.
Other Stuff on the Markets
The S&P/ASX200 added just 0.34% despite trading higher during the day, while overnight the Dow Jones Industrial Average gave back most of Tuesday’s gains, losing 173 points. While in Europe, the FTSE100 added only 4.51 points.
The price of gold in Australian dollars was steady at $1,216.13, while in US Dollars it dropped to $947.12. See The Swarm Trader’s view on gold below.
The Aussie dollar remains stable against other currencies, trading at USD$0.7776 and JPY74.06.
Crude oil remains high at USD$62.93.
For the biggest movers on the market yesterday click here…
And today on the economic calendar we have the HIA New Home Sales and a speech from the RBA deputy governor. While in the US tonight they have Durable Goods Orders and New Home Sales.
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Second-favorite Robert Altman film. ,