Why Interest Rates will go UP

How much longer can global central banks depress the true cost of money? If the business world has become a riskier place, then the cost of borrowing should be going up. If governments around the world need to borrow more to finance their spending programs, they should be paying higher rates on bonds, not lower rates.


Welcome to a world of inverted economics courtesy of quantitative easing and public debt issuance. The problem of course with suspending the laws of gravity for a period is that eventually the sky will come crashing down.

High inflation coming
This means a period of very high inflation at best, and at worse an inability to raise funds for public expenditure on health, welfare and education, and real spending cuts or higher taxation. Why inflation?

This is the simplest phenomenon to understand. If governments print money then this inflates the money supply and more money in circulation leads to inflation.

Of course, this only happens when this money is spent. If consumers choose to save – as they are now – then the impact of the increase in the money supply is delayed until that new money finds its way into the economy.

That buys the government time – to get re-elected perhaps – but it does absolutely noting to tackle the underlying problem, in fact it makes it worse. The longer the delay in correcting imbalances and the worse the inflationary problem will be.

Higher interest rates
Once the new money is spent, then the inflation arrives, and bank account holders will demand a higher interest rate as compensation or take their money out and spend it, adding to inflation. In these circumstances central banks have no alternative but to raise interest rates.

Imagine what an impact that will have on financially stretched consumers, quite apart from the negative implications for public spending and its impact on economies. It is nothing short of a double-dip recession scenario.

Yet there is a sense of historic inevitability of this process. It all happened before in the late 1970s. Then the only investors who did well bought gold, silver and oil, and even cash out performed equities, bonds and real estate.

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