If “Sea Level” Changes, Everything Changes. But How? Tsunami? Land Rush? Japan?

I’m still seeking clarity on what the heck is going on out there with interest rates.  I figured I’d lay out the questions and see if it helps spark any insight.

Interest rates matter like sea levels matter.  The tide goes up and down, but you sort’ve take for granted that “sea level” is a fixed constant average.  Most of humanity lives near water, so that’s an important measure.  But one we can safely ignore because, well, it’s a fairly fixed constant (leaving global warming aside for a moment).

Interest rates worldwide have tanked.  We have negative real rates (adjusted for inflation) in Japan, German, Sweden, etc…  The US is just barely positive.

These are market-driven rates (10 and 30 year).  The Central banks don’t have their thumbs on those scales.   The Fed’s recent move to stop raising rates is clean evidence its raising the short-term rate scale wasn’t doing squat with long-term rates.

If I traveled back in time 10-15 years and showed a current yield curve interest rate chart to an audience of investors and economists, they would.

  1. Not believe me.
  2. Assume 2019 must be experiencing a five alarm economic crisis.

In reality, we are just sort’ve chugging along.  So what are some plausible scenarios/expectations?  In sea level terms.

  1. Pre-Tsunami:  Apparently the sea receded noticeably before the Thailand Tsunami hit.   People wandered out to look at the near-shore sea floor.  Unaware all that water was going to come back in a wave of destruction.  Maybe today’s low rates are a prelude to another economic maelstrom as we destroy all the debt piled up and un-written off since the 2008 financial crisis.
  2. A permanent shift?  Maybe we’ve slain the inflation beast and the new normal is just that.  Normal.  In which case there’s not too much to worry about.  If anything, we should be rushing to buy all that new beachfront property where the ocean used to be.  Or something like that.
  3. Prelude to Deflation?  The Japan “lost decade(s)” scenario?  We’ve succeeded too well in slaying the inflation beast.  We’re tipping over into deflation.  We’ve over-cranked on monetary policy tools and won’t crank enough on fiscal policy tools.
    • Monetary:  The Fed only has 2-3 points of interest rate cuts available for the next downturn.  It typically needs 4 or even 5.
    • Fiscal:  Government spending to stave off recession is anathema to too many politicians.  Egged on by the .01% who can ride out a downturn but suffer disproportionately from inflation and hate to pay taxes.   Just look at what a heavy lift the lame, anemic, pop-gun “stimulus” was in 2008.

I am most concerned about Scenario 3.  Probably because I have a gut feeling it is what is actually going on out there.  Inflation is anemic everywhere.  A downturn probably tips that to deflation.  And deflation is really really hard to get rid of.  Inflation is like an illness requiring surgery.  It can be beat with enough short-term pain.  Deflation is like a chronic wasting disease.  It just lingers and lingers.  See “Japan 1990-2019”

The other reason I suspect scenario 3 is that most commentary seems as perplexed as I am.  And most if it is still centered around scenarios 1 and 2.  That is at least partly because we have the best explanatory tools for those scenarios.  Like the joke about the drunk fellow looking for his keys under the lamppost; “Well, I lost them somewhere over there, but the light’s better over here…

I have a nasty feeling Japanese economists have insight to offer, but I don’t speak Japanese.  Most economic thinkers and policy makers don’t either. So I’m left staring at the receding surf line and wondering to go forward, run to high ground, or buy an off-grid cabin stocked with canned food and a shotgun.

So that’s why I’m so worried about interest rates.  Any suggestions or comments would be welcome.  Sorry for any typos I’m on a flight later today and wanted to send this out.

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