Lobo Tiggre made a very good point recently on an interview on Kitco News on YouTube.
It prompted me to do this video. I’ve talked about this in previous videos in terms of extreme environments etc, but it’s worth talking about again.
People might not be aware of it, but we have been living in an extreme environment ever since the Financial Crisis of 2007 / 2008. In most so-called “developed countries”, interest rates have been kept very low and for an awfully long time. In very basic terms. Low interest rates mean that money is cheap to borrow.
If you pan out and take a more historical perspective however, the interest rates have normally been at around where we are now. So, where we are now has in the past been considered as being normal. To say this in another way, this would be the normative model.
So, for the past decade plus we’ve been living in a world which is not normal, not in Economic terms. We’ve actually been living in a very abnormal, I would say, warped, world.
Extremely low interest rate have skewed things significantly and even to the extent of skewing people’s perceptions. But anyway …
In an Economy which is used to near Zero interest rates, anything that moves much away from that is going to be problematic.
One of the mandates of Central Banks is to create a stable Economy.
While it could be argued that the Economy has been stable throughout the last decade or so, up until recently that is, by keeping interests rates at artificially low levels, they have actually engineered a situation which is inherently unstable.
Put in colloquial terms, Central Banks have made junkies of the markets. They got them hooked and then they have been feeding their habit ever since. Moreover, low interest rates combined with Quantative Easing has turned Cocaine into Crack. The markets go through “cold turkey” if cheap money is withdrawn, or if there is a change in rates.
Controlling interest rates are part of FED’s Monetary Policy remit along with Currency Creation. They shouldn’t be, but they are. And we have to deal with things as they are, rather than as we would wish them to be.
Interest rates and the Money Supply are the two giant levers the FED uses to manage (I would say control) the Economy. The same is true of most other Central Banks. The BoE, the BoJ, The ECB etc.
