Record Low Interest Rates

Things are actually looking up. In one sense I find this surprising, but in another sense I do not. I have been predicting what the old seasoned investors call a “sucker's rally.” There has been a combination of three factors that has caused this. Taxes were raised at year’s end; the budget is being cut modestly due to the automatic budget cuts; tax receipts are tending up. 

The reason that tax receipts are going up is a combination of historically high corporate profits and historically low interest rates propping up the housing market.

Here is how Jon Harrison, at the online magazine Liberty, describes it:

The brightened fiscal picture is the result of a recovering economy. In February the CBO estimated the deficit would be about $200 billion higher than it now projects. Better than expected revenues caused the CBO to revise its forecast in May. About $100 billion is accounted for by increased individual and corporate tax receipts. The other half comes from payments to the Treasury by Fannie Mae and Freddie Mac, the result of an improving housing market. A continued slow to moderate expansion of the US economy, together with the tax increases and spending cuts enacted earlier this year, will, the CBO says, get us to a deficit that’s only 2% of GDP by 2015. 

Jon points out that the CBO's new projected deficit over the next ten years has dropped to 6 trillion. We live in a strange world where a 6 trillion dollar deficit is good news. 

Here is his concluding paragraph.

To continue as we have will almost certainly lead to fiscal and economic ruin in the 2020s or 2030s. The short-term shrinking of the deficit is an unexpected gift that we must not squander. We are being given a brief span — a few years only — to correct the errors of the past half-century. If we listen to the Krugmanites we may not become Greece writ large, but we will doom our descendants to less prosperity and a burden of debt that they had no part in creating, and that may, eventually, crush them. 

I am not quite so optimistic. I think that 3 to 7 years remain for the US to get its house in order. It could be 10 to 15 as Harrison is implying. The power of Leviathan, or Babylon as I call it, is immense. This should never be forgotten. (I recommend Harrison's article.)

How will the crisis start? I have no idea. In fact my guess is that the crisis will begin in Japan and Europe and this will be bullish for the dollar—until it isn't. 

But as Herb Stein said, what can't continue, won't continue. Look at this chart of UK interest rates

I will conclude by quoting my favorite blogger, myself. 

In fact the low interest rates have been fueling a resurgent Real Estate bubble. The rates are not just low; they are not just at generational lows; they are as low as they have ever been in history.

All bubbles pop. While I am guardedly pessimistic about the future and still hope for reform, get ready just in case. 

The next crisis won't be pretty. Rising interest rates will tank the economy, and interest rates will rise.