Is There an Economic Bomb Cyclone Ahead?

First of all, nobody knows what will happen next with the economy. On the one hand our Democratic friends seem to think that their supercalifragilisticexpialidocious omnibus spending bill and glorious Inflation Reduction Act are already steering us to the green and pleasant land of woke Jerusalem.

But then you have Jeffrey A. Tucker saying that the end of negative interest rates ain’t gonna be a walk in the park. Sez he:

Most people under the age of 40 have no financial experience in a world of positive interest rates for most dates of maturity… When Ben Bernanke pushed his new policy [back in 2008], he was flipping all economic and financial logic on its head.

See, ever since the Crash of 2008, interest rates have been less than the rate of inflation, to help revive the economy, courtesy of Little Ben Bernanke. Until this year.

Back in the 2000s, real-estate mortgage rates stayed pretty constant between 5.5 and 6.5 percent. But short-term Treasuries went from 0.95 percent in 2004 to 4.9 percent three years later in 2007. Then we had the real-estate meltdown of 2008 and the Great Recession.

That was nothing compared to 2022.

In 2022, 30-year mortgage rates have gone from 3 percent to 6.5 percent in one year.

And in 2022, short-term rates like three-month Treasuries have gone from effectively zero percent to the current 3.72 percent. In one year.

I think that if you double mortgage interest rates in one year, and punch short-term interest rates from zero to four percent in one year, I’d say you got Trouble with a capital T right here in River City.

My understanding of money comes from Walter Bagehot in Lombard Street: A Description of the Money Market. He wrote the book after the Crash of 1873.

His notion is simple. For the credit system to work, you need two things. First, you must have loans properly collateralized, so that loans can be liquidated without loss to the creditor. Second, you need borrowers to be able to service their loans. If either requirement is not met, as in a recession, you got trouble in River City.

In the 2008 Crash a ton of mortgages were not properly collateralized, and a ton of borrowers couldn’t make their payments. That’s why we had a Crash.

When things go south, Bagehot proposed the notion of “lender of last resort.” The central bank would stop future crashes by lending money to banks to prevent them from going broke.

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