The Low Interest Rate Trap

You know, back in the day, a 25 basis point rate hike was usually just one step of many in a tightening cycle of, say, 2 to 2.5%.  Accordingly, you would expect that the actual economic impact of a single 25 bp hike would be slight and most likely outweighed by the impact of the signalling effect.  Furthermore, interest rates would have been anywhere from around 5% to 10% (or even pushing 15% in Canada back when I was a kid), so interest rate duration wouldn’t have been a major factor.

Now, however, the Fed says that it can’t pull off a single 25 basis point hike without pushing the economy into the abyss.  What the heck?  Sure, the first rate hike seems scary because it will be only the first of a series, and interest rate duration is higher now that rates are around zero.  A rate of hike 0.25% is still potent and fearful … not to be used indiscriminately.

Come on… 25 basis points is only 25 cents on $100.  Let’s say that I lend you $100 at first interest-free, and then I want to charge you 25 whole cents a year interest, but you can’t take it…  Well, this is just a variation on the old saying that if I owe you $100,000 it’s my problem, but if I owe you $100,000,000 it’s your problem!  An economy that can’t handle a 0.25% interest rate hike without keeling over is an economy that has serious, serious issues.

And while 25 bp on the upside looks like a bullet to the temple, all the helicopters in the world seemed to have accomplished zilch in stimulating growth.

Many observers believe that the global economy has fallen into an enormous poop hole, tarted up by the cosmetic effects of phony money and good-looking statistics (otherwise known as lies and damned lies).  To make things worse, this poop hole is in uncharted territory.  This is the kind of situation where we fear to look in the mirror and see how deep in poop we really are.

Final thought:  How did we get into this situation?  I believe it’s all about globalization and the information revolution.  Those led us into this mess…. perhaps they also will point to the way out.

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