If you mosey on over to the suddendebt blog, you will see some very interesting charts that portend much higher long term interest rates. How, you may well ask, can a wobbly economy sporting a first class housing bust, and a tapped out consumer, be due for higher rates? It doesn't make sense. Actually it does, if one considers the possibility, if not the likelihood that the powers that be are set to flood the system with credit at an unprecedented rate. It is about as ironclad a law as exists in economics that the more there is of something the less valuable that something becomes. With that in mind, some of you may have noticed that for some time, since roughly 2002, in fact, the dollar has been acting rather poorly against the rest of the world's fiat currencies. That's what happens when supply swamps demand. As this trend continues and even accelerates, borrowers of U.S. debt, who are generally foreigners, can reasonably be expected to demand higher rates as compensation for the falling greenback.
The "crack up boom", a colorful term coined by Ludwig Von Mises to describe a phenomenon seen in such diverse cultures as 1920s Weimar Germany, and 1980s Argentina, is one in which prices for many assets are bid through the roof as folks become desperate to trade in their rapidly depreciating currency for items that will maintain purchasing power. Purchasing power is the name of the game, which is why, though we should not get overly excited by the present action of, for example, the stock market, as it makes nominal new highs (After all, if we have, as I contend, experienced high single digit inflation year over year since, oh, say, 2002, then the Dow Jones would need to be closer to 17,000 then 14,000 to be equal in real terms to where it was at its highs in early 2000.) seemingly on a daily basis, we might equally worry that the market is going to go parabolic as people look for places that might conceivably compensate them for their rapidly eroding currency.
For years now, the monetary authorities have created an environment of revolving asset manias that have, to some degree, masked general economic deterioration. Alan Greenspan, and now, Helicopter Ben Bernanke, aided and abetted by all sorts of dodgy private sector credit schemes, have, for years, literally and figuratively papered over the structural hollowness of our burger flipping, consumer on steroids driven, domestic economy. Over the better part of the last fifteen years the U.S. ecomony has experienced several stock market booms and busts, and most recently one real estate boom and epic bust. And one of the prices we have paid, since approximately 2002, for official and unoffical financial profligacy, is that the dollar has been absolutely drubbed by every other major fiat currency and precious metals.
In truth, the greenback has been beaten down on a purchasing power basis since the inception of the Federal Reserve System, such that a dollar today will buy what a nickel would in 1913. But I only mention that fact to provide context. Fiat regimes, without exception, always end badly, because any system that abandons discipline, no matter what arena we are speaking of, political, military, or financial, is ultimately doomed to failure. However, we may now be at the point of acceleration of the dollar regime's implosion. The fact that we are staring at prospectively higher long term interest rates even as our domestic economy seems poised for a downturn, is merely the most recent and perhaps best sign that things are about to enter a new phase of deterioration.