The interest rate bears …
… of whom I am one, are starting to growl again.
The cenral tenet of interest rate bearishness is that if interest rates are low enough to generate negative savings, as is the case in the US and Australia, they are too low to be sustained. The counterargument, put most forcefully by Ben Bernanke is that someone must be willing to lend at these low interest rates, and this lending must reflect a “global savings glut”. Bears respond that the supposed glut does not reflect savings by households or business, but is really a liquidity glut created by expansionary monetary policy around the world, which must eventually come to an end, or be dissipated in inflation.
Exhibit A for the bears is Japan where the central bank has not only held interest rates at zero for years, but has pumped vast amounts of money into the system. But Japan is now emerging from the long period of depressed activity that followed the collapse of the property and stock market bubble in 1991. Over the next year or two, we can expect to see liquidity being sucked out of the system and, eventually a return to positive interest rates.
Europe is similarly tightening policy. Again, there’s been a long period of macroeconomic depression, this time associated with the merger of East and West Germany also in the 1990s.
It’s probably premature to make too much of this, but over the last few weeks, the US 10-year bond rate seems finally to be drifting up towards 5 per cent. If the bears are right, it has a long way to go.