Via International Man

Prices in Capitalism

International Man: Interest rates are simply the price of money.

They have an enormous impact on banks, the real estate market, and the auto industry. It’s hard to think of a business that interest rates don’t affect in some meaningful way, either directly or indirectly.



That’s why interest rate expert James Grant correctly describes interest rates as the most important price in all of capitalism.

What’s your take?

Doug Casey: It’s absolutely true: the price of money—of capital—is the most important of all prices. Among other things, interest rates help determine whether people prefer to be debtors or savers. That makes a huge difference for a society because when you’re a debtor, you are either mortgaging your future earnings or consuming the capital that other people have saved in the past. Of course, debt can also finance businesses and facilitate production—but most debt today, including almost all government debt, is for consumption, not production. Debt is generally dangerous and often very destructive. Low-interest rates encourage debt.

On the other hand, “saving” means that you’re building capital that can be lent or invested—you’re creating capital for the future. High-interest rates encourage saving and production and discourage debt and consumption.

Interest rates have been politically manipulated for many years. That’s how the US can have a nominal interest rate of 2%, while the real interest rate—taking into account inflation—is probably about minus 8 or 10%.

This is rather perplexing for the average person, and it causes him to do things that he wouldn’t do otherwise.

The level of interest rates has a huge effect on whether people act as savers, investors, or speculators. When things get really out of control, they become gamblers out of desperation. A sound currency at a high-interest rate encourages people to save, which is to say, produce more than they consume, setting aside the difference in currency. Sound money encourages rationality. If interest rates are real and the currency is stable, then it’s easier to make reasonable predictions as to what a good investment or a bad investment might be.

Let me define that word. An investment is an allocation of capital so that, through real production, you can grow capital and have more in the future. However, artificially low-interest rates and a rapidly depreciating currency make people foolhardy and make markets fluctuate unpredictably and radically. People don’t understand what’s going on or why. They start trying to second guess the markets and generally lose money in the process. They’re forced to be speculators. But most people aren’t very good at it. They don’t know the difference between speculating and gambling. Speculating (generally) is to “take advantage of government-caused distortions in the market.” Gambling is just betting in hope of getting lucky.

Take the recent bubble in “meme” stocks, abetted by new brokerage houses like Robin Hood opening up millions of new accounts with newbies who’d gotten thousands of dollars in “stimmy” checks from the government’s PPP programs. 98% of them would be better off to recognize they’re just gambling. If they went to a casino instead of a stockbroker, they’d at least get free drinks and a show while losing their money.

Interest rates have a huge effect on the way society itself operates and its psychology.

International Man: Interest rates are controlled by a politburo of central planners at the Federal Reserve, not set by the market like any other price.

It’s strange that so many people thoughtlessly accept this as “normal.”

In reality, the Fed is engaged in a massive price-fixing scam… and nobody seems to care.

What are the implications of this?

Doug Casey: The average guy is neither investment-oriented nor economically sophisticated. He tries to save if he wants to get ahead in the world, which is good. He’s leery of investing and probably thinks speculating is immoral.

He usually saves with his national currency. In the case of Americans, that’s US dollars; for Zambians, it’s kwachas, and for Argentinians, it’s pesos. But when interest rates and currency prices are fixed politically at arbitrary levels, the average guy is forced to speculate just to keep his head above water.

Politically speaking, artificially low-interest rates and high rates of money printing are bad for society but good for politicians because those things encourage consumption. Everybody feels good consuming things, even when they’re living out of capital. That’s a problem for the future. Politicians generally only think of the immediate and direct consequences of what they do. Even if they understand the delayed and indirect consequences, they figure that will be somebody else’s problem.

It’s as if the Fed were to deposit a $100,000 in everybody’s bank account Sunday night. Everybody would feel that they have the wealth to go out and buy a Ferrari the next morning. In the short run, it’s a lot of fun, but in the long run, it’s disastrous to a society, from both an economic and a social point of view.

From an economic point of view, low-interest rates and high money printing destroy the value of the currency and encourages people to consume more than they produce. The net wealth of society goes down, which has serious social implications. Why work when you can become wealthy just by buying stocks? Or collecting stimmy checks.

When the standard of living goes down enough due to underproduction and overconsumption, or when inflated stock, bond, and property markets crash, you’ll see business failures, riots, and political chaos. A dictatorship of some type is likely at that point. Somebody will come along, promising to magically fix everything if you just give him enough power. We’re close to that stage now.

The Federal Reserve and every other central bank around the world should be abolished. They serve no useful purpose. But few people, with the prominent recent exception of Ron Paul, are brave enough to say that. The public has been propagandized into believing central banks are part of the cosmic firmament, however. In fact, they’re engines of inflation, destroying the value of paper money.

Money is a medium of exchange and a store of value. It shouldn’t be used as a source of government income or treated like a political football. Gold should be reinstituted as day-to-day money.

International Man: While the Fed exercises undue influence over interest rates, what other significant factors are at play?

Doug Casey: Let’s look at the bond market.

Right now, bonds are about the worst possible place to allocate your capital. They’re a triple threat to your financial future because of three things: inflation, creditworthiness, and interest rates.

First, all bonds are denominated in currency, and all currencies today are fiat paper. As the currency is inflated and loses value due to money printing, the value of your bonds go down.

Second, there are scores of trillions of dollars of bonds outstanding. If anything serious goes wrong in today’s very unstable world economy, a lot of that will be defaulted. Plenty will go wrong during the Greater Depression. Just because you lent $100 to some entity doesn’t mean that you’re going to get it back. So you have a credit risk in addition to inflation risk.

Third is the interest rate risk. If interest rates go up, the value of your bonds will go down proportionately. In other words, when—not if, but when—rates go from the current 2% to, say, 6%, the value of a 30-year bond will fall from 100 to about 40. If long bond rates go back to the levels of the early 80s, bonds will collapse to about a quarter of present prices.

Unfortunately, all three factors are now working against bonds. I’m short bonds and expect to remain short for the foreseeable future.

International Man: Interest rates rise and fall through decades-long cycles. Where are we in the cycle right now, and what happens next?

Doug Casey: This is an easy question to answer. Interest rates last peaked in the early 1980s.

Back in the early eighties, at one point, the US government was paying 20% on T-Bills. Interest rates have been going down for the last 40 years. It’s dangerous to pick tops or bottoms in the market, but my guess is that interest rates reached their ultimate bottom in the last year.

Now, because there’s so much debt in the world, and money is being printed so fast, interest rates are headed up to and beyond the levels they were in the early 1980s. And it will take a lot less than 40 years this time around.

That will have real consequences—bad ones—for people who own homes, finance cars, save money and have money in the stock market.

International Man: Given your outlook on interest rates, what are the implications for the average person’s portfolio? How should our readers be positioned?

Doug Casey: Well, if I’m right and long-term interest rates go way up, it’s going to be disastrous for the typical investor’s portfolio.



When interest rates go up, it generally hurts a company’s stocks for several reasons. Most of them need to borrow money. When the cost of money goes up, their earnings get hurt. Further, as the economy slows down and people consume less, it hurts corporations’ sales and earnings. And most directly, if interest rates are 12%, 15%, or 20%—and they’re real interest rates, not just nominal high-interest rates—people will start buying and holding dollars as opposed to speculating in stocks. They’ll sell stocks. Generally speaking, low-interest rates mean a high stock market. High rates mean a low stock market. And we’re headed for years of much higher rates.

As I said, if interest rates go from 2% to 20%—I know that sounds unbelievable, but things are now much worse than they were in the early ’80s— the price of the average long-term bond will drop roughly 80%. And that’s going to devastate pension funds, insurance companies, and banks. They mostly own bonds. The stock market will go down in tandem.

I expect we’re headed into a bear market for most conventional assets—in real terms—for the foreseeable future. Considering how inflated and overvalued all the markets are, collapse could be gruesome.

One consequence of this—there will be many others—will be what I call the Greater Depression. The general standard of living is likely to drop significantly in the years to come. It’s been artificially high for many years—mainly due to low-interest rates, which have encouraged people to consume capital, malinvest, speculate, gamble, and generally live above their means.



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