Why All the Fuss About a Return Toward Normalcy?
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Something is different this time. Interest rates have never been lower, but that’s beginning to change and it’s causing a fuss, as explained in this recent Lance Roberts article. So what’s the fuss? You’d think investors would be relieved by a return to a more normal situation. But be careful.
The costs of rising interest rates
A low interest rate is one of my 15 explanations for the inflating of our stock market bubble because investment analysts discount future earnings at a low rate. Consequently, an increase in interest rates reduces the present value of future earnings, so stocks are worthless.
The second cost of rising interest rates is the increased cost of servicing our country’s $23 trillion debt. We can barely afford to service the debt under zero interest rate policy (ZIRP). Consequently, the government will need to take money from other programs like Social Security and Medicare, and it will likely print more money.
The problem with printing more money is that we’ve authorized $5.2 trillion in COVID relief (including the just-signed $1.9 trillion stimulus) in addition to the $4 trillion in quantitative easing (QE); that is “new money.” President Biden supports another $2 trillion in infrastructure spending. Our GDP is $21 trillion, so that expansion will cause inflation, the third cost of rising interest rates.