Higher Rates are Coming

0:00Welcome back to Butler on Business, and I'm sure you'll join me in welcoming Dr. Mark Thornton with the Mises Institute in Auburn, Alabama. He is actually, like Todd, traveling along the interstates right now on his way back to Auburn. Mark, thanks for calling in, buddy. Alan, it's great to be back on the show. Well, I always enjoy having you. You know, as I mentioned to you during the break, I have a godson that lives in Auburn, but he is currently on his way to Denmark. He works for a pharmaceutical company, so their headquarters is in Denmark, so he's on his way. But what I wanted to talk to you about, despite the central bank, the Federal Reserve's manipulation of the bond market, the bond market appears to be breaking out and trying to force its will.

0:50The Federal Reserve, fiat money, fractional reserve banking, Human Action, yields on bonds of all sorts, high yield, municipals, treasuries, corporates, for those rates to start to rise, they've been falling forever under pressure from the Federal Reserve, adding more and more credit, adding more and more liquidity into these markets, and basically what the Fed has been doing is trying to keep the stock market on life support, where they're lowering interest rates, in the short run. And then, of course, earlier this year, they started putting pressure on the long-term bonds by buying up basically most of the treasuries that were issued, buying up most of the mortgage-backed securities that were being issued, in a sense absorbing all the supply that was coming online and keeping prices of those bonds high and the yields incredibly low. And that can only go on for so long.

2:20The realities of markets eventually have to take place, and I think that's what we're seeing right now. How do you think then this plays out now that we're beginning to see the market break out of the central bank's manipulation of it? Well, I think that's absolutely correct. On a technical basis, the yields have broken up to the upside, prices have broken down to the downside in terms of bonds. And that's a long-term breaking trend that we've seen in many of the bond market areas. And so with long-term rates rising, and I think we can expect that to be a continuing process because basically what bond buyers are seeing is that the value, the underlying value of the asset, which is dollars essentially, bond buyers get paid back in dollars.

3:16And if the value of those dollars is falling, and other currencies as well, then they're going to ask for a higher return in order to make up for those losses on the underlying assets. And so this is a long-term change in trend, I believe, that we've seen right now. And that basically with higher rates on bonds, that's also going to have adverse effects on stock prices. So as bond yields rise and interest rates more generally rise, then we should expect the value of stocks also to come under pressure. And this could be, you know, it's very difficult to anticipate the timing and magnitude of these things.

4:06But basically what we've seen in bond markets is that prices of bonds have been rising for Several Decades. And interest rates have been declining. You know, when I graduated from college, interest rates were almost 20 percent. And more recently, they've been lower than 2 percent on long-term government bonds. And so if this is a change in the long-term trend, then the higher rates trend could continue for a very long period of time. And as I said, And as I said, that's going to put pressure on all sorts of markets, including stock markets, which compete with bonds, and also with mortgage rates, which would put pressure on the housing sector as well.

4:54So in terms of the holders of all those assets, they could be experiencing negative returns for quite some time now. The positive sign is that there are people who want to buy houses, who need houses, and Why should the average person who may not be invested in bonds care about the bond market? Well, in a sense, we're all invested in bond markets because bonds are the capital stock of society and the bond market is ten times larger than the stock market.

5:43People don't often realize that, but pensions and life insurance companies, they're all invested in bonds and so bonds are the lifeblood of the economy. When we look around and we see all the houses and hotels and warehouses and train tracks and all the assets society, they're all owned and directed in large part by bondholders and stockholders. And so the bond market is a very important component of the U.S. economy, whether or not you actually have bonds or bond funds in your retirement accounts, it really does has impacted everybody in all institutions throughout society, and so, you know, they've been basically keeping that bond market on life support through the Federal Reserve for a very long time, and that's very, it's an artificial support to those markets, and as a result, people haven't really been engaged in those markets to the extent that we should and there is a lot of short-term money in those bonds that could flee those bonds.

7:01So you can see some dramatic changes in bond prices and bond markets. Mark, back in 2011 when they had the budget control act of 2011 and the stock market here in the U.S. as well as the U.S. dollar went into a free fall. The Central Banks around the world colluded, colluded, I would say, to simultaneously devalue all of the currencies, all the fiat currencies, so no one could really see the weakness in the dollar vis-a-vis the other fiat currencies. But it looks to me as we continue to generate monetary inflation that the rest of the world is beginning to push back despite the ignoring of this story by our media.

7:53Do you see it that way? I think I do, Alan. It's clear that central banks, when they saw the problem in 2011, 2009, here in the US and really around the world, it would include certainly the European Union, it would include China and it would certainly include Japan. They only have one tool, and that is to print money. And despite the fact that you can very often hear government officials and central bank officials saying they want a strong dollar, they want to keep inflation low, they're really a one-tool machine, which is basically a money printing machine. And the U.S. benefits from the fact that it's a world reserve currency, or at least was a world reserve currency.

8:44And so people were generally willing to hold U.S. dollars and dollar-denominated assets. But basically what central banks have been telling markets is that we're going to print our way out of this problem, and of course nobody has really ever successfully turned money printing into productive assets and goods and services at a general level throughout the economy. So, basically, I think that this upward move in interest rates is an indication that the market has seen that they're not really going to ever relent in this money printing process and they're pushing back. And so investors around the world are pushing back against the dollar and other currencies.

9:35And as a result, that's what we're seeing today in markets. They finally, I think, have topped off in terms of stocks and bonds, and that things are generally looking like they're going to move lower. As I indicated earlier, this process of money printing, people will put up with it for only so long. And when the demand for U.S. dollar and other currencies starts to decline, there's an inevitable pushback in markets, and the result is that we're going to see lower dollars, The Interest Rate on Bonds here in the United States is that barometer.

10:35Mark, listen, I appreciate you calling on such short notice, and I'll tell you what, later this week when you're back in the saddle at your home office, we'll do this again, okay buddy? Yeah, and I think we're going to be doing a lot of shows here because I think we've entered into a period of very interesting times and very dynamic marketplaces, but the period of apathy and lethargy that we've been experiencing here for several months, I think is going to change, and we're going to have to do a lot of talking about that. Mr. Mark Thornton of the Mises Institute, Mark, I appreciate it, buddy.