With free markets in debt and interest rates, it’s virtually impossible for real interest rates (the nominal rate minus the inflation rate) to remain negative for any length of time. That they have remained negative for years in both the US and Europe bodes poorly for their economies and financial markets. From Lance Roberts at realinvestmentadvice.com:
The Fed’s monetary policy has screwed Americans. Such is the basic premise of a recent Washington Times article discussing inflation. To wit:
“Do you find it odd that banks and other financial institutions provide mortgage loans to millions at an approximately 3% interest rate for 30 years, while the government reports that inflation is over 6% at an annual rate and rising? Are you frustrated that you are a responsible and prudent person who saves for a ‘rainy day’ or retirement, and your savings account only pays 1% or so interest, while inflation is many times that? Do you find it odd that the government official most responsible for inflation – Treasury Secretary and former Fed Chairman Janet Yellen – several months ago told us that inflation would be mild and transitory, neither of which has turned out to be correct? Do you suspect that she may not know what she is doing, particularly when she says that more record government spending will bring down inflation?”
There is a lot of truth in that statement. However, it is not just Janet Yellen’s fault. The problem lies directly with the Fed’s monetary policy decisions implemented since the turn of the century, and particularly, the Financial Crisis. As each bailout of the financial system occurred, yields fell along with inflationary pressures and economic growth.
Of course, as discussed in “Fed Issues Stock Market Warning,” the only thing the Fed succeeded at was inflating a “valuation” bubble of epic proportions.
At 40x trailing earnings, current valuations are higher at the peak of the market in 1999.