Interest rate cycles are lengthy, sometimes several decades. It looks like we’re in for a long stretch of higher interest rates. From Charles Hugh Smith at oftwominds.com:
Interest rates are linked to inflation, but they’re also linked to risk.
As a result of recency bias, where we assume the recent past is a permanent state of affairs, many believe near-zero interest rates are “normal.” They aren’t. As the chart of 10-year US Treasury yields–a proxy for interest rates throughout the economy–illustrates, rates in the 3% or lower were an anomaly that only occurred in the relatively brief period of 2011-2022.
For the five decades between 1960 and 2007, interest rates of 4% and higher were the norm. These included the glorious decades of stable growth and rising stocks / housing valuations–the 1960s, 1980s, 1990s and up to 2007, just before the financial crisis of 2008-09.
For 33 of those years, interest rates of 5.75% or higher were the norm, from 1967 to 2000. No one said that the economy would collapse if interest rates didn’t drop to 3%, for it was understood that super-low interest rates would ignite inflation and incentivize destructive speculative excesses.
For the 25 years between 1970 and 1994, rates between 5.75% and 8% were normal. The 10-year Treasury yield is now around 4% to 4.2%–far lower than what was considered normal for 25 years.
It’s long been noted that interest rate cycles tend to run for decades, not years. Interest rates rose for around 25 years, and then declined for 40 years from 1981 to 2020–a period that was longer than average, thanks to the dominance of central bank monetary policies, or perhaps more accurately, the growing dependence of economies on extraordinarily low interest rates for their “growth.”
