Expert Commentary

With Inflation Raging and the Dollar in Free-Fall for Six Years, Why Are T-Bill Rates So Low?

This article originally appeared in the December 14, 2007 issue of The Elliott Wave Theorist. Fifteen months later, the stock market had fallen by more than half and commodities had crashed in the first deflationary wave.

I met with a group of smart analysts a few months ago, and the one thing they agreed made no sense was the low interest rates on U.S. Treasuries. Many investors and analysts believe that the market has been inexplicably blind for several years and that these rates must soar. Well, sometimes markets do seem to ignore the obvious only to move in the anticipated direction later. But at other times, it is the participants who don’t get it. I think this is one of those times.

One answer to the mystery is that we are in the “winter” portion of the Kondratieff economic cycle, which is when interest rates on good debt fall to their lows. That’s what has been happening in Japan since 1990, and it is happening here, albeit more slowly.

But most people are not satisfied with cyclical explanations, so let’s try another tack. I think the market “understands” that the inflation of recent years is not so much currency inflation as credit inflation. This is a crucial difference, because credit can disappear. I think the market is priced for an approaching debt implosion. Even though the dollar can’t buy much now, surviving dollars will soon buy more, and anyone who has the foresight to keep his money in debt that does not fail will be wealthy in a kingdom of paupers. So 4%-5% rates on Treasuries provide a perfectly good return on IOUs that will almost surely survive the credit collapse. When much of this debt, which is falsely perceived as money, disappears, remaining dollars will be valuable. Soon even a one percent return will be welcome, as it was in 2002-3 and as it has been in Japan.

Conquer the Crash is on record forecasting that interest rates will trend lower—probably to near zero—for bonds that will remain AAA, and higher—in many cases to infinity—for bonds that are at risk of default, a category that includes most currently outstanding consumer, corporate and municipal debt. I believe this process has already begun. T-bill rates fell hard in 2007, and shortly thereafter rates on sub-prime mortgages soared and in cases of default have already reached infinity. So I do not think the market has been “wrong.” I think it agrees with my book.

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