The yield on the U.S. 10-year treasury note (^TNX) hovers around 2.3%, a figure that seems incredibly low until it’s compared to European rates. Germany’s is just under 1% and in Sweden, the yield is around 0.18%. Japan’s 10-year yield clocks in at 0.44%. In Switzerland, the 2-year treasury yield is actually negative at -0.148%.
“We have never had this kind of interest rate structure upon which is superimposed a federally sponsored rise in asset prices,” says Jim Grant, author of the new book,"The Forgotten Depression" and editor of "Grant’s Interest Rate Observer."
“One can’t be too dogmatic about where these rates would be in the absence of these monetary exertions,” warns Grant. But, he argues, deflation ought to be natural in a world where technology makes goods cheaper and easier to produce and if something becomes less expensive to create, the price of the good should also become less expensive. “The central bankers have been almost unanimous in declining to acknowledge that fact,” says Grant. “They say they must restore some measure of inflation and want prices to rise by 2% a year or more.”
Grant doesn’t believe we’re using the term deflation correctly. He categorizes it as a crisis of debt. It’s important to distinguish between a credit crisis and a decline in cost due to technological progress, he says. “It’s called 'everyday low prices' and Walmart (WMT) has seemed to made a good business out of it."
Suppressing these interest rates can cause future cash flows to become inflated and asset prices to become higher than they might otherwise be. “Central bank policy has served to inflate [assets] but we don’t call it inflation, we call it a bull market,” says Grant.
Grant believes that distorted interest rates distort production and that when rates do eventually go up “you’re looking at some recalibration of asset values,” certainly not a bull market.
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