Watch Interest Income You Depended on Go Poof!

If you’ve glanced at U.S. mortgage rates lately, you might understandably have surmised we’re stuck somewhere in the Twilight Zone. The average fixed-rate mortgage is currently at 3.39%, down twenty-one basis points from a week ago.

Some people, including my brother, who owns a title insurance agency, are very happy about this turn of events. Others, including Lawrence Summers, are feeling pretty dismal. Like William Shatner gazing out that plane window, he’s not all that comfortable in the Twilight Zone, and he doesn’t feel you or I should be either.

Summers is President Emeritus of Harvard University. He’s also served as Vice President of Development Economics and Chief Economist of the World Bank, Undersecretary of the Treasury for International Affairs, Director of the National Economic Council from 2009 – 2011, and U.S. Treasury Secretary from 1999 – 2001.

In a July 6 article entitled, “A Remarkable Financial Moment,” that appeared in the Washington Post and on several other sites, the noted economist warns of the disastrous state of global economic conditions associated with worldwide low interest rates:

“Record low 10 year interest rate [was] also registered in Germany, France, Switzerland and Australia.  Notably Swiss 50 year interest rates are now for the first time negative.  Rates out 15 years are negative in Germany and 9 years in France.

Such rates would have seemed inconceivable a decade ago and very unlikely even a couple of years ago.  I remember my parents paying off their 30 year mortgage on the house I grew up in during 1991 and thinking that the 4.5 percent rate they paid was some kind of antique the likes of which would never be seen again.  At the beginning of this year US 10 year rates were 2.27 percent and there was a general view that they would rise sharply to perhaps 3 as the Fed began to tighten.”

As Summers sees it, we’re mired in what he terms disinflation. While he acknowledges some central bankers’ earnest attempts to lift us out of the swamp, most are working from an outdated paradigm. Their take on things is they can somehow alter this disinflation through fiscal policy. But what they won’t face is, even with a dramatic increase in the price of oil, the global economy remains “demand short.”

In other words, central bankers can’t generate market activity, and that market activity is what we need to jump-start a global economy that could justify higher interest rates. Higher rates, in turn, would stimulate a normal rate of inflation that would help businesses invest and grow. Instead, Summers says we’re stuck with,“…sluggish growth expectations, concerns about the ability even over the fairly long term to get inflation to average 2 percent, and a sense that the Fed and the world’s major central banks will not be able to normalize financial conditions in the foreseeable future.”

In other words, it appears low interest rates will be with us for a very long time.  If so, it’s not just central banks that need to change their paradigm; so do investors.

The conventional wisdom of financial pundits has been to pass up gold in favor of interest-yielding investments. But as interest rates yield next to nothing, and the price of gold continues to soar, an investor’s fixation with interest-yielding investments can only represent his sentimental, and self-defeating, attachment to the Twilight Zone.