Where Do Interest Rates Go?

By: Jonathan M. Lamb. Jonathan M. Lamb is an Economist that resides in the Research Triangle of North Carolina.

Over the next few weeks I am going to start discussing Uncle FED and when and what he will be doing to our good Ol’ US of A interest rates. But for now let’s take a peak around the world and look at some of the things from a global stand point that Uncle FED will need to consider. (Full disclosure, there is a time and place for rate changes, and I strongly oppose a USA rate change in 2015.)

The meeting minutes of the FED seems to focus on Macro level indicators, domestic issues and things like world GDP numbers. Don’t get me wrong, our Uncle FED needs to be digging through all the Macro data, but from a Micro view we have lots of domestic and world issues that cannot be ignored.

The media has been picking up on the messes in Italy and Greece, and we are finally starting to see noise about the craziness in China (more of that to come). One thing that seems to “fly under the radar” is the #3 economy, Japan. Japan’s GDP has been chopped by a third in 2014 even after the Bank of Japan pumped an additional $1 Trillion into the $5 Trillion economy over the last two years. Japan’s monetary policy has ONLY spurred the economy to a growth rate of 1.5% after borrowing 10% of their GDP in 2014. Here comes the scary part, Japan’s total debt is over $1,000,000,000,000,000 (Quadrillion) Yen, which is 2.3x times bigger than their economy! At a borrowing rate of 0.1% it takes 20% of their tax base just to pay the interest. This printing press has devalued the Yen by 20% over the last 6 months, and the weak Yen is a huge inflationary hit to real earnings for those in Japan.

Japan has been an ugly place since deflation of the 1990’s, and things like the Tsunami and nuclear disaster have not helped the situation. Japan is a serious situation that the United States FED needs to take into account on possible rate moves. We no longer live in a Small World, what we do domestically dominoes around the world and comes right back to us.

The rest of the World is on life-support and cutting rates. I am not supporting cutting rates, but a rate increase would not just cause domestic ripples, but huge domestic and worldwide title waves.