“With Interest Rates This Low, There are Bound to Be Accidents…”

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RHODES, Greece – We have been writing about radical ways to reduce your living costs.

Our monthly budget was $500. We were just fantasizing about it. But judging from all the feedback we’ve received, many Diary readers have done it!

Interestingly, many of those who reported living on little money report that it was the happiest time of their lives!

Right now, your editor is spending considerably more than $500 a month.

He is sitting on the balcony of his cabin on the luxurious Crystal Serenity cruise ship, overlooking the harbor at Rhodes. (Cruise ships aren’t usually our thing.

But we were invited on board to speak at the second annual MoneyWeek “Cruise for Investors.”)

Arriving at Ephesus… after departing from Rhodes

To our right is where one of the Seven Wonders of the World, the Colossus of Rhodes, once stood – a huge bronze statue of the titan god of the sun, Helios. The people of Rhodes built it to celebrate their victory over the ruler of Cyprus, Antigonus the One-Eyed, one of Alexander the Great’s former generals.

The Colossus stood for 54 years, before an earthquake toppled it in 226 B.C. Four centuries later, an Arab force, under the Muslim caliph Muawiyah I, captured Rhodes… had the toppled statue disassembled… and sold the bronze to a Jewish merchant.

It was said that there was so much bronze it had to be loaded on 900 camels.

“With Interest Rates So Low…”

But we will spare you the history and return to our subject: farce.

Yes, the world of money has become a joke.

Yesterday, the Dow crossed back above the 17,000 mark.

What? Is the correction over? Is it clear sailing… all the way to 20,000… and the moon?

On the deck below our balcony, fellow travelers get exercise by walking around the ship. Hark! We recognize a voice…

“Well, with interest rates this low…” said the familiar voice. It was Tim Price, a professional investment manager and colleague from our London office.

Tim was walking around the deck, talking to a friend. It took a few minutes to complete the circuit. So, we only caught little snippets of his conversation…

“One of the hardest things to understand…” was the phrase we picked up on his second lap.

“Of course, we have no idea when that will happen…” was the remark on lap No 3.

Like archaeologists reassembling an ancient pot, we will have to fill in the missing parts.

“With interest rates this low, every asset price is suspect,” he might have been saying.

Or: “With interest rates this low, there are bound to be accidents.”

False Signals

Ultra-low interest rates are like highway signs that have been tampered with by a mischievous troublemaker: They send drivers in the wrong direction. Soon, there is a pileup.

Right now, for example, Deutsche Bank is warning about a huge accident in corporate debt.

Corporations have been able to borrow hundreds of billions of dollars at some of the lowest interest rates ever.

There is now $4 trillion in U.S. corporate debt maturing over the next five years.

Some of them used the money to good purpose – building factories and developing new capacity to boost output. With that new output they will be able to increase sales and repay their loans.

But the signs misled the bad as well as the good. Many corporations took the money simply because it was made available to them at such low cost.

Then they distributed it to corporate managers and shareholders – by way of dividend payments and share buybacks.

And now, with consumer prices and world trade in decline, the question is whether they’ll be able to service the debt. As long as interest rates remain ultra-low, they may be able to roll over their debt. (They’ll be able to borrow more to pay down their existing loans.)

But interest rates – like every other price – go up as well as down.

When interest rates go up, the pavement gets slick and the ambulance sirens scream.

As Tim said, “Of course, we have no idea when that will happen.”

But we have to stop. It’s time to go ashore.

Until Monday…


Bill Bonner
for The Daily Reckoning

Originally posted at Bill Bonner’s Diary, right here.

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