The Interest Rate Conondrum

Everyone who has assets is beholden to interest rates. As rates fall, asset prices go up. Finance 101.  

When you discount a future cash flow, the cash flow is in the numerator and the discount factor is in the denominator.  The more subtle takeaway from this formula is that a change in cash flows  (numerator) has a smaller difference on the value of an investment than a change in the discount factor (denominator).  The denominator has a much greater impact on the value of the investment.  

This being the case, when interest rates are at zero, money and cash flows have greater value than they do when they are at, say, 8%.  This is because at 8% your money doubles every nine years and at 0% it never doubles at all.  In order to get your money to grow, you have to find an investment that provides you a growing or stable cash flow at a price that affords you a yield. Today, bonds do not provide this.  Stocks might, if you have a long enough timeframe (like twenty years), and real estate still does in a lot of cases because of the massive inflation in rents we are seeing. 

But in all cases, what this means is in order to find yield you have to take on riskier investments.

The problem is that interest rates (and yields) are a function of the likelihood of getting your money back.  

Today, the ability of sovereign governments, companies and people to pay back their debts in fiat currency that holds its value in the future is nil.  There is simply too much debt.  Sovereign borrowers will not be able to pay it all back unless they print money, and if they print money the value of the currency you get back in the future will be further weakened.  

Said another way, every day there are more and more debts backed by unproductive money and if they are to return that capital to shareholders, money will have to be printed which will lead to inflation.

Flash forward to today:  Bonds are at their highest risk ever, yet paying their holders the  lowest returns ever.  Because stocks and real estate get dragged along, they both  are also at their highest risk ever.  At some point, some country or large bank is going to default, which will either bring down a  Central Bank, or, to save itself, the Central Bank will fight it tooth and nail with their printing presses and there will be massive inflation.  

It is like the old margarine commercial, "It isn't nice to mess with Mother Nature".