In 1974, the Cleveland Indians baseball team promoted Ten Cent Beer Night for a game against the Texas Rangers.
Fans showed up in droves for the cheap beer and drank it by the gallon.
The inevitable result was an entire stadium full of drunken fans, bench clearing brawls, a 9th inning riot with all the fans spilling onto the field to fight with both the Rangers AND the Indians, and the forfeiture of the game by the Indians.
He was analogizing cheap beer to excessively low interest rates – making the case that economies get “drunk” and falter from too much cheap credit in exactly the same way that sports fans get drunk and falter from the availability of too much cheap beer.
He went on to point out how interest rates prior to the COVID-19 crisis were equivalent to “cheap beer,” while the interest rates we are seeing now are equivalent to “free beer.”
What this means is that economies throughout the world will again get “drunk” and falter at the trough of too much cheap credit.
And what that means is that we should expect a lot more so-called “black swans” or entirely unexpected economic events that will rattle the world.
Mortgage and real estate professionals love low interest rates b/c they fuel appreciation, borrowing, and buying – or more business for all of us.
But, excessively low rates can be bad for economies overall b/c they punish savers (whose returns are too low in low-rate environments), they encourage too much borrowing/leverage, and they foster bad investments, as investors chase yield anywhere they can find it.
This in turn fosters asset bubbles and very precarious economies overall, as over-leveraged firms (with too much debt) can ill-afford even short downturns.
We have seen two huge bubbles pop in the last 20 years with the dotcom bubble popping in the early 2000s, and the housing bubble bursting in 2008.
Everyone likes to blame those crises on greed, the lack of regulations and other factors, but people like Jim Grant blame the crises entirely on excessively low interest rates.
Here are the points to this blog:
- We should all expect a lot more black swans or economic turmoil – so we should all keep our powder dry (save money), diversify our assets and expect more and more change;
- I still think real estate remains a great investment – as a “hard asset” hedge against economic turmoil and against highly probable inflation at some point;
- This is one more reason why borrowers should refinance now if their refi is truly “no cost” and it saves them money – the subject of tomorrow’s blog.
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