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Scott Burns is a nationally syndicated financial writer. He also has co-authored several books with Boston University economist Laurence Kotlikoff, the latest is The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy. [1]

Scott interviewed economist Lacy Hunt for his column yesterday (11/4/12). [2] Lacy is with Hoisington Investment Management and has been the most accurate forecaster of low interest rates in recent years. On many occasions where the consensus was that US interest rates had bottomed, Lacy said they had further to fall.

Lacy has some bad news for investors hoping to get back to positive real (after inflation) interest rates. He expects them to bottom in about 2022 and remain low until at least 2028. The widows and orphans are NOT happy, but they will not shoot the messenger.

A few excerpts from the article:

Or: How long can this low interest rate siege last?

Borrowers will love his answer to the last question. Savers will be troubled. Flipping through one of his chart collections, Dr. Hunt comes to a chart that overlays the history of interest rate declines after major financial panics. If the future replays such past events, it takes about 14 years for interest rates to hit bottom. Since our last financial debacle was in 2008, that suggests interest rates may continue falling until 2022. Yes, savers, you read that right: 2022.

And when that happens, the same data shows that long-term government bond yields will bottom at about 2 percent, compared to their current rate of 2.9 percent. Even 20 years after financial disasters like 2008, interest rates are only about 2.5 percent.

Savers are facing a yield famine that could last beyond 2028. And borrowers who just refinanced their homes at 3.5 percent may have yet another opportunity to reduce their mortgage payment.

Is there a government policy solution?

Not much hope there, he observes. “The Federal Reserve has really been on the wrong course for a long time. It started with the response to the S&L crisis in the early ‘90s, then the Long Term Capital crisis, the failure to regulate the growth of mortgage debt after 1995 and all three Quantitative Easings—all involved liquidity injections and reduced interest rates. And it is continuing now.”

“The argument is that if you have gains in the housing and equity markets (induced by low interest rates) you’ll stimulate consumption. But it really depends on who has the higher propensity to spend out of income, savers or debtors. Remember, the income of one is going up and the income of the other is going down.

“Another problem with additional debt is that it’s likely to be the wrong kind of debt—debt that won’t generate enough income to repay itself… The process of building this massive debt takes a long time and in the build-up there is a persistent erosion of economic capability.”

As a consequence, he points out, the favored response from Washington is likely to make our economic problems worse, not better, because the only “cure” is time—time for the burden of debt to decline.

Lacy has also been consistently critical of Federal Reserve Policy as you might imply from his comments.

I recommend all LIBOR loan holders to take a few minutes to read the brief interview. Lacy’s forecast for low interest rates certainly goes out further than what I had been assuming. Assuming he is correct that interest rates remain low through 2028 would likely alter long range plans for many investors.

[1] Burns and Kotlikoff book

[2] Scott Burns interview with Lacy Hunt: The End of the Yield Famine is Far Away
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