On Why Interest Rates are so Low?; A Rebound in Asian Currencies?; Are Vitamin D Supplements Necessary?

From: aditya rana
Date: Sat, Apr 4, 2015 at 2:01 PM
Subject: On Why Interest Rates are so Low?; A Rebound in Asian Currencies?; Are Vitamin D Supplements Necessary?


The level of interest rates in an economy is a key variable which affects not only economic activity, but also all categories of assets – financial as well as real. It is for this reason that so much attention is being paid to the likely timing of a rate hike (and its subsequent path) by the Fed, given the central role the U.S. economy and financial markets play in the global economy. There is perhaps no person better qualified to provide an insight into the Fed’s thinking on the subject than the former Fed chairman Ben Bernanke, and he has started a blog (http://www.brookings.edu/blogs/ben-bernanke/posts) with the first post being on the subject of why interest rates are so low. To summarise:

-Interest rates (both short-term and long-term) globally are currently at exceptionally low levels with 10-year government yields at 1.9% in the U.S., 0.2% in Germany , 0.3% in Japan and slightly negative in Switzerland.

-Interest rates have been declining for several decades (see chart below), following the peaking of 10-year U.S. government yields at 15% in 1981. This can partly be explained with the movements in inflation, which has also been in a declining trend since the early eighties. However, the yields on inflation-protected (i.e. real or inflation adjusted) bonds are also very low with the 5-year real rate at minus 0.1%.

-Why are rates so low? Popular perception of the main reason behind this phenomena is the Fed. However, this is not fully accurate, as the Fed sets only the nominal short-term interest rate and indirectly affects longer term rates via inflation and inflationary expectations resulting from its policies. But the key rate for the economy is the real rate of interest, which is most relevant for capital investments, and this rate (over time) is affected by factors like economic growth and not by the Fed.

-The determination of real interest rates is tied to the concept of the equilibrium real interest rate which is the level consistent with full employment of labour and capital resources. This equilibrium rate changes over time – in a rapidly growing economy the equilibrium interest is higher reflecting the higher return on capital, while in a slowly growing economy the equilibrium rate should be lower, as the return on capital is low or even negative. Additionally, government deficits tend to push up the equilibrium rate as the related financing diverts savings away from private investment.

-The role of the Fed is to try and push market rates towards its estimate of the equilibrium level, as higher market rates will cause the economy to slow down as the return on capital investments would be lower than the cost of borrowing set by the Fed. Similarly, too low market rates would cause an overheating of the economy and inflation. Therefore, the state of the economy is the ultimate determinant of the real interest rate and not the Fed, who only tries to influence market rates to reach their equilibrium level.

-While this may all sound rather theoretical, it is important to understand this fundamental point so as not to be led into erroneous thinking. While he was the Fed chairman, some legislators accused him of “throwing seniors under the bus” as they were earning a very low return on their savings.

-Given the weak economy of recent years, the equilibrium rate is likely to be very low and perhaps even negative. Therefore, a premature hiking of rates by the Fed would have led to a slowing economy and therefore even lower returns on capital investment , forcing the Fed to reverse policy at a later date (as other central bankes have been forced to do in recent years).

-Another criticism of the Fed’s low rate policy is that by keeping rate “artificially low” it is distorting financial markets and investment decisions. However, it is the job of the Fed to set policy rates (it cannot withdraw from that role!) and the best policy is to set that rate consistent with a healthy economy which is the (today, low) equilibrium rate. There is a legitimate discussion to be had regarding the equilibrium rate level, but that does not seem to be the focus of the criticism.

A very Insightful piece, and highlights the unfortunate misconception in the popular media about the “artificially low rates” and the distortions they are creating. Rate are low for a good reason (i.e. a weak economy) and premature hiking of rates by the Fed would only push the economy lower. As the famous economist Irving Fisher noted in his classic 1933 essay on debt and deflation (https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf para 41) which studied the lessons from previous financial crises – the initial efforts of the Fed to reflate and prevent the Great Depression in the aftermath of the 1929 crash “were not kept up and recovery was stopped by various circumstances, including the political "campaign of fear."

The latter point presents the greatest risk to global financial markets today, that the central banks globally are forced to prematurely reverse their monetary policies due to a political campaign of fear which, in the words of Fisher (para 40), “would be as silly and immoral to let nature take her course as for a physician to neglect a case of pneumonia”. I personally doubt very much that the Yellen led Fed would follow this course (besides a very gradual and muted increase), but her current term expires in 2018, and the risk magnifies in the following years. This period is particularly important, as noted earlier by the bond manager Jeffrey Gundlach, as the current treasury holdings of the Fed start maturing around 2018 and it will be faced with a crucial decision to implement a new round of QE to refinance the treasuries or offload/refinance them in the market with disastrous consequences.

Turning to current financial markets, the FT carried a “Big Read” on April 2 titled “The Great Unravelling”, about how emerging markets that “engorged themselves with debt in recent years are now suffering their biggest outflows since the financial crisis causing a big drop in EM currencies”. As a classic contrarian indicator, this could be a sign of a bottom in Asian EM currencies, to follow Asian stock markets higher (and subsequently for Eastern Europe and Latin American stocks and currencies) . As the two charts below from EWI illustrate:

Are Vitamin D Supplements Necessary?

An interest note from well known nutritionist and plant food advocate Dr. John MCDougall (https://www.drmcdougall.com/misc/2015nl/mar/vitamind.htm) about a recent mega study which invalidates the need for Vitamin D supplementation.

Worries over vitamin D, once known as "the sunshine vitamin," have turned hundreds of millions of people into patients with worse, not better, health. The latest, and likely the final, analyses of the studies performed on treating people with vitamin D supplements has shown that this multiple billion-dollar business does not work. The authors, after thoroughly examining the results of nearly a quarter-million people from 46 major randomized trials, conclude: "Our findings suggest that vitamin D supplementation with or without calcium does not reduce skeletal or non-skeletal outcomes in unselected community-dwelling individuals by more than 15%. Future trials with similar designs are unlikely to alter these conclusions."

-Vitamin D supplements are so powerless that the benefits of supplements can only be seen at the extremes of need, such as with institutionalized elderly women (and even then the benefits are with a combination of vitamin D and calcium, not vitamin D alone).

-The medical and pharmaceutical industries’ infatuation with vitamin D began when researchers correctly observed that the incidence of common chronic diseases, such as obesity, heart disease, type-2 diabetes, and multiple sclerosis was more common in populations of people living further from the equator and closer to the North and South Poles. Since even a school-aged child knows that the sun is hotter near the equator, the investigative spotlight looking for the cause of epidemic diseases became exposure to sunshine. Rather than recommend the obvious—more sunshine—the remedy of traditional medicine was manufactured pharmaceuticals in the forms of oral and injectable vitamin D. In the US between 2002 and 2011, the sales of vitamin D supplements increased by more than 10 times, from $42 million to $605 million.

-More than 100 years of laboratory and clinical research has established the causal relationship between the rich Western diet (heavy in animal foods and vegetable oils) and common chronic diseases. The geographic changes seen with vitamin D and, more accurately, the amount of sunshine, also conform to this incriminating research. The real reason for this correlation is that as populations migrate from the equator to more temperate climates, their food supply naturally changes.

-The seasons of fall, winter, and spring are times of low food productivity by plants: Fruits from trees and bushes have ripened by summer’s end; the wheat and corn crops have all been harvested by fall. To survive, people living farther from the equator have relied more on meat, poultry, fish, and dairy foods for calories. Concentration of human financial wealth in the northern and southern latitudes today has perpetuated this inequality in food distribution. Rich people consume richer foods. Poorer countries have traditionally been equatorial, and their foods have been beans, corn, potatoes, rice, and other starches.

-Eating the Western diet causes serious common chronic diseases. In an effort to heal, the body responds with repair processes that include inflammation. One of the responses to this inflammation is the lowering of the serum 25-hydroxyvitamin D in the blood. Thus, low vitamin D in the blood is a result of being ill, not the cause of sickness. This is the main the reason studies using vitamin D supplements have consistently shown no benefits to patients with common chronic diseases. The metabolic imbalances created by administrating this unnatural substance may actually be responsible for the increase in falls, fractures, and other damage.

-The epidemic of obesity has added to the epidemic of vitamin D deficiency. Because vitamin D is fat-soluble, excess body fat will pull vitamin D out of circulation, thus contributing to lower levels.

-For excellent health, people must get sunshine; there is no substitute. The amount of sun required depends on one’s skin pigmentation. For a light-skinned person, exposing the face, arms, and hands to five minutes of sun at noon two to three times a week at a latitude of Boston, MA in the spring, summer, or fall will cause the body to produce sufficient vitamin D to meet all of its needs. Asian-Indians may require three times as much exposure, and dark-skinned people may require 10 times as much exposure under the same sunlight conditions. During wintertime, this fat-soluble vitamin is stored for long periods of time, mainly in the liver and the fatty tissues.

-Commonly people claim that they live in a part of the world where the sun does not shine. This is, of course, not true; there has always been enough sunshine to promote good health. Consider that people have lived in high northern and southern latitudes from Canada to New Zealand for more than 15,000 years, without taking any vitamin D supplements. And many of these people have had darker skin pigmentation than the typical very-white-skinned northern European Caucasian. -High-tech environmental studies on the penetration of sunlight all over the globe confirm the abundance of ultraviolet radiation available to produce vitamin D in people, even for those living in higher latitudes.

-I encourage people to avoid routine examinations of their blood for vitamin D levels (25-hydroxy vitamin D). There is nothing to be gained; adequate sunshine and eating well are "givens," regardless of blood test results. Various experts consider wide ranges of test values, between 12 and 100 ng/ml, sufficient. People with and without adequate sunshine exposure are commonly found to be deficient based on these blood results. Finally, and most importantly, treating abnormal blood tests with vitamin D supplements hurts people, at least by causing more fractures. Thus, there is no level of vitamin D discovered by a blood test that would cause me as a medical doctor to prescribe vitamin D supplements to one of my patients.

-I recommend people expose themselves to as much sun as tolerated. That may mean to let their skin become slightly reddish at times. Skin damage, however, must be avoided because serious precancerous conditions (actinic keratosis), skin cancers, and accelerated aging come from over exposure.

Here’s to getting some more sunshine!



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