The interest rate measures the probable financial risk. Since it is probable, there is the “real” risk and the “actual” risk, depending on the chronic condition.
A high expectation of risk measures a high rate of reward at maturity, which is the “actual” price in the future discounted by the rate of interest now. Hence, bond prices are inverse to the rate of interest, essentially measuring the same thing–risk–but that does not mean they can’t be perceived as disconnected like when the CPI is used to really measure deflation by actually calling it inflation.
“Risk-transfer vehicles” derive from the inverse relationship of a bond’s price and its rate of interest. A Synthetic Fixed-Rate Swap, for example, is chronically conditioned to explode if interest rates move down. The client is stuck, contractually obligated to pay a premium price that it can’t pay, which is why it agreed to “the swap” (taking the risk) in the first place. The default condition forces the liquidation and acquisition of assets at deflated prices (at a high rate of interest).
With the repeal of Glass-Steagill, taking risk at a high rate of interest is manipulated by derivatives contracts in swaps markets.
Swaps merge commercial and investment banking with insurance products. This was an illegal consolidation of the risk for a reason.
There is a big, macro detriment associated with consolidation of industry and markets, and financials especially. As long as Bank of America, Goldman Sachs, and AIG can integrate and operate together, there is the incentive to make the detriment “just happen” so that they end up with your assets, “derived” (contractually obligated) for pennies on the dollar.
Deliberate deflationary risk used to be an illegal activity–racketeering. Now it’s the formula for success, and especially potent when combined with inflationary measures designed to adjust and actualize the real risk on demand, which is measured by the rate of interest.
When big banks use deposits to demand high commodity prices with commercial paper (derivatives), and then OPEC deflates the price by adding supply against declining demand, the result is deflation in the first order. The adjustment has been made. Loans to energy producers at inflated prices are forced into default at a non-conforming rate of interest. What was once a high rate of interest is now low, and the value of those loans (the underlying assets) will be available for acquisition (consolidation) for pennies on the dollar, discovering the “real” value and the “actual” identity of the risk.