The Fed is caught in a trap and they can’t get out.
Submitted by Tyler Durden on 12/11/2015 15:12 -0500
On June 29, 2006, the Fed did something it would not do again for (at least) nine and a half years: it hiked rates by 25 basis points, its 17th consecutive rate hike. Everyone knows what happened after.
On December 16, 2015, the Fed is expected to do something it hasn’t done for 3,457 days: hike rates by 25 bps, ending the longest period in US history (84 months) of zero interest rates.
How has the world changed in the interim? Some quick observations from BofA:
- Back then US housing starts were booming (2¼ million per annum), a stock market bubble was taking place in Saudi Arabia, another one was forming in China, no one had heard of “Quantitative Easing” and there was no such thing as the iPhone.
- Today, US housing starts are moribund (around 1 million per annum), the Saudi’s have just been downgraded (a devaluation of the Saudi riyal is one of BofAML’s noted “black swan” events in 2016), Chinese debt deflation has reduced China’s “growth” opportunity set to babies, tourists & capital outflows, central banks have purchased a remarkable $12,400,000,000,000 of financial assets since Bear Stearns, and the iPhone now powers retail sales.
And here is the biggest difference: back then total debt/GDP was 61%, with total debt just over $8 trillion. Now, it is 104%, with the total US debt just shy of $19 trillion.
Good luck Fed.
So, what’s the problem?
Tonight I’m going to party like its 1929 !!!!!!
I think your question is rhetorical but I’m going to give my 2 cents anyways. You likely know more about this than me.
Debt is money.
When it comes to interest on debt..
Credit expands on way down. Contracts on way up.
Bonds are worth less as rates rise.
The Fed is loaded down with lots of paper at what will be lower rates.
At least that is the Cole’s notes version as I understand it. Maybe someone else with better grasp can have a go at it.
The Fed is an organization of bankers. Their chance of making a good decision is miniscule – for a good decision would reduce their power, influence and “wealth” (measured in currency, not money).
Politics and ideology prevent adopting von Mises economics and abandoning Keynesian economics – and that is the only “good” decision the Fed can make at this point. Once the currency collapses, they will give us all sorts of reasons they made the “right” decisions – which we can ponder, over our oatmeal (if we’re lucky).
The economy is like a quarter standing on edge and even a whiff of a rate increase could knock it over. Bonds become worth less; the Treasury’s interest payments go up; housing sales and all types of new loans will decrease. When the money train’s engine slows down, all the cars start banging around; when aircraft slow down, some hit stall speed and fall like rocks; when business slows down, it can start an unemployment landslide. Recession begets Civil Unrest begets hyperinflation begets Civil War.
Robert,
I don’t think civil war so much as civil unrest. You will have pockets of violence especially where it is most crowded, but I do not think there are a single large enough contingent vs another to make for a civil war. What will be really interesting is when violence breaks out on a larger scale than the government has had to contend with since the 1800s, how will the government react. How well will government apparatchiks follow their beholden government’s orders. Will the armed government thugs follow the orders of TPTB or will the form their own bands and protect themselves and their families. How widespread will the violence get. How far will the government let it go ie Baltimore. When shortages of necessary items flare up in certain violent areas will the government step in. As basic services start to break down what parts of the ruling class will flee. I never believed we would be confronted with the possibility of these types of situations, but it has become more and more apparent that something big and very bad is going to happen. I just hope to get my family out on the other side.
Bob.
Elvis is the #1 Greatest Ever musical acts of ALL-TIME.
Jubilee
And tonight at midnight the government runs out of money, again.
Having watched that Elvis clip, I’m thinking about growing some mutton chop sideburns and long hair like Elvis circa ’73. I still have the hairline for it. I already have the cape.