The Fed & Interest Rates: The Nightmare That Will Not End Nicely…”This is the classic battle between DEFLATION and INFLATION. This is the essence of BIG BANG.”

Wednesday, June 3, 2015
By Paul Martin

by Martin Armstrong
ArmstrongEconomics.com
June 3, 2015

QUESTION:

Mr Armstrong;

You have written that the Federal Reserve remains on track to raise interest rates later this year and this will accelerate the capital inflows driving the dollar higher. You previously warned that this will also set off further defaults in emerging market debt and you have also said that the pension funds desperately need higher rates to survive. But higher rates will blow up the government budget. This seems like a real mess. Is there any way out of this nightmare?

Thanks

JF

ANSWER: NO, this is all inevitable. The Fed will be forced to raise rates, and both Congress and the media will blame them for not raising rates sooner and for creating an asset bubble. They will have no choice because that is their job, as expected from the public at large. Even in Australia and Canada where there are real estate booms going on in Sydney and Toronto, criticism is rising attributing the booms to low interest rates when in fact it is foreign capital inflows that have some calling Canada the new Switzerland. The problem is always blinders on with analysts who only see everything domestically and are ignorant of international capital flows. They play with government budgets and money supply and attribute everything to domestic consequences. They help to keep the majority the victim in these major international events. We have asset bubbles in property that will be blamed on low interest rates when it is driven by capital flows. The Chinese are the biggest ticket buyers in US property while Canadians are the biggest buyer in the number of properties in the United States. So just like the 1987 Crash caused by the G5 currency manipulation, the domestic analysts always turn out to be the fool since they cannot see the wildcard coming in from the outside.

The Fed will have to act regardless of the impact upon the Federal budget. They raised rates under Volcker to insane levels, despite the fact that it raised the national debt from $1 trillion to $6 trillion on interest rates alone. So, the budget has NEVER prevented the Fed from raising or lowering interest rates in the past. However, raising rates in this environment will cause national debts to explode. This is the Fed now trapped and this is what central banks are scared about. They have lost control and the old theories are collapsing. The desperate move is to tax money, eliminate cash, and go negative on rates but that too would compel selling of government debt producing the same net effect as raising rates – eventual monetization. Negative rates will compel the central banks to buy the debt when private entities will not while raising interest rates will explode the deficits. Either way leads to monetization. Manipulating interest rates is its only real tool. Buying in paper as in QE1 to 3 is indirect and there is no guarantee those who sell them the debt are domestic holders so the stimulus leaves.

This is the classic battle between DEFLATION and INFLATION. This is the essence of BIG BANG. Governments have become addicted to low rates that it has reduced their interest rate expenditures, creating a false sense of budgets under control. When rates start to rise, that is when capital will shift from PUBLIC to PRIVATE to get away from insane government debt. That is where rates would normally rise with no bid.

The Rest…HERE

Leave a Reply

Join the revolution in 2018. Revolution Radio is 100% volunteer ran. Any contributions are greatly appreciated. God bless!

Follow us on Twitter