OK I have to say: I've just heard too many times how the fed won't let interest rates go up because they can't. I hear it over and over and over again from people who I personally know to have zero clue about economics. And oh are they forceful about this mal-informed opinion. But to read it on Zerohedge drives me over the edge because "Tyler Durden" should know better. It's one thing to say that things will get bad WHEN interest rates go up. That I would whole heartedly agree with. But to make the statement that because things will be bad when that happens that it in fact cannot happen, well gee.
So let me put it like this folks. You are in a 747 airplane. You have been flying for a long time and you are out of gas. There are 350 souls aboard and nowhere nearby to land. The engines are flaming out and you have throttles set to 110% yet the aircraft is slowing down and nosing down. When that airplane hits the ground it will explode and everyone will die. Period. Does this mean that it CAN'T? Hogwash! It can and in fact it will.
The feral reserve is not God. It is the wizard of Oz. It is shock and awe and show. You either are afraid of it and move in the direction that it wants you to move or you pull back the curtain and come to the realization that Greenspan, Bernanke and Yellen are nothing but confidence game operators. Interest rates are NOT set by the sellers of debt. They are NOT set by decree of the feral reserve. They are set by BUYERs of US debt. If no buyers show up then the interest rate bid must be raised in order to attract some buyers. It's as simple as that. If 1% begins to fail to garner interest then it will be 2%. And if not 2 then 3. In fact, it had to go up well over 13% in the 80s in order to find any buyers.
So this whole rant about what the feral reserve will and will not "allow" is such crap that it makes me want to scream. But Cap'n, they tell me, the fed can just print more money and buy more treasuries and in this way they can keep the rates low. Well, it all sounds good on paper but as the monetary base rises so does the price of copper and and steel and beef and energy. Sooner or later you have McDonald's employees participating in rallies and demonstrations and then later on they either walk off the job or stay on the job and sabotage the place.
Folks, if we could reliably and forever print up prosperity out of thin air then we would all be billionaires. A con job appears to work FOR A WHILE but it cannot work forever. Stop believing the hog wash that the feral reserve is God and omnipotent because we will soon observe it foundering around like a fish out of water, not knowing what to do next. Then the confidence will first melt and then evaporate like ice in Hell. Once that goes then interest rates will skyrocket just like they do in any other despotic $hit hole where the central bank con men lose control of their debt (bond) market. No, people, it will not be different this time. It will be the same because it is the same. Just because things have been going in a certain direction for a long time does not mean that the laws of economics have been suspended. Distorted? Absolutely. But when they snap back they will leave a mark. Or perhaps I should say they will leave a Mark and a Patsy.
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8 comments:
Captain,
We disagree on the mechanics of the interest rate, but we're in total agreement that the "ZIRP forever" policy being set in stone, is absurd. The major banks have pretty much realized most of the gains from ZIRP and will at some point relish the idea of higher rates in order for them to further squeeze the population and collect even higher economic rents than they already do. Will it wreak havoc on the population and emerging markets? Of course, but the banks don't serve either of those interests.
Cap'n,
Off topic, but wanted to share... curious as to your take.
Harvey Organ- By December Whole Thing Going to Collapse
http://youtu.be/aZwSiHBxm0c
Do you have an email address you would not mind sharing?
Steven B
Chance, the only power that banks have is the power of the con. The con people into going into debt whereby the people pay interest on a loaned asset that was never earned by the loaner. This is what bank credit is in a fractional reserve system. Higher interest rates are not good for anyone in the military industrial complex. It means a slower economy, less ability to collect taxes, less loans being taken out and much less overall interest paid. It also means a decline in value of assets held by the banks, insurance companies and other financial institutions. Finally, it means a collapse in living standards that lead to civil unrest. If you think bankers will be happy about higher interest rates because they can make some kind of a killing by this eventuality then please rethink. They will be lucky not to get dragged into the streets and killed by the civil unrest it will cause.
Steven B, I agree with most of what Harvey Organ said with the main point being that the US is running a fractional reserve gold scam. I agree the leverage is very high, 100:1 does not shock me at all. Keep in mind that fannie and freddie are leveraged 70:1 as a known fact. So the US government is no stranger to massive, massive leverage.
But this Harvey guy probably doesn't know the timing of the scam of the collapse any more than anyone else. Scams can run a lot longer than anyone can imagine. Also, Harvey's interview is just loaded with speculation. His body language also tells me that he is filling in fact gaps with speculation.
I prefer to look at the wave count to do market timing. The best wave count right now says that gold is now in a 5th wave down (5 of A) which should bottom out around $1000-$1100. Then we should see a big, big rally to at least the 38.2% fib, perhaps the 50 fib and possibly the 61.8% fib. But after that (and this is really looking into the future...), the wave count currently expects another wave down, the C wave.
Of course the wave count can change. But if the goal is to know when a major change is coming then we should see any changes coming.
Captain,
Modern banking is even worse than what you describe. People aren't paying interest on a loaned asset. They're paying interest on credit that was created out of thin air. Banks aren't constrained in their lending by reserves. They make the loans and then get the reserves from the Fed later. The Fed provides liquidity whenever needed.
The Fed isn't God when it comes to the amount of credit created, and the velocity of money. But they are God when it comes to the interest rate. The Fed has always hit their target Fed funds rate (post gold standard). Even in the 80's when the rate went up to 13% as you mentioned, this was due to Fed policy. It was Volker that pushed the rate to that level, not market forces. Higher interest rates add more currency into the system. Since there are big incentives for net saving (IRAs, pension funds, incentives to business for holding currency reserves), the net savers are going to have currency rained on them for doing nothing other than holding currency at the 13% rate.
I should have been more clear, I don't think bankers are going to lobby to push interest rates up to the point of civil unrest. I think they might over time, persuade the Fed up to like 250-300 basis points. Like I mentioned before, this will hurt some people. Enough for civil unrest? I have my doubts. Under the current system the natural rate of the Fed funds rate is zero. The Fed uses treasuries and interest on reserves to push up the overnight rate to hit whatever target it decides upon. The Fed/Treasury/Congress coalition is the monopoly issuer of net financial assets. They set the own rate.
I'm a punk rock classical liberal, so do I agree with that system? No. But it's still the system regardless.
Cheers Captain!
Chance
Hey Chance,
Your statements about the federal reserve controlling interest rates are indeed common wisdom but are factually wrong in that the fed does not own the interest rates. It instead follows the markets. Bob Prechter has proven this with real historical data many times but here is a short video for you to see for yourself.
http://www.elliottwave.com/freeupdates/archives/2014/06/24/Interest-Rates-Think-the-Fed-Is-in-Control-Think-Again..aspx#axzz3D8S9ZFiE
What really happens is the fed tries to appear omnipotent but trying to influence interest rates while in reality being a fast follower of the market. The market moves the rates, the fed then matches the move in order to fool the population into thinking that the fed is in control. Don't feel bad, lots of people are fooled by this con job.
Captain,
Appreciate the link, I'm going to look at it closely when I'm off shift and can devote the necessary attention.
But one quick point:
You're arguing that the it's the market that has demanded that the Fed funds rate be at 25 basis points since 2008? The Fed is just jumping in front of the market parade and acting like they're leading it?
Is it the market that has demanded the overnight rate be 10 basis points in Japan since 2008 despite the absolutely schizophrenic economic policies that country? Is Japan's central bank a different kind of animal perhaps?
Appreciate you letting me bounce ideas off of you!
Chance
Hey Chance,
Because of your interest (no pun intended) in this topic, I will write a post about it. If you have these questions still then many others will too. It it I who appreciate the comments of others on this blog!
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