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555 Trillion Reasons Why Central Banks Won't Let Rates Normalize
The biggest question for most investors today is that whether or not rates will rise in 2015.
This question is focusing on the wrong issue: the economy. It should be focusing on the REAL issue: the bond bubble.
The Fed may raise rates a token amount this year, but the move will be largely symbolic. With over $100 trillion in bonds and over $555 TRILLION in interest rate derivatives trading based on interest rates, the Fed will not be normalizing rates at any point in the future.
Indeed, former Fed Chairman Ben Bernanke admitted this in private during a closed-door luncheon with several hedge funds last year. Bernanke’s exact words were that rates would not normalize anytime during his “lifetime.”
So the Fed may raise rates from 0.25% to say 0.3% or possibly even 0.5%. But we won’t be entering a hawkish period for the Fed by any means.
The reason is very simple… any normalization of rates would implode the bond market.
The fact is that much of the globe, particularly the developed west, is up to its eyeballs in debt. Mind, you, this is based solely on official public debt numbers. If you include unfunded liabilities, then the US, most of Europe, Japan, and even China are sporting Debt to GDP ratios well over 300%.
In the US, a 1% increase in interest rates means over $100 billion more in interest rate payments. The US is already running a deficit (meaning that it spends more than it takes in via taxes) and has been for most of the last 20 years.
Of course, the deficit could become larger to service the increase in interest payments, but with the US already having to resort to issuing NEW debt to cover OLD debt that is coming due, this is a slippery slope. The US issued over $1 trillion in new debt in an 8-week period for precisely this purpose.
The reality is as follows:
1) Bonds are the biggest bubble in history, dwarfing even the real estate bubble of the mid-2000s.
2) This bubble also encompasses the bubble in Central bank policy. Every single Central Bank policy is focused on maintaining the bond bubble and the TBTF banks with the greatest derivative exposure to it.
3) When the bond bubble bursts, entire nations will fail, as will the Central Banks themselves. Draghi, Yellen, Kuroda et al will do everything in their power NOT to allow the system that has put them at the top of the economic food-chain to collapse no matter what the costs for ordinary citizens.
4) Rates will only rise significantly ONCE the bond bubble bursts. There may be symbolic raises here and there, but with over $555 trillion in derivatives based on interest rates floating in the system globally, you can bet there will NEVER be a shock and awe interest rate raise.
5) This bubble, like all bubbles, will eventually burst no matter what the Central Banks do. When it does, everything about modern finance will prove misguided and based solely on the belief that Central Banks can control the system.
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In the past the fed would raise rates to control inflation. I wonder if that's going to be the thing to watch. If the fed can't effectively raise rates when inflation begins to become out of hand, won't that likely spark the fuse to pop this massive bubble? Things seem out of whack, so I'm just guessing like anybody else.
I could give a shit if they can only get .25% for government debt. Savers should still be able to get a decent return on savings without having to gamble. This financial repression sucks.
pheonix, dude, once again, stop being glib
it is the COMPOSURE of that $555 trillion interest rates derivatives that has meaning. Stop being lazy, do some serious investigative journalism, and then report back to us on what portion of that figure is triggered by a raise in rates. Otherwise, who knows, 95% of it could be triggered by rates STAYING AT ZERO
So if rates cant rise, just what happens to all those pension funds depending on it?
It's over. The Fed cannot control the long end of the curve at this point. It is imploding and will continue to sink to close to zero (like everybody else). And the very thing that the Fed wants to guard against, an inverted yield curve and an end to any long short duration carry trade will unwind. It is a tripple whammy, low yields everywhere else, a declining global economy and equity risk coming off. It is creating demand for treasuries along the entire yield curve.
The unwind is going to be massive.
Same goddamn ad over and over, and I get it in my email every damn day...
It makes me mad when I'm reading an article here in Zerohedge only to discover a 'Click here for a FREE copy!..bla bla bla' link at the end of it. Totally discredits the whole thing, was it written for the sole purpose of getting clicks and hopefully harvesting new customers? I feel like such a chump.
But hey, Zerohedge is just another web site among millions, out to make a buck, I know that, I just get suckered in sometimes. ....sigh.
You're new here right? This guy Graham Summers writes all of these pimpy (ones that pimp for clicks on another link) articles - he gets the redass so much here that he doesn't even sign off with his name anymore.
US Treasury bond rates are a controlled item. That "bubble" cannot burst. However, the rates on junk bonds can spike. The bond market for any instrument with default risk can blow up. The Euro can blow up as well if the European Union falls apart. That is a political risk.
My own view is that US Treasury rates will not rise significantly until there is world war. World war will bring full employment, and that will bid up the price of labor and bring on inflation. Until there is world war, the world will be in debt deflation, or a holding pattern between inflation and deflation. Commodity inflation can never bring about wage-price inflation because commodity prices can fall - just as oil has just done. Only full employment can bring on real inflation and force an era of rising interest rates. And that requires a very very big war.
Actually Central Banks have no control over Treasury rates which will soon start to rise astronomically.
Follow the blue route
http://www.globaldeflationnews.com/10-year-u-s-treasury-index-yieldellio...
I'll see your "Central Banks have no control over Treasury rates" and raise you 4 Trillion CTRL-P's.
True, if they cared.
So who will be thrown under the bus if and when rates go up, the MIC? The Free Shit and Medicaid (ObamaCare) Army? Those who actually paid into the SS and Medicare system? All of them?
Who has the least political influence, why it's those that actually paid into the system. They will get fucked first and hardest.
If they thought raising rates was possible and it was going to happen they would have already started a long time ago incrementally. They won't because their whole fiasco of unlimited government spending to stay in power at zero rates would be exposed.
Why can't a financial institution offer a higher rate than the 30yr treasury rate and scarf up all the business?
Rhetorical question.....they could.
But they are all greedy bastards that want to borrow at 1% and loan you money at 15%.
The federal reserve only sets one interest rate, I must conclude that the entire financial industry, neigh, they whole WORLD (except for a very few people) want it this way.
How many people really have enough money in the bank anymore to be missing out on a lot of interest income? 5% of the population? Less?
We are a society of debtors not savers now.
No one really knows how things will come apart. There is just too much complexity, it can never be unwound, or figured out. The only way to know what will happen is to do stuff, and sit back and wait to see what happens. There just IS no playbook for any of this.
TPTB are scared shitless...they hope they can stop anything big from happening, but they know it is unlikely. They can't fix it either. Right now all they CAN do is try to keep it from toppling.
So we are all in a 'holding pattern', waiting for them to wake up to the reality everyone else is aware of. We are like the hapless wife who has to watch and listen as stubborn hubby tries once again to repair the leaky faucet...we can SEE the thing is cracked, and will NEVER be fixed-it must be replaced. But hubby will exhaust ALL possibilities, including Krazy Glue and duct tape, before he admits it.
Meanwhile, we will have a nice big mess on our floor while he plays around and wastes everyone's time.
I swear to God, you just want to sneak up behind him with the wrench wrapped in a towel...
More like the hapless wife watches as her stubborn husband tries to find the natural gas leak by flicking his lighter in the basement.
ever notice there is more than one economic bubble( an amazing engine of an economy)...bubbles come with regular frequency...some conventional i.e. real estate......some not the Dot com of 99-00........bubbles have been with us for hundreds of years...... east china tea...tulip frenzy....tobacco........I believe the international banking cartel....an element of the ruling western elite......will combine forces with the east in closer fashion than before.........in an and attempt to manage and transfer from bubble to bubble in an international economic scale.......inflation...deflation...transfer...rinse and repeat......dont let convention in economic theory hold you back from bigger reasoning......knock those blinders off you untermensch plowhorse....lol
hope it happens in my grandchildrens life,..not mine.
I can live with that result.
Awww, how selfless of you.
Yikes. Why not simply toss the grandkids out the car window at 70mph on a busy freeway and get it over with?
Train the grand kids on "hit & run" insurgency tactics in preparation for a police state.
I would prefer it happens in my lifetime so that my grandchildren may have a better world in which to live and thrive. Assuming we make it through whatever catastrophe happens.
I haven't had children for this very reason. My contribution to the gene pool will go away but that's probably for the best anyway.
The names Bond, Bubblelicious Bond.
At some point somebody is gonna turn out their pockets and say "Sorry. I can't pay."
Thanks, you answered Stewie.
Counterparty insolvency risk - chain reactions - total exposure not quantified.
The only way to understand the consequnces of raising rates to the 500+T IR derivatives is to know the exact structure of those derivatives, which nobody do, not even the TBTF. As I understand the situation, those are private contracts and the banks will strive to maintain a market neutral position. So it's all fine and dandy to say "They can't raise rates becuse the IR derivatives would blow up the banks" but without facts it's only speculation.
Does anybody know the "facts"? Please do let me know if I am missing something...
The 'facts' are that much of the derivatives risk is mispriced. When everything is normal the odds of a loan going bad are known. When many loans go bad and you rely on an insurance agency to make good on an insurance policy and they've mispriced the price of the insurance to get you to pay a commission up front, then they won't/can't pay. And then you lose money from the insurance contract and your loans go bad which creates contagion and more loan and margin calls cascading throughout the system. All the chains are linked together as the anchor is released into the water to drag everyone down. Those are the 'facts'.
Right, the whole counter-party risk thing. Fair enough. But how do you know they mispriced those risks? They are private contracts! How do you know they will loose money if rates go up? Maybe they will make a fortune! We don't know what's in those contracts. How do you know contagion will occur? Maybe the payments will more-or-less cancel eache other out! See, we don't know squat, and we are just speculating.
The fact that tax payers are now on the hook for derivative looses doesn't mean there is impending doom. The Bernank doesn't see rates at 4% in his lifetime and Japan has been playing that zero game for decades. I wouldn't hold my breath...
Look at what happened with MBS insurance - that was just a fraction of interest rate derivatives.
"Normalized" rates would measure risk in the market place. We just can't have that!
Misuse of interest rate swaps, caps and collars are unregulated gambling. The fact that these "institutions" demand a bail out from taxpayers when the bet goes wrong is obscene beyond any moral standard and needs to end.
The problem is a lot of bonds qualify as junk, and for good reason. When those start falling apart it will take the bond market with it.
Taxpayers will be on the hook to back junk bonds all over the world then.