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Three Huge Reasons Why the Fed Cannot Let Rates Normalize
The Fed continues to dangle hints of a “rate hike” in front of investors… but the reality is that as far as any significant raise in rates, its hands are tied.
True, the Fed may raise rates from 0.25% to 0.3% or possible even 0.5% sometime in the next 24 months… but these moves will be largely symbolic.
There are three reasons for this:
1) There are over $555 trillion in interest-rate based derivatives trades sitting on the big banks balance sheets globally.
2) The US Dollar carry trade is over $9 trillion in size.
3) Many Western welfare states would go bankrupt if rates normalized.
Regarding #1… the Fed cannot risk a significant rise in rates, as doing so would potentially burst the bond bubble. Bonds have been in a bull market for over 30 years now. Today, globally the bond market is over $100 trillion in size. And there are over $555 trillion in derivatives that trade based on these bonds.
This is why former Fed Chairman Ben Bernanke admitted that rates would not normalize anytime during his “lifetime” during a closed-door luncheon with several hedge funds last year. For rates to normalize (meaning rise to the historic average of 4%+) would trigger a derivatives implosion. Bernanke knows this. And current Fed Chair Janet Yellen knows it too.
Given that ALL of the Fed’s actions over the last seven years have been devoted to propping up the insolvent big banks (insolvent due to their massive derivatives portfolios), the Fed cannot and will not risk any interest rate surprises.
Regarding item #2 (the US Dollar carry trade), there are over $9 trillion in borrowed US Dollars sloshing around the financial system. These are effectively US Dollar (shorts) as when you borrow in one currency to fund a carry trade you are effectively shorting that currency.
US Dollar deposits yield 0.25%. The Yen yields 0.001%, while the Euro yields negative 0.2% and the Swiss Franc yields negative 0.75%.
In simple terms, the US Dollar is extremely attractive as a store of value relative to most major world currencies. This is why capital has been flowing into the US Dollar, pushing the US Dollar to a 10 year high.
The flip side of this is that every upward move the Dollar makes against other currencies puts more pressure on the $9 trillion worth of US Dollar carry trades. This is why the US Dollar’s rally has been so aggressive: because much of it was carry trades blowing up forcing traders to cover their US Dollar shorts.
On that note, the US Dollar is currently breaking out against most major world currencies.

This is already a big enough concern that the Fed has been mentioning it in FOMC communiqués. Any rate hike will only INCREASE the interest rate differential between the US Dollar and other major world currencies… which in turn would drive even more capital to the US Dollar… and put even more pressure on the $9 trillion US Dollar carry trade.
Finally, regarding #3 (the impact of interest rates on welfare states)… it is no secret that most western nations are bankrupt due to excessive social welfare expenses. Most nations rely heavily on the bond markets to fund their social spending patterns as tax revenues don’t come anywhere near enough to cover them.

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. As the above charts who, most Western developed nations are in similar situations.
If the Fed began to let rates normalize it would render numerous nations insolvent. Every asset under the sun trades based on its risk relative to Us Treasuries (the so called “risk free rate”). If US yields rise, so will yields around the world.
And the world cannot afford that.
In short, the world is awash with debt. The bond market has ballooned up to $100 trillion in size. And most nations are struggling to service their debt loads even with rates at historic lows.
At some point, the bond bubble will burst. And when it does, entire countries will go bust.
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Most likely all the central banks have to do is disappear a bunch of debt for which insufficient money exists in the world. Thanks to the miracle of compound interest, there is a lot more debt in the world than there is money to pay it.
Once back in balance they could restart their cycle of usury.
they certainly have the ability to raise rates with ease what they lack is anything resembling testicles.
It would be interesting if China opened up and started giving 3-4% on its CDs or Bonds. Would there then be a flood of money out of these low yield accounts to China? What result?
The real reason for no rate hike is to prevent a massive deflationary episode followed by a hyper inflation. Taxation and interest rates can serve as monetary tools, in fact that's all they are. We are at the end of a long cycle with debt levels poised to swallow everything, just a matter of when.
Anyone who thinks the economy is in the toilet hasn't looked through the "free" section of Craigslist lately. TV's, furniture, household items .. everything you need to outfit an apartment if you're starting out .. all FREE ! Heck, there are entire business models succeeding on the predicate of people DONATING their cars. Face it. Debt money works. When money is essentially free, every conceivable investment opportunity gets funded. The economy is then at full strength. You just can't use money as a store of wealth anymore. It is simply a means of exchange. Japan has had zero percent interest rates for a generation. That was the test. It succeeded. Now the rest of the modern world can enjoy the same. Free money, Bitches. Get over it.
My theory of why central bankers are intentionally fucking up the global economy:
http://s2.dmcdn.net/K0E4/526x297-Wj-.jpg
I suspect the idea that: 'US govt can not afford real interest rates' is wrong.
The Fed is already monetising everything, so monetising extra interest charges would be trivial for them.
For private borrowers....now that is a different problem. The RE bubble, and stock market would crash - but maybe that is the plan. Blood in the streets is the ideal time to pick up new assets at a price that is a fraction of their real value.
Real estate floats on a sea of debt. All this debt and leveraging will come to a spectacular end. When and how is anybodies guess. Stocks, bonds, real estate, even cash could get wiped out (made illegal cashless society). A socioeconomic cataclysm will hit. I have no idea what things will look like, but I know gold is sound. The truest form of money there is. I don't think this message can be repeated to often. Yet gold flows East!
"!Many Western welfare states would go bankrupt if rates normalized."
Funny, that would imply they are not bankrupt yet. Now strange that one might think they are not.
There is a temporary "fix" coming, but the people don't want it. TPTB are just waiting to soften up the people.
Go Trump!!
It is tax law that make the argument right and they can be changed... Ask Hillary.
+ 10
Yep, they are literally selling their book, so the +10 is for this:
"US Dollar deposits yield 0.25%. The Yen yields 0.001%, while the Euro yields negative 0.2% and the Swiss Franc yields negative 0.75%.
In simple terms, the US Dollar is extremely attractive as a store of value relative to most major world currencies. This is why capital has been flowing into the US Dollar, pushing the US Dollar to a 10 year high."
This is why rates simply cannot go meaningfully higher, pretty much ever................
LOL, 6 years as Zero and that's enough time to recover from a Fraudulently induced Ponzi Scheme.
Even if they rose 1 basis point !! per week,(1 / 100 of 1% ) eventually you are going to break the Camels Back. That 18 Trill becomes unservicable, which means the Gov will have to borrow even more money to pay down the debt.
Todd "Bubba" Horwitz says that Bernanke had a chance to raise rates but didn't and let traders take over and says The Fed daytrades the markets.They won't even raise rates this year,it's extend & pretend with all the members feeding the public a line of interest rate rise bullshit imo.
http://www.kitco.com/news/video/
I have said it before, the Fed will NOT raise interest rates until Obama is out of office. If Ted Cruz wins, the day after he takes office expect the fed to raise rates back to 5% overnight. Showing what a terrible idea it is to elect a fiscal conservative.
Understand?
Now go back to sleep.
That is dark.
But accurate.
But if Trump won they would raise to 20%. Hillary will yield NIRP at -5%
Reason #6: Every 1% rise in the borrowing rate for US debt increases the budget deficit by $180 billion. A 5% rate increase, which I believe gets us back to "normal" means a cool $900 billion in additional interest costs. Whoever's the Pres at that time, along with Congress, pitches one hell of a hissy fit when that happens, plus the Fed probably says something about bad fiscal policy on the part of the goernment.
I'm guessing a nominal 0.25% rate increase that causes the market to shit its collective pants, followed by a 0.5% rate cut. LOL. They'll get us into European negative rates soon enough.
Everyone will raise interest rates when the world goes cashless in about 10-15 years.
Then everyone will have no choice and no say so when the automatic "bail-ins" occur. No bank runs. The banks will have end-runned YOU.
Once the world goes cashless in about 10-15 years....that's it. It's all done. They will be able to do whatever they want. And so will their whores in the halls of power everywhere from the E.U. to China and to the good 'ol U.S.S.A.
The ECB and BoJ ramped up QE after the FED 'quit' in Oct. They're just taking turns. FED QE again within a year. There's an election coming up.
If the economy was healthy and balanced we would not be experiencing slow growth while massive amounts of money are being printed and poured into the system. The crux of our problem remains in the fact that both people and governments have lived beyond their means by taking on debt they cannot repay. Over the last several decades we have created entitlement societies built on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances.
Promises were made on the assumption that the advantages we enjoyed would continue in both Europe and the US. Ever greater prosperity and entitlements were to be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about evermore growth. Debt does matter and the following article delves deeper into why kicking the can down the road will ultimately fail.
http://brucewilds.blogspot.com/2014/08/modern-monetary-theory-is-wrong-d...
"slow growth" -- So, you are yet another asshat that believes growth can go on forever in a world with finite resources? Yes, some humans will go on to do great things, but the carrying capacity of the planet is what it is, so most humans will not...
No point in reading your bullshit as you have no credibility. same as it ever was...
An amazing summary. Other than lunatic Sweden, do you think Western nations see mass immigration as a (partial?) solution to this? They love it so.
Reason #5: Charging interest is un-Islamic. Maybe paying interest is, too.
Reason #10 through 99: Wishful thinking on the part of the bag holders--
Perhaps Raising QE will do the trick. lol.
Reason # 4: Raising rates when an economy is in recession isn't that smart I quess. ;)
Yes, they'll start raising rates in about 24 months...no maybe 36 months, or possibly 48 or 72 months to be safe.
They'll get back to you when the time is right, I'm sure.
Raising rates is another way of saying paying people to save.
The FED's purpose is to pay Wall Street and punish savers.
Therefore, ZIRP and QE to infinity, and some talk.
"Reason # 4: Raising rates when an economy is in recession a depression isn't that smart I quess. ;)"
Fixed. ;)
What is this normalized talk? The current rates are normal for a country 7 years into a depression with no signs of recovery.
Solution: Pay off all the people expecting "Social Policy" money from the welfare states in newly issued government bonds. Problem solved.
Solution: War, with attendant debt cancellations as countries are conquered. Unfortunately, that's what resolves this.