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How Janet Yellen Is Orchestrating Her Own 'Big Crisis' Moment

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Janet Yellen seems to be absolutely obsessed with increasing the benchmark interest rates in the USA as she desperately tries to put her stamp on her legislature as Chairwoman of the Federal Reserve. Even though the American economy definitely isn’t as strong as she thinks it is – the increases in employment are mainly due to part-time jobs which aren’t even sufficient to cover the costs of life – Yellen is determined to increase the interest rate which has been at a historical low since the Global Financial Crisis erupted (see next image).

Yellen Fed Funds Rate

Source: Trading Economics

This could have a devastating effect and in this article we will investigate the impact on a) the government finances and b) the stock market as a whole.

But first, allow us to start with a general remark. The past few chairmen of the Federal Reserve have always created their own crises during their tenure, only to try to solve those crises themselves to go out with a bang. Ben Bernanke said there was no bubble in the housing prices and a few decades before Alan Greenspan had to ‘solve’ the 1987 crash, only to create his own technology bubble in the 2000’s.

But, let’s go back to today’s situation. The Fed Funds Rate is at an all-time low and this results in lower borrowing costs for both the US government and the companies as the cost of debt is going down due to a lower risk-free interest rate. The interest expenses for the US government are now only marginally higher than 5 years ago, even though its total government debt has increased by 80% to $18T. The symbolic barrier of the government debt/GDP ratio of 100% has been reached a while ago, and now the risk of the snowball-effect is very realistic.

Yellen US Debt

Source: ibidem

So, let’s keep it realistic and assume the total borrowing cost for the US government will increase by 1%. Nothing shocking, just one miserable percent. That’s absolutely not outrageous as the current interest on the 10 year government bond is 2.27%, but was more than twice as high in 2007, when it topped the 5%.

10Y T note

If the interest rate increases by one measly percent, the US will have to pay $180B in additional interest expenses. $180B. That’s approximately $560 per American citizen but as not every American pays taxes (kids for instance have no income and can’t pay taxes), it might be a more useful exercise to see what the impact would be per American.

According to the St Louis Fed, there are approximately 205 million Americans in the ‘working age population’ category. So if the US government would push the higher cost of debt on the taxpayers, a working American would have to pay almost $900 per year in additional taxes. And that’s just to cover the increased interest rate and doesn’t contribute a single dollar to reduce the government’s budget deficit.

The $900 per working person will have to come from somewhere, so it means the consumption pattern will change resulting in a lower purchasing power per person, lower demand for products and this a higher unemployment rate. A higher unemployment rate would mean those who still are working would see their taxes increase once again, and yes, a vicious circle is born!

And it’s not just the public debt that is worrying us, but the corporate debt is also on the rise. Due to the low interest rates, companies have issued a record amount of debt. Not to make smart and strategic acquisitions, no. The majority of the debt was used to reward their shareholders with special dividends and share repurchases.

Yellen FactSet

Source: FactSet

Not only will that debt have to be repaid, it will very likely have to be refinanced as well. And yes, once the interest rates start to increase again, it will be much more expensive to refinance that existing debt. We tried to find out how much debt the S&P500 will have to repay before the end of this decade, and the results are shocking.

Yellen Debt S&P

Source: JP Morgan and Bloomberg

As you can see on the previous image, S&P 500 members will have to refinance approximately $2.5 TRILLION in the 2016-2020 timeframe. So if the interest rate increases by 1%, it will cost them $25B in additional interest expenses. But as the interest rates on corporate bonds usually increases faster than on government bonds, the damage will be much higher. A 1.75% yield increase means the S&P 500 companies will have to cough up almost $45B in interest expenses. Per year.

Let’s single out one company as an example. According to the most recent balance sheet, General Electric has $250B in debt on its balance sheet. If the company would see the cost of debt increase by just 100 base points, it would result in an $2.5B higher interest expense. If you’d use an 1.75% higher cost of debt, General Electric would lose an additional $4.4B per year in interest expenses, resulting in a 25% drop in the pre-tax profit! And how do you think the market will react if companies would start to report double-digit net profit drops?

Our bet: Janet Yellen is so obsessed with increasing the interest rates she doesn’t look at the bigger picture. The profit increases at the stock markets will come to a screeching halt and once the increased interest rate trickles down to the corporate debt market, most companies will see their profits drop by a double digit percentage.

Yellen will push the domestic economy over a cliff, will then do her best to save the world right before the end of her tenure to start a successful career in giving lectures, at $200,000 a pop.

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Sun, 07/26/2015 - 18:21 | 6356845 honestann
honestann's picture

The federal reserve has no intention of raising rates.  Their endless claims they want to and "will soon" are merely BS to back up their HUGE LIE that the economy and unemployment are improving.

The collapse is happening so fast now, by September NOBODY will be talking about raising rates.

Sun, 07/26/2015 - 15:44 | 6356428 lasvegaspersona
lasvegaspersona's picture

I wonder if this is the central bank's way of telling the administration that it's number are bullshit. 'You say you've got 5.3% unemployment?...great. we'll raise rates to keep things from overheating'

....though I can't really believe even the CB could be considering those number real.

As things get near the end some kind of story could be being told...we will have to have some explanation for the greatest crash in history that 'no one saw coming'.

...cue the next  'Peter Schiff was right' reel.

Sun, 07/26/2015 - 15:39 | 6356414 Contrariologist
Contrariologist's picture

Two things to point out (errors in thinking which seem to be prevalent, even on ZH):

1. Republicans are not the answer (nor are Democrats, but the ZH crowd seems to be solidly ensconced on the rightward edge of the political spectrum). Quick: name the last Republican to reduce federal spending. Answer: Ha! There never has been one since the modern Republican Party came into existence.

2. Welfare and social spending are not the problem (I see all too many "if only we stopped all the entitlements" bromides on ZH). Quick: how much would be cut from the budget if all non-Social Security/Medicare payments ended? Answer: about $120 billion per year. That's little more than a rounding error in the current federal annual budget.

Why leave out Social Security/Medicare? Well, at least they are (mostly) self-funded by specific taxes. If we returned Social Security to its roots (benefits for retirees), increased the retirement age a bit, reduced benefits to be actuarially sound on a 75 year horizon, and had some "means testing" (all things which AARP retirees are in favor of, by the way), then SS and Medicare would be fine.

So, what needs to be slashed, quickly, to make things work: Military. There is no sane reason for the USA to be spending more than THE REST OF THE PLANET COMBINED on military. The terrorist threat? What a fucking joke. It is a myth. Stop killing people all over the planet, stop being the biggest bully ever on the world stage, and the terrorist threat (at least towards the USA) totally DISAPPEARS.

Sun, 07/26/2015 - 15:29 | 6356386 g speed
g speed's picture

Rates to borrow will rise without the FED---the FED is following the market--- they will raise--they will not QE again in this decade-- 

corporate buy backs are the FED divesting equities ( the other side of the trade). When the corp buy backs are finished FED will raise. 

Other world currencies are easing--the FED is ahead of the curve--Helicopter Ben went abroad to talk up the easing and when the others started the FED slowed down. 

Although pensions in Illinois are involate (at least for now) the US pensions are not--neither is SS. The majority of unfunded liabilities are pension, welfare, and medicare related. Those are only promises to fund -not debt owed.

Anyone that thinks value has something in common with price is living in a dreamworld. The big equity casino is price equivalent, VaR not withstanding. Shares outstanding, volume, underlying fundamentals, honest price discovery and market participation are moot. Price manipulation reigns supreme. The number of shares times price of shares on any asset side of the sheet now determines the health of the entity--not EPS, not sales, not revenue. The reported bottom line is reduced to a fudge factor. Funds of any type are the most abusive of this process. ETFs enjoy a complete disconect from their underlying.

Bonds will not un-default with QE.  Ratings are arbritrary and are what governs marginablity. Bonds which cannot be sold can be held to maturity. 

Commodities have become speculators hedges and margin collateral--very little to do with the use of the actual commodity itself. Taking  delivery rises and falls with the economic need---price does not--the old saw supply and demand effecting price is a thing of the past. 

The currency wars that are going on require a less valuable currency for exporting countries and a more valuable currency for debt paying countries. Needing to both pay a sovereign debt and export is untenable. Those countries have a falling standard of living. And because of the global market a falling tide lowers all boats. 

During the last few years didn't the FED corner the market on the mid term T bond?  A buy and hold stratagy? A Tbill price support? 

IMHO--QE has nothing to do with the economy and the FED will not use the "mandate of jobs" to govern its decisions on rate. Rate will have everything to do with the strength of the dollar going forward and thats the main interest of the FED

 

Sun, 07/26/2015 - 15:01 | 6356297 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

 

 

Once the shears are all sharpened, and the sheep are in the corral, it's time to shear.  This rate hike could be the trigger for a generational buying opportunity, by exacerbating an already deflationary trend.

When the "click" gets their "buy signal", they'll deploy their free/cheap fiat reserve war chest and gobble up commodities & distressed assets.  Once they've blown their wad into the economy acquiring hard assets, they'll

bide there time waiting on the wad to wend it's way through the system, picking up velocity, priming the pump---till the "sell signal" is given.  Wax on , wax off.  Riding the wave of credit boom manipulation through the

ages.  Inflation & disinflation, the millstones used to grind our bones to make their bread.

Sun, 07/26/2015 - 14:53 | 6356281 DaNuts
DaNuts's picture

$560, Not such a bad price for war on terror, war on drugs and any other wars ya can't win.

Think of it as an interest free loan, for the moment at least.

Sun, 07/26/2015 - 14:03 | 6356168 stock market loser
stock market loser's picture

Why does ZH attract so many matrix zombie christians?

Sun, 07/26/2015 - 22:50 | 6357065 monad
monad's picture

Those are the governments and religious orgs trolls sent to bloat threads, discredit embarrassing truths with tinfoil hat astroturf and confuse issues. Apparently these are the qualities of the best and brightest overpaid janitors that sleazy PACs: government agencies, corporations and corrupt churchs can find.

Sun, 07/26/2015 - 11:22 | 6355696 ThrowAwayYourTV
ThrowAwayYourTV's picture

So does this mean I'll be able to back out of my friggin driveway on weekends?

Sun, 07/26/2015 - 16:13 | 6356508 RaceToTheBottom
RaceToTheBottom's picture

Location, location, location.

"There is not a better time to buy than right now".

Sun, 07/26/2015 - 12:18 | 6355856 Uchtdorf
Uchtdorf's picture

Please, back into your driveway when you get home. It's for the children.

Sun, 07/26/2015 - 10:05 | 6355466 lester1
lester1's picture

You can't outsource good paying jobs for 30+ years and think everything will be OK economically. We are experiencing the end of failed trickle down Reaganomics. Main street is flat broke. The country is heading for a major economic and financial crash due to what the sellout politicians and oligarchs have done to rape the USA.

Sun, 07/26/2015 - 09:33 | 6355405 Retired Guy
Retired Guy's picture

On the other hand, bad news for borrowers is good news for savers. I myself would spend new interest income. That would be good right?  Isn't GE in the lending business? Wouldn't that 25% profit loss be mitigated by increased interest income?  Staying on ZIRP leads to an ever darker place. Getting interest rates back to 'normal' is the right thing to do.

Sun, 07/26/2015 - 09:16 | 6355362 Not if_ But When
Not if_ But When's picture

This is what happens when you replace free market capitalism with oligarchy.  I suspect each and every S&P 500 CEO (and all banksters, etc) will escape with nothing but riches before it comes crashing down on the rest of us

Sun, 07/26/2015 - 09:15 | 6355359 Herdee
Herdee's picture

Higher interest rates mean less Corporate taxes paid to the Government since interest is used in calculating tax write-offs.Again,where's the Government going to get the money from when it pays higher rates on deficits itself?They're "boxed-in" because of structural problems and demographics.It is not just a Federal problem,it is at State,County and Local levels.Most towns and cities are bust.The neo-cons won't change an aging tax system to keep Corporations spending at home.They have a strategic geo-political problem with world military spending along with propping up their crooked foreign friends running these countries.The prison system along with the legal system iseating into the budget.It is too easy to sue in America and is bad for business.The social problems creating the prison system go unanswered.The infrastructure of the country is aging.The root of the problem is in spending around the globe,not at home.It is a domination mentality going knowhere fast and has resulted in America's Government secretly depending on funding itself from world drug trafficking operations.You have a corrupt Federal Government system that is against its own "People".

Sun, 07/26/2015 - 23:06 | 6357594 monad
monad's picture

When he was first elected I wrote President Obama a letter of congratulations. His administration responded with a 90% redacted promise to kill me because I'm a white American. I could not believe it, but I learned.

I slugged mud with black Americans. I with black Americans fought messican mafia on the street.

I should have killed the lawyers.

There is still time...

Sun, 07/26/2015 - 08:49 | 6355312 quasi_verbatim
quasi_verbatim's picture

I fail to see how popping the Fed Rate 25 bps one month and then stopping the pop the next month will save the world, but then I'm not a central banker.

Sun, 07/26/2015 - 23:02 | 6357575 monad
monad's picture

It proves there is no free market here.

Sun, 07/26/2015 - 11:00 | 6355608 philipat
philipat's picture

Trying to restore credibility perhaps? Although they have now been talikng about a 25bp increase for over 2 YEARS now. Fortunately, all the Wall Strret players who control the "Markets" are Fed insiders who won't cross The Fed because then the Free money would stop? But to any intelligent thinking person, it astounds me that The Fed could have ANY credibility left at this point. Maybe time for a new "Creature"?

The existing "Creature" will increase rates by 25 basis points then yell(en) out loud that THAT IS IT. Then wait for the equity "Markets" to react and then rapidly introduce QE4. So, again, where is the credibility in that? It's just another total admission of failure by The Fed, isn't it?

Sun, 07/26/2015 - 10:40 | 6355570 Bluntly Put
Bluntly Put's picture

That's a problem of their own creation. Since they determined to become the origination of rates for the entire market, they need room to lower rates in the future to stimulate the economy. The fed and banking cartel sort of took it upon themselves to become the engine of the economy. Capital markets are for price discovery and capital formation, they do not lead the economy even though your average american may in fact think they do from years of media propaganda.

If you subtracted debt increase from overall economic productivity you would see that nearly every year the US economy has not seen actual growth. When they calculate GDP they include government spending in the calculation, which is entirely consumptive and has no productive component to the economy plus they include deficit spending in the GDP calculation. That means to maintain their phoney growth numbers they need to continually lower interest rates over time to be the engine of the economy since they don't want a free market or people's choices as demand to determine market winners and losers. This entrenches fat elitist corporations and friends of ivy league graduates.

Now that the fed as been at zero bound credit origination rates for nearly 7 years they realize when the next downturn or recession comes along they will not have any room to lower rates to provide their artificial gas to the engine (banks) and thus the economy. So, they are in a box, they need to raise rates at least a little so when the next recession hits they can lower them again and move the economy forward a little and report some phoney GDP increase.

Think of the economy as a corpse propt up by steel frames and mechanical systems, it needs gas which is the below market rates of credit created by the fed, all unsecured lending. It is a zombie economy kept alive by ever cheaper rates.

Sun, 07/26/2015 - 12:51 | 6355934 Herodotus
Herodotus's picture

There will be no improvement in the economy until the debt is repudiated.

Sun, 07/26/2015 - 23:01 | 6357573 monad
monad's picture

Herodotus is the new Greek.

Sun, 07/26/2015 - 10:24 | 6355519 KnuckleDragger-X
KnuckleDragger-X's picture

Nothing Yellen can, or will do is going to make anything better. America's problems are systemic and won't be fixed by the people who caused the problems in the first place. The writer of this article needs to cut back on the hopium......

Sun, 07/26/2015 - 08:39 | 6355293 Fukushima Fricassee
Fukushima Fricassee's picture

Troll man Jew is in over its head. Just to hear it speak is excruciatingly painful.

Sun, 07/26/2015 - 11:03 | 6355628 philipat
philipat's picture

Why does ZH attract so much anti-Jewish comment? I'm not in favor of Israeli policy towards Palestine but that is not the same as being anti-semitic.

Sun, 07/26/2015 - 22:55 | 6357558 monad
monad's picture

Look out for the jews hanging out jews as bait. Clean this:

http://iamthewitness.com/

http://www.sweetliberty.org/issues/wars/

...and much, much more.

Sun, 07/26/2015 - 11:50 | 6355774 mvsjcl
mvsjcl's picture

Not all zionists are jewish. We generally vent our spleen against the zionist agenda.

Sun, 07/26/2015 - 23:00 | 6357568 monad
monad's picture

Go to Hell.

Do NOT follow this link or you will be banned from the site!