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Why The Fed Has To Raise Rates
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
No empire has ever prospered or endured by weakening its currency.
A great many insightful commentators have made the case for why the Fed shouldn't raise rates this month--or indeed, any other month. The basic idea is that the Fed blew it by waiting until the economy is weakening to raise rates. More specifically, former Fed Chair Ben Bernanke--self-hailed as a "hero that saved the global economy"--blew it by keeping rates at zero and overfeeding the stock market bubble baby with quantitative easing (QE).
Now that the Fed isn't feeding the baby QE, it's throwing a tantrum.
On the other side of the ledger is the argument that the Fed must raise rates to maintain its rapidly thinning credibility. I have made both of these arguments: that the Bernanke Fed blew it big-time, and that the Fed has to raise rates lest its credibility as the caretaker not just of the stock market but of the real economy implodes.
But there is another even more persuasive reason why the Fed must raise rates. It may appear to fall into the devil's advocate camp at first, but if we consider the Fed's action through the lens of Triffin's Paradox, which I have covered numerous times, then it makes sense.
The Federal Reserve, Interest Rates and Triffin's Paradox
Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012)
The core of Triffin's Paradox is that the issuer of a reserve currency must serve two quite different sets of users: the domestic economy, and the international economy.
Those who argue the Fed can't possibly raise rates in a weakening domestic economy have forgotten the one absolutely critical mission of the Fed in the Imperial Project is maintaining U.S. dollar hegemony.
No nation ever achieved global hegemony by weakening its currency. Hegemony requires a strong currency, for the ultimate arbitrage is trading fiat currency that has been created out of thin air for real commodities and goods.
Generating currency out of thin air and trading it for tangible goods is the definition of hegemony. Is there is any greater magic power than that?
In essence, the Fed must raise rates to strengthen the U.S. dollar (USD) and keep commodities such as oil cheap for American consumers. The most direct way to keep commodities cheap is to strengthen one's currency, which makes commodities extracted in other nations cheaper by raising the purchasing power of the domestic economy on the global stage.
Another critical element of U.S. hegemony is to be the dumping ground for exports of our trading partners. By strengthening the dollar, the Fed increases the purchasing power of everyone who holds USD. This lowers the cost of goods imported from nations with weakening currencies, who are more than willing to trade their commodities and goods for fiat USD.
The Fed may not actually be able to raise rates in the domestic economy, as explained here: "But It's Just A 0.25% Rate Hike, What's The Big Deal?" - Here Is The Stunning Answer.
But in this case, perception and signaling are more important than the actual rates: by signaling a sea change in U.S. rates, the Fed will make the USD even more attractive as a reserve currency and U.S.-denominated assets more attractive to those holding weakening currencies.
What better way to keep bond yields low and stock valuations high than insuring a flow of capital into U.S.-denominated assets?
If stocks are the tail of the bond dog, the foreign exchange market is the dog's owner. Despite its recent thumping (due to being the most overloved, crowded trade out there), the USD is trading in a range defined by multi-year highs.
The Fed's balance sheet reveals its basic strategy going forward: maintain its holdings of Treasury bonds and mortgage-backed securities (MBS) while playing around in the repo market in an attempt to manipulate rates higher.
Whether or not the Fed actually manages to raise rates in the real world is less important than maintaining USD hegemony. No empire has ever prospered or endured by weakening its currency.
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First they print;
then they take us to war.
It's game over either way.
No empire has ever prospered or endured by weakening its currency.
But they always do. Empires always fail, it's the nature of the beast.
Could have stopped at "No Empire has ever prospered or endured." I'm not sure it matters what we do now. Our Empire is not long for this world.
Wrong again Charles
oblig
https://www.youtube.com/watch?v=dsx2vdn7gpY
Andrew Jackson's farewell address was pure prophesy in this matter. Old Hickory said that the bankers woild first make credits plentiful, then withdraw them to seize the encumbered collateral.
"Collateral"... what's that. You are funny.
Unfortunately for them, all this fiat and bullshit paper promises have in fact been created without any real work or real collateral. this is well documented thanks to modern technology.
They have failed to "disarm" the world in many ways. My tribe and I are prepared and looking forward to retribution.
same as it ever was... ..after all, infinite growth in a world with finite resources is fucking impossible. The herd will be culled, one way or another...
He'd Be spinning in his grave if he can see his face on that $20 bill.
At least he had the balls to take them on .
But did he see the people rising up and taking their country back (after they hung every banker, politician and lawyer from trees, lamp posts and overpasses).
http://beforeitsnews.com/conspiracy-theories/2015/12/road-to-ww3-time-to...
"... by signaling a sea change in U.S. rates, the Fed will make the USD even more attractive as a reserve currency ..."
And it will turn US Treasuries and derivatives into turds!!
What sewer does Tyler drag some of these writers from?
Dollar hegemony is already over, must not be quite the time for the final act yet. Must pretend for a bit longer. The trend is clear though. We are a paper tiger.
Unfortunately, the dollar still has some legs to it with the ability to extend and pretend.
What is a dollar worth when the underlying asset, the US economy, faulters under its weight.
Yes. now please name one currency that isn't.
Took a while roman hegemony to end as well.
But just any ol' paper tiger. The USA is a paper tiger with large numbers of nuclear weaons, and run by psychopaths.
The future certainly looks bright to me.
The Fed is merely a monetary suicide bomber and we're the crowded marketplace they've targeted. This won't end well no matter what happens.....
Spend em if you got em!
Or print em if you don't!
who cares,,, raise rates on a ponzi scheme BS money... no one should want this garbage BS money...
.25 % on something worthless = Zero...
Raising rates should improve things in the long run if the country has the strength to endure the short term pain.
But
Honestly I think the country is too far gone to make a real recovery.... (you know a recovery where 99% of people working have only one job that pays well enough to start a family).
99% of these jobs numbers are bullshit because they count one person working multiple times if they occupy more than one shit job, and I am sure the way they count it there is a lot of over-lap.
I think they are just about ready to pull the plug and let this shit go down, they had QE cause they just needed a few years to finish building their luxury bunkers.
In a different era, one with far less shadow banking financialization and leverage and outright systemic fraud, the country would be fine. Now? Sigh....... You know the story.
Until now.... they have derivatives, the printer, collusion, the politician, corporations all under their thumb. This will go on for years
Perhaps it goes on for years. It has persisted longer than most here believed. However, the forces in play against it are multiple and are gaining power. Peak fraud is just one overreach away from collapsing from universal mistrust.
Peak Fraud.. nice catchy sound to it..
How about the factor of keeping people loaning the gov $, buyin bonds? Is that the same as "Strong dollar?"
And it is only when people won't won't buy bonds that we need capital controls?
https://thinkpatriot.wordpress.com/2015/11/10/a-measure-of-propagandas-p...
https://thinkpatriot.wordpress.com/2015/11/11/dynamics-of-national-colla...
9/11 was a False Flag Operation by the US Government under control of Israeli-Neocons.
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I read CHSmith's new book "Radically Benevolent" a few weeks ago and strongly recommend it. Charles diagnoses the problems AND provides solutions, shows how communities can begin to produce more wealth for everyone.
"The Fed cannot and will not ever raise interest rates."
Nirp is their next ace.
Dude you make a mint betting in a few Wall Street bars..
On a train bound for nowhere...
you gotta know when to hold em,
you gotta know when to fold em...
https://www.youtube.com/watch?v=Jj4nJ1YEAp4
Know when to RUN.
The best you can hope for is to die in your sleep...
"the ultimate arbitrage is trading fiat currency that has been created out of thin air for real commodities and goods"
I've been saying this for years - the real risk to the us isn't #s in computers (which is all $ supply & "asset" prices are), it's the day the chinese realize they've given us a generation of slave labor and/or the middle east realizes they've given us a few hundred million yrs of hydrocarbons in exchange for strings of glass beads...
FUCK ALL PAPER MONEY AND THE FUCKERS WHO PRINT THAT SHIT.
"The core of Triffin's Paradox is that the issuer of a reserve currency must serve two quite different sets of users: the domestic economy, and the international economy.Those who argue the Fed can't possibly raise rates in a weakening domestic economy have forgotten the one absolutely critical mission of the Fed in the Imperial Project is maintaining U.S. dollar hegemony."
I'd never heard of Triffin's Paradox before - obviously I'm not a regular of Charles Hugh-Smith; silly me. But it's an extremely important observation. I wrote somewhere on ZH the other day that foreigners should no longer regard the US as a nation but as an empire. There's a whole world of difference. I hadn't considered the USD and its status as a reserve currency, as a factor - but I guess it is. That's part of being an empire.
The federal and state deficits might have a problem with the return of "real" interest rates. The ME might have a problem (lower oil revenues) with the return of "real" interest rates. The multinational corporations might have a problem with return of "real" interest rates. Housing might have a problem with the return of "real" interest rates.
If anyone thinks we can get back to 4% 1 year, 5% ten year and 6% thirty year rates I think they're missing the debt problem. I'd love to see it, would be great to get a real return on ones money, however in a world awash with debt how can people actually afford to pay more interest on it. Credit card debt at 12-14% is likely to explode to 18-20% in a "real" interest rate world. Car loans no longer will be 0%, and what about student loans?
Hey Chuck if there was no debt (federal, state, household), maybe, but ever 1% rise in debt equals $240 billion in state and federal debt. Its only going to get worse. Imagine 10 years from now when the boomers are at their peak, getting SS and healthcare the debt stands at 30-35 (federal and state debt) trillion and the US is paying on average 5% on that. That's 1.5 to 1.75 TRILLION alone to service the debt.
It's unpossible.
Not only possible, easy. They just print money to pay off the debt. They could pay off the entire national debt tomorrow.
First every country on the planet with a central bank could pay off all their debt overnight then the currency goes to shit. Second the people that own all the debt aren't just going to forgive the debt, debt is what they hold over everyone who's in debt. Germany tried it in the 20's Japan has been printing for 25 years and it hasn't helped.
The idea that debt can just be printed away has never work. If it was that simple the central banks could just print money and send everyone a check and we could have a the proverbial "air car." Send me a check for $7,000 every month and everything would be great. Nobody would have to work we could all just consume. Well, someone would have to work to satisfy our need for cloths and food and oil and housing but I guess we could just get the rest of the world to do that.
Then we could truly be an empire.
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'the Fed must raise rates to strengthen the U.S. dollar (USD) and keep commodities such as oil cheap for American consumers.
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Don't we have that?
•?•
V-V
What asset is the US dollar depreciating against???
Inquiring minds wish to know...
When the Fed raises rates there will be Hell to pay and Satan doesn’t take checks!
Like I always bang away: " The ability to spend twice what America earns every year is a form of super power status that no other nation can approach." No need for factories humming away, forcing down labor costs to stay competitive in the world trading market place. No, none of that "competition shit" for the USA. We simply print dollars, which all the world collects as their reserves by selling us the good and services , while taking only fesh green paper in return.
In fact, America's wealth and status comes from a printing press. Any nation without Reserve Currenct status lives in a totally different universe than the USA. One where trade accounts must balance, or the currency comes under pressure. One where earnings matter. While the USA prints Super Power Status from Green Paper.
Well, ... interesting arguments, I guess.
But at least this first adjustment is tiny, so don't get all lathered up about it.
And remember remember remember that ZIRP is entirely unnatural and should not and cannot be maintained, yet it has been, for years longer than necessary, because it also constituted a couple of billion dollars a month handout to the big banks, ... and for secondary reasons related to the continued overhangs in real estate.
Don't try to apply monetary theory to ZIRP, they are two separate things. Have to end ZIRP before monetary theory can apply again.
What the beanstalk of America's corporate and private wealth requires; in a country suffering under a recurrent and abysmal trade balance and debt tsunami that allows it to import products made to enrichen its Oligarchy class; is to protect the prima facie evaluation of that wealth, aka the Greenback; the totem of its preeminence now controlled by Cerberus; the three headed dog of FIat Hades : FED/IMF/ECB.
All this in a country that cannot truly prime the pump of economic growth as all employment seen today is in low productivity labour.
Any increase in output of an economy is the sum of productivity gains plus manhours worked. If the manhours/capita are constant, as today, the output gains are due to low output gains via more low quality workers; the productivity gains are simply not there in the national economy outsourced for hard stuff.
So Interest rate goes up to save the REAL economy from wrecking the Totem given the alarm signals in ME oil geopolitics and Yuan's IMF basket entrance. Is that a sign of Chinese monetary containment or of letting the fox into the dollar henpen?
A hike in interest rates is good for China exports which is key to keeping the EM bouyant as part of the Greenback hegemony. But it cuts both ways as the trade balance does not go north.
What it does to the KEY shadow finance sector and its king beanstalk of WS remains to be seen.
Money creation and lending is first and foremost a control mechanism... and always has been.
Anyone who has ever had to live by bank covanents in receipt of a loan understands who is in control. The more in debt someone is, the more they are owned by the banks.
Throughout history the banking empire in its various forms has always extended credit to those who it wanted to enslave ... and extended more credit to those who it wanted to enslave even more.
One only has to look at what the banks have done to Greece and Argentina in comparison to what they have done with the Ukraine. When banks want to exert their control, they tighten the reigns of credit and when they want to hopelessly indebt someone so that control can be exerted in the future they extend credit. Typically the extension of credit is to those they corrupt and the tightening of credit are thos who want to fix the country or the economy. If a country is able to fix its economy then bank control is lost.
So, let's think of this in the context of why the Fed has gone to the zero bound and what they will be doing when they start raising rates. The zero bound allowed the mass extension of credit to the government and to businesses without having a severely negative affect on the operation of those businesses and government in the near-term. When interest rates rise (if they do), then those who massively borrowed will have a hard time making payments and will be even more under the control of the banking power. Look at Greece and Argentina. When the banks tightened their grip, the governments were replaced. How can debts be paid back during an austerity binge? They cannot. How can they be paid back when interest rates rise? They can't, but that will be used an excuse to tighten the economy further and raise taxes.
Yes, no country can be an empire (or even be healthy) if it is starved for money. No country is in control of its own destiny if its money supply is controlled by someone else. The Fed and the international banks control the money supply of the US and most of the world.
Now what is all this B/S about a strong dollar being the excuse for raising rates?
Yes, and like the collapse of Rome, this collapse will take generations to play out. Kudos on such "insight".
It is not so much the control system itself that concerns me. People adapt. It is the multigenerational aspect of the control system that goes beyond normal human bounds. It implies a non-human bound controller or set of controllers.
Anyone who has watched what happens to family businesses understands that the vision of the founder almost never survives psat the 3rd generation. Even if the banking empire was an interlocked family business, that does not explain the way that it is persistent in its methods.
Yes, families, countries, societies/organizations and close knit cultures are used to serve the power, but it does not explain the power itself. It is something much more cunning, timeworn and persistent.
One can infer that it is non-human.
Blah blah blah. That's some fine mental masterbation. Pretty good work if you can get it I guess. My tribe and I have been farming for 4 generations. Through two world wars and a great depression, we are prepared.
nothing new under the sun my friend.
Its a way of keeping China in the dollar loop.
As we all know this $ hegemony is based on the US/China partnership that runs the industrial world.
American WS cannot survive the China/US fallout if its goes to the monetary core equilibrium.
Already the Oil energy divide with Saud has weakened the US $ matrix.
Raise interest rates. Nash's game theory (based more on non -cooperating parties) suggests that everyone will hold their position (not change their behavior) as long as they perceive that the other parties aren't going to change theirs. Raising interest rates means perception of stronger dollar is sustained.
So, increase in interest rates means more $ needed to pay interest on the debt, which means the FED must print. But the FED can print because paradoxically the ability to print means that the US government appears to be servicing its debt, hence the (false) confidence in the dollar which maintains its hegemony.
All foreign parties (elites especially) in theory will overlook money printing because they want things to stay the way they are, in a relative sense, in so far as the 3rd world is not absolutely disintegrating (yet) from the high relative valuation of the dollar, countries like Venezuela, Brazil , Greece etc. not withstanding.
It has to get a lot worse before the world spins out of the Nash equilibrium constraints.
Board of Governors of the Federal Reserve System at 4:00 PM on Friday, December 4, 2015, will be held under expedited procedures http://www.federalreserv ··· 04advexp.htm -- ,http://www.federalreserve.gov/aboutthefe...
Interesting and would love to read more but neither link you put up works and i see no mention of it on the website myself!
who cares about a qtr pt when you can whip up 2% in stocks at will?
"No empire has ever prospered or endured by weakening its currency."
1.Ain't no empire, never will be after we get the mentally deranged dim out of our White House.
2. 98.4 is the dollar at this time. Uh when all the rest are belong lying, cheating, thieving, miscreants, who they calling?
the US of A Dollar, with 175 million armed and ready, for whomever.
raising rates implies a policy of raising rates. if the fed vacillates, raise one time, lower the next the markets will punish them. you mention domestic and imperial clients, but the stock market is the biggest client of the fed. mess with the stock market and you lose all credibility and your politically appointed status. you might just as well go back to being a real banker, and the fed enjoys the power that goes with a having a polished political acumen. without that the fed would effectively abolish itself
The Fed was designed to cover the costs taxpayers could or would not pay. The original design was for them to buy corporate bonds, buying government securities was forbidden. This was changed to support WWI and it continued to fund all future wars. Now it supports 70-90 percent of the government on/off books funding. The audit we see showing government expenses are fraudulent like everything else that emanates from it.
If the Fed was any normal banking institution they would be shut down before the turn of the century. Today all banking institutions are free to do ANYTHING illegal or fraudulent they wish without fear of legal reprisal or incarceration. They are involved in money laundering, derivative scamming, out right theft of customers funds, you name it,,, yet everyone looks the other way including the individuals that deposit their earning with them. Even when they steal customers money,,, MF Global and how about this,,, outright theft of depositors money at Citizens Bank.
http://www.wsj.com/articles/citizens-bank-fined-for-failing-to-credit-co...
This never hit MSM in any big way,,, yet they are still in business and citizens still deposit money with them knowing full well they are thieves.
BOA still makes their employees train their H1B replacements. One would thing Amerkans would give them the cold shoulder but alas,,, not to be. Every year their customer base grows, while many of these same customers are the loudest to complain about the off shoring, on shoring and illegal immigration. It simply boggles the mind.
Central Banks are designed solely to fund governments while siphoning off Peoples money via debasement and fake inflation numbers. Anything else they claim to do is pure BS.
But Americans are world class at eating BS. In 15 years they have eviscerated their constitution and created the largest fascist, war mongering nation ever to exist. Very soon they will see the fruit of their apathy up close and personal.
ALL EMPIRES HAVE PROSPERED AND ENDURED BY WEAKNING THEIR CURRENCY---UNTIL A STRONGER EMPIRE ARRIVED.
it's all about competition. YOU WEAKEN YOUR CURRENCY SO LONG AS NO OTHER EMPIRE HAS A STRONGER CURRENCY...
that is what the imf is doing in buying chinese currency. they are creating a currency ARRANGEMENT. the chinese currency is about to collapse. and the u.s. is weak too. and so is the euro. so they all get together and instead of going to war, actualy physical war, the bankers make a deal so that the militaries keep getting money so they don't have to go to war to get more money or die trying ( as biggie put it) .
there is somethign positive about global banking cartels to the extent they legitimately delay world war 3 , which is , after all, inevitable.
^^^^ This seems to be very true ^^^^
Since the inception of the Fed, the US dollar has been devalued by ~97%, and in 2012, didn't the Fed state that they wanted to devalue it another 33%?
Standard Disclaimer: End the Fed, hang the banksters.
LOL! They are making things much, much, worse in the long run. Capital and resource mis-allocation and mal-investment (regardless of the central bank) will always have consequences, now much much worse.
but yes, such "let the majority eat cake" monetary experiments always end the same way.