The Fed meets this week on Wednesday and Thursday.
Many in the investment world believe the Fed will finally raise interest rates during this meeting.
If it does, this will be the first rate hike since 2006. And it will represent the first time in six years that rates are not effectively at zero.
Will the Fed raise rates or won’t it? Honestly, I don’t know and neither does anyone else.
Back in 2012, the Fed claimed it would start to raise rates when unemployment fell to 6.5%. We hit that target in April 2014.
Here we are a full 17 months later with the unemployment rate at 5.1% and the Fed has yet to raise rates even once.
Indeed, projecting a rate hike at some point in the future, only to hit that point and offer some other excuse to not raise rates has become something of a pattern for the Fed.
Everyone was convinced the Fed would raise rates in April 2015.
Then everyone became certain a rate hike would come in June 2015.
It’s now September and less than half of private economists believe a rate hike is coming this week.
Bottomline: no one has a clue when the Fed will raise rates. This includes Fed officials who continue to make various arguments for not raising rates this week.
However, one thing is relatively certain, whenever the Fed does raise rates, the tightening will be short-lived.
With over $555 trillion derivatives trading globally based on interest rates, the Fed cannot normalize rates without triggering a crisis that would make 2008 look like a picnic.
This is not just idle talk either.
Consider that as early as 1998, soon to be chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born, approached Alan Greenspan, Bob Rubin, and Larry Summers (the three heads of economic policy) about derivatives.
Born said she thought derivatives should be reined in and regulated because they were getting too out of control. The response from Greenspan and company was that if she pushed for regulation that the market would “implode.”
So Greenspan knew about the derivatives problem in 1998. Bernanke, knows about it as well. This is why he admitted that rates would not normalize anytime during his “lifetime” during a closed-door luncheon with several hedge funds last year.
Janet Yellen is also aware of the derivatives issue. This is why she has continued to refuse to raise rates for months after hitting the Fed’s unemployment “target.”
The fact of the matter is that the Fed has backed itself into a corner. It should have raised rates in 2012 or 2013 so that it would have some dry powder now. Instead, it continued to ease and now it has nothing left in its arsenal.
Well, almost nothing…
More and more outlets have begun to call for imposing a “carry” tax on cash.
The idea here is that since it costs relatively little to store physical cash (the cost of buying a safe), the Fed should be permitted to “tax” physical cash to force cash holders to spend it (put it back into the banking system) or invest it.
The way this would work is that the cash would have some kind of magnetic strip that would record the date that it was withdrawn. Whenever the bill was finally deposited in a bank again, the receiving bank would use this data to deduct a certain percentage of the bill’s value as a “tax” for holding it.
For instance, if the rate was 5% per month and you took out a $100 bill for two months and then deposited it, the receiving bank would only register the bill as being worth $90.25 ($100* 0.95=$95 or the first month, and then $95 *0.95= $90.25 for the second month).
It sounds like absolute insanity, but I can assure you that Central Banks take these sorts of proposals very seriously. QE sounded completely insane back in 1999 and we’ve already seen three rounds of it amounting to over $3 trillion.
No one would have believed the Fed could get away with printing $3 trillion for QE in 1999, but it has happened already. And given that it has failed to boost consumer spending/ economic growth, I wouldn’t at all surprised to see the Fed float one of the other ideas in the coming months.
This is just the start of a much larger strategy of declaring War on Cash.
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