If I could go to the highest mountain in the land, and scream at the top of my lungs...this is what I'd bellow:
"THE US FED IS NOT GOING TO RAISE INTEREST RATES!!!"
OK, now that I've got that off my chest... Look, the Fed can "pause", "talk tough", or dance of the head of pin. It is impossible for the Fed to raise interest rates. Why would they have cut them AGAIN last month if they were going to raise them next month. Why is it impossible for the Fed to raise interest rates? If the Fed raises interest rates it will cause our now fragile economy to implode and go down swiftly in flames. Rising interest rates would destroy the already beaten down housing markets. Rising interest rates would make it too expensive for business to borrow money that is near impossible to get now at today's fires sale rates. Rising interest rates would force uncountable defaults on credit card debt from coast to coast.
For the Fed to even have a glimmer of hope in stopping inflation they would have to raise interest rates to levels ABOVE the rate of inflation. And since we ALL know that inflation is substantially higher than the 4% the Fed leads us to believe, interest rate increases would have to be gargantuan. Shadowstats.com pegs real inflation at 12%. Do you really think the Fed is going to raise interest rates back to 5% let alone 13%? Not a freaking chance! As a matter of fact, the Fed has lost complete control of interest rates.
The bond markets are going to determine where interest rates go now. And the Fed is not going to like it one bit, and they will continue to buy Treasuries in an attempt to continue to keep a floor under the long bonds. This will prove to be, in the end, the Fed's ultimate boo-boo. You see, the interest rate the Fed loves to monkey around with is the rate that banks charge each other for money. The Fed Funds rate has little real impact on the consumer. The rates consumers pay are tied to the 10 year and 30 year long bonds. Ever wonder why mortgage interest rates have barely budged to the downside since the Fed began cutting interest rates last Fall? The Fed claims to be confounded by it as well. They know exactly why mortgage interest rates have not fallen. The Fed has been buying long bonds to monetize the nations debt and keep interest rates low. Where do you think they get all the treasuries they trade for the investment banks toxic waste at the bi-weekly auctions? Rising interest rates are the biggest threat to the band-aids the Fed has, to date, applied to the sucking chest wound we have all come to know as "the sub-prime crisis". Rising interest rates threaten an unraveling of the credit derivatives that continue to hang over the world financial system. Rising interest rates will detonate this thermonuclear financial time bomb if they are allowed to rise. Rising interest rates are absolutely the last thing the Fed wants to see happen. Unfortunately they may be powerless to stop it.
The 10-year T-bill closed today with a yield of 3.90%. With "official" inflation running at 4%, investors are not making ANY money holding them. But with "unofficial" inflation running at 12%, investors are LOSING 8% by holding them. With inflation of the verge of exploding much higher, how much longer do you think investors will continue to hold their LOSING investment? Long bonds "should be" yielding in excess of inflation, so that investors get a "real return" on their investment. As inflation escalates, investors are going to run for the exits in the bond markets. This in turn will cause interest rates to rise, and chase inflation. Falling bond prices result in rising yields, or as we know them, rising interest rates. Investors will take the money from their bond sales and park it in the one place that has historically been the best hedge against rising inflation: The Precious Metals. Gold and Silver are going nowhere until investors flee bonds, and race to the Precious Metals and commodities.
So you see, no matter how much hot air the Fed Heads blow about rising inflation, they are powerless to use the one tool they have at their disposal to keep it in check. Heck, the truth of the matter is they have all but abandoned the idea of lowering interest rates because not only has this ploy completely failed to resolve the "credit crisis", it has in fact lit the fuse to an inflationary explosion. The Fed has really F'd things up folks. The Fed could sit still on interest rates for months, it wouldn't matter in the least when it comes to controlling inflation. And it will matter even less towards shoring up the US Dollar. The Fed has sacrificed the Dollar, and the rest of the world better wake up soon to the fact that the Fed and the US Government have NO wish to see the Dollar go up. You can't pay off this nations mountain of debt with a rising Dollar.
And this nations debt is really the NUMBER ONE reason the Fed cannot tolerate rising interest rates. It costs the US Government $3 BILLION A DAY to service this country's $9 TRILLION debt. And that is at today's minuscule interest rates. Imagine the costs to the government with each one percent increase in interest rates. You think homeowners with adjustable rate mortgage resets are in trouble. OOOOOOOoooo momma, do you see the corner the Fed has painted themselves and the American Taxpayer into? Do you begin to understand why it is imperative that you have Gold and Silver investments. It's the DEBT stoopid! This country's DEBT will ultimately be its undoing.
Don't be deceived by the talking heads in the financial media, or the talking heads at the Fed. The Fed has absolutely NO interest in controlling inflation. Say what? Here's some Fed induced inflationary news that has slipped through the cracks:
Fed seeks approval to pay interest on reserves
WASHINGTON (Reuters) - The U.S. Federal Reserve has decided to seek authority from Congress to begin paying interest on commercial bank reserves this year, a tool that could help it thaw frozen credit markets, a person familiar with the issue said on Wednesday.
Paying interest on the reserves banks are required to hold at the Fed to balance customers' deposits would make it easier for the central bank to move more funds into financial markets seized in the grip of a credit crunch without driving down benchmark interest rates.
"It's particularly relevant now because the Fed would like to put a bunch of cash in the market, and it can do that beyond what the market will take at the given (benchmark interest) rate only by increasing the demand (for reserves)," said Douglas Elmendorf, a former Fed staffer now at the Brookings Institution. Paying interest should spark that demand.
Paying interest on reserves would boost demand for reserves and could help the Fed pump liquidity into markets without lowering benchmark rates.
Bernanke Wants Fed to Pay Interest on Bank Reserves
May 7 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke, seeking ways to stabilize money markets, will ask Congress for authority to pay interest on commercial-bank reserves this year, a person familiar with the discussions said.
``It would have the effect of putting a floor under the federal funds rate,'' said Walker Todd, a research fellow at the American Institute for Economic Research in Great Barrington, Massachusetts.
So it would appear then that the Fed has NO intention of stifling inflation with a "pause", only accelerating it by directly increasing the money supply with an end run around the more obvious inflationary interest rate cuts. These guys make the Great and all Powerful Oz look like a Crackerjack salesman. Talk about deceit!
Bernanke Says Fed to Boost Loans to Banks as Needed
May 13 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed.
While markets have improved, they remain ``far from normal,'' Bernanke said today in a speech to an Atlanta Fed conference at Sea Island, Georgia. ``We stand ready to increase the size of the auctions if further warranted by financial developments.''
European govt bonds track Treasuries sharply lower after solid U.S. data
LONDON (Thomson Financial) - European government bonds were tracking their U.S. counterparts sharply lower after solid data from the world's largest economy reinforced views that the Federal Reserve will not cut interest rates at its meeting in June.
Although retail sales showed the headline figure fell by 0.2 percent in April, market players chose to ignore this and focused on retail sales excluding autos, which rose by 0.5 percent, beating expectations for a smaller 0.3 percent rise.
'A better than expected ex-auto print and relatively firm underlying details were a big negative for Treasuries,' said Meny Grauman, economist at CIBC World Markets.
'Markets are impressed by the ability of American shoppers to continue to spend, and this result will only help strengthen the view that the Fed will pause at its next rate setting meeting,' said Grauman.
Bond prices were also pressured by concerns about imported inflationary pressures, following news that import prices rose by 1.8 percent in April. Although this is below March's 2.9 percent rise, analysts had forecast a smaller rise of 1.7 percent, and March's reading was revised up.
'Inflation concerns are also supporting the expectations of a more hawkish Federal Reserve with import prices rising... more than expected,' said Rhonda Staskow, an analyst at Thomson IFR Markets.
So the perception now is that with "rising inflation" in the headlines the Fed will now lean towards raising interest rates. Case in point today's bump in the Dollar. I think we made it clear above, that is not going to happen. Rising interest rates in the long bonds are the result of the bonds being sold. Don't be misled. This is NOT Dollar positive. Falling bond prices will cost investors Trillions of Dollars as the capital investment tied to these bonds begins to evaporate. The worst fear of the Fed and US Government is that foreign investors will begin to dump their US Treasuries as the Great 20th Century Bond Bubble begins to burst. And damn well they should be scared to death of this reaction in the bond markets. It will spell certain doom for the American economy, and all the investors foolish enough to hold onto these USA, Inc I.O.U.s. The exits from the bond market could get crowded in a hurry. Don't even consider for a minute that the Fed could buy all the Treasuries that will be sold. Not even the Fed could print that much money. And if they could, could you imagine the inflationary result?
And as quickly as the exits to the bond markets jam up, the lines outside the Precious Metals markets will become blocks long. Yes, Gold can rise in a rising interest rate environment, and it will be soon enough.
No comments:
Post a Comment