I would welcome increased interest rates, 0.2% interest on deposits is criminal, in comparison to what is being charged to borrowers. I believe the US government will default on bond obligations. This has been done in the past, the holders of WWI liberty bonds got screwed in 1934. Liberty bonds were supposed to be paid with dollars that were worth $20.67 per ounce of gold, instead of $34.00, around 70% lower real buying power.
The bond market seems to indicate that raising rates will, in fact, result in a recession. What has happened is that rates between 1 month and 7 years duration have come up under the jawboning of the Fed, but the 10Y+ rates haven't moved nearly as much- in short the entire duration curve has gotten flatter, not steeper, and a flatter curve indicates no growth expected 7 years and out.
Will the Fed start raising short term rates? I don't know. I do know the math shows interest costs to the US government will get much worse if they do anything more than they did during the last raising rates cycle from late 2015 to 2019. The difference now, though, is the effect of the COVID policies are added on top of the load.
Like I wrote last week- I have made my bets- my bet is basically that Denninger is correct- the Fed will raise rates to choke inflation in its crib, and this will cause a recession.
But we've had inflation for what... 10-12 years? It was asset prices that were inflated rather than stuff we buy every day, so it hasn't been so obvious; the Fed has just been running cover, essentially. Seems to me there are 2 big, big problems we have that have no easy button way out. 1) We have inflation hammering consumer prices and 2) at the same time we really aren't producing much of anything.
That's the definition of STAGflation.
Regardless, our economy the past 40+ years was built on government borrowing and completely* out of control spending by the Federal Gov't. Look at our total* debt to GDP ratio right now - we're approaching 150%...
I'll have a bit more tomorrow. I'm too ignorant to comment on this stuff beyond agreeing that it's a binary choice that the Fed faces: recession or roaring inflation. But I like reading the comments.
I don't think the Feds has the stomach for higher interest rates. It would blow up the US deficit, as well as pop a bunch of bubbles in the stock market and real estate. I think they will stay with "Stern Words", but no real action. So I see lots more inflation. And with the mid terms in 9 months, too risky.
Biden basically did what Obama did on pipe lines, so no real change there from a risk standpoint. What has changed is the impact of huge investment funds, black rock, that are DEMANDING that the oil companies try to be greener. This is translating as reducing oil exploration and reserves. Same is being done with the banking industry, using the excuse of "Climate Change". The result of this for 3 more years is going to be higher oil prices. My guess $7 dollar gas in California is coming. We are already just under $5.
Obviously there's a tug of war going on here, policy wise. As I've said in the past it looks like a lose-lose proposition. KD's point is that letting inflation rip is the bigger loss. I agree, but also agree with you that responsible action is far from guaranteed.
Like KD, I believe the Federal Reserve does not have a choice in having to raise rates. The question is the timing and rollout of the raising. I believe it will be gradual with a primacy of consideration on not causing havoc in the stock market or other interest-sensitive sectors before the midterms. That said, I have already pulled my money out of the stock market and am sitting on cash for now. Too much potential volatility for my liking given our current political situation.
I would welcome increased interest rates, 0.2% interest on deposits is criminal, in comparison to what is being charged to borrowers. I believe the US government will default on bond obligations. This has been done in the past, the holders of WWI liberty bonds got screwed in 1934. Liberty bonds were supposed to be paid with dollars that were worth $20.67 per ounce of gold, instead of $34.00, around 70% lower real buying power.
The bond market seems to indicate that raising rates will, in fact, result in a recession. What has happened is that rates between 1 month and 7 years duration have come up under the jawboning of the Fed, but the 10Y+ rates haven't moved nearly as much- in short the entire duration curve has gotten flatter, not steeper, and a flatter curve indicates no growth expected 7 years and out.
Will the Fed start raising short term rates? I don't know. I do know the math shows interest costs to the US government will get much worse if they do anything more than they did during the last raising rates cycle from late 2015 to 2019. The difference now, though, is the effect of the COVID policies are added on top of the load.
Like I wrote last week- I have made my bets- my bet is basically that Denninger is correct- the Fed will raise rates to choke inflation in its crib, and this will cause a recession.
But we've had inflation for what... 10-12 years? It was asset prices that were inflated rather than stuff we buy every day, so it hasn't been so obvious; the Fed has just been running cover, essentially. Seems to me there are 2 big, big problems we have that have no easy button way out. 1) We have inflation hammering consumer prices and 2) at the same time we really aren't producing much of anything.
That's the definition of STAGflation.
Regardless, our economy the past 40+ years was built on government borrowing and completely* out of control spending by the Federal Gov't. Look at our total* debt to GDP ratio right now - we're approaching 150%...
I'll have a bit more tomorrow. I'm too ignorant to comment on this stuff beyond agreeing that it's a binary choice that the Fed faces: recession or roaring inflation. But I like reading the comments.
I don't think the Feds has the stomach for higher interest rates. It would blow up the US deficit, as well as pop a bunch of bubbles in the stock market and real estate. I think they will stay with "Stern Words", but no real action. So I see lots more inflation. And with the mid terms in 9 months, too risky.
Biden basically did what Obama did on pipe lines, so no real change there from a risk standpoint. What has changed is the impact of huge investment funds, black rock, that are DEMANDING that the oil companies try to be greener. This is translating as reducing oil exploration and reserves. Same is being done with the banking industry, using the excuse of "Climate Change". The result of this for 3 more years is going to be higher oil prices. My guess $7 dollar gas in California is coming. We are already just under $5.
https://gasprices.aaa.com/?state=CA
What is being threatened is the US Dollar as the world's reserve currency. Step by step this is being slowly eroded.
Obviously there's a tug of war going on here, policy wise. As I've said in the past it looks like a lose-lose proposition. KD's point is that letting inflation rip is the bigger loss. I agree, but also agree with you that responsible action is far from guaranteed.
Like KD, I believe the Federal Reserve does not have a choice in having to raise rates. The question is the timing and rollout of the raising. I believe it will be gradual with a primacy of consideration on not causing havoc in the stock market or other interest-sensitive sectors before the midterms. That said, I have already pulled my money out of the stock market and am sitting on cash for now. Too much potential volatility for my liking given our current political situation.