Thursday, February 23, 2012

The U.S. (and much of the West) Caught Between a Rock and a Hard Place

The U.S. Federal Reserve Bank initiated a temporary "zero interest rate policy" ("ZIRP") nearly 4 years ago. Last quarter, the Fed announced that they would keep rates low until 2014. Not to worry, in 2013  the Fed will announce ZIRP until 2015, and so on, and so on, for now on.

The Fed will never tighten monetary policy again (well, not in my working lifetime).

In dropping rates to essentially zero, and twisting and shouting (and printing and buying) on the long end of the curve, the Fed has destroyed the returns of savers. Not just dear old Mom & Dad... every pension in the system buys bonds - and they are getting zippity-do-dah for a return. But the Federal Government's fiscal policy of deficit spending over a TRILLION$ per year was done in concert with the Fed's ZIRP, and now they are stuck. If the Fed tries to raise rates, the stock market will get killed, and if the long end of the bond curve responds upward the Fed will have caused the U.S. Treasury into cardiac arrest. The Government cannot afford a 200 basis point increase in interest rates on the debt they have. For the sake of argument, et us pretend that all of the U.S. debt was floating rate... On $15 Trillion, a 200 basis point increase would mean a $300 PER YEAR increase in the deficit for interest alone - and that's on top of 2011's $454B in interest expense.

Got that?

Now that's not how it would work out... because the U.S. government's debt is NOT floating rate... what would happen is the bond market would get killed, the stock market would get killed, the banking system would get killed, the pension system gets killed either way...

So the Fed ain't tightening monetary policy, ever again. And that is not hyperbole. Because the Fed does not survive the Keynesian endgame. Somebody else, the market, the central planners, the whoever... might tighten monetary policy... but it won't be the Fed.


Anonymous said...

The average maturity is around 5years, any spike in rates will be felt almost instantly. Between our collapsing tax base, which collapses even faster without constant stimulus, the FDIC, Social Security, and the PBGC the government has backed themselves into a corner and there is no way out. As I said a while back, Since e^X is a slower route to default than e^2X either the fed monetizes the debt or interest rates explode taking out the economy and bringing about an accelerated path to default.


buzzingstreet said...
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