Warning to the Fed Raising Rates

08 Jul

Warning to the Fed Raising Rates

Unless they want to blow the federal budget to smithereens!

We wish the Federal Reserve hadn’t created all this inflation in the first place.  It’s decapitalizing America and making the people poorer.  So, we wish they hadn’t done it in the first place.

As long as we’re on the subject, we wish that Washington hadn’t spent the country into this deep debt hole, and then invited the Fed to finance the deficit by printing trillions of dollars.

But we are forced to live with their malperformance and irresponsibility.  So, the best we can do to protect ourselves is to buy gold and silver.

Meanwhile the Fed now apparently wishes it hadn’t created all this inflation, too.  Now it says it isn’t going to rest until it brings it back under control.  Now Chairman Powell says, “”We understand better how little we understand about inflation.”  

But we are at pains to understand the source of their confusion.  After all, inflation has been well understood for a very long time.  With hundreds of professional economists on the Fed’s payroll, couldn’t someone have explained what Germany’s central bank did a century ago when Powell’s counterpart, Rudolf von Havenstein, decimated the economy and radicalized the entire nation with runaway inflation?  Couldn’t one academic economist at the Fed have pointed to the precedent in Zimbabwe?  There Powell’s counterpart, one Gideon Gono, impoverished the country and made Zimbabwe a laughingstock with its extraordinary money printing.

So now the Fed is trying to unwind a little of what it has done.  “There’s a clock running here. The risk is that because of the multiplicity of shocks, you start to transition into a higher-inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening,” says Powell.  Its primary tool is raising interest rates.  It has done some of that already and promises another increase in the Fed funds rate later this month.

But there is a limit on how much the Fed can raise rates.  That is because the US government is the biggest debtor in the world.  As interest rates rise, it must pay higher rates to roll over its existing $34 trillion debt, not to mention the additional debt it piles on.  

With that prelude, we turn our attention to Jeff Deist, the President of the Mises Institute:

If Treasury rates continue to rise and rise precipitously, the effects on congressional budgeting will be immediate and severe. Even if we laughably assume total federal debt remains static at around $23.8 trillion (the publicly held portion of the $30 trillion), interest rates of merely 2 or 3 percent will cause interest expense to rise considerably. Average weighted rates of only 5 percent would cost taxpayers more than $1 trillion every year. Historically, average rates of 7 percent swell that number to more than $1.5 trillion. Rates of 10 percent—hardly unthinkable, given the Paul Volcker era of the late seventies and early eighties—would cause debt service to explode to over $2.3 trillion….

Everyone knows the US will never pay its debts except nominally through inflation; everyone knows off-balance sheet entitlement promises cannot be kept in any meaningful way. Spendthrifts get cut off eventually.

Stated differently, there is no way out.  If the Fed doesn’t try to rein in inflation, it will destroy the dollar, the capital markets, and the resilience of the US economy.  It does try to rein in inflation by raising its policy rates and reducing its holding of bonds, it will drive rates to the moon and bankrupt the Treasury.

Oh, we wish they hadn’t started this fiat, unbacked money nonsense.  But people of sound mind who examined the historical precedents (We’re looking at you Zimbabwe.  And you Germany.  And France and Venezuela and hundreds of other monetary fraudsters!) knew that no good would come of it.  And they said so.  Over and over.

Have you spoken with a Republic Monetary Exchange gold and silver specialist?  It would be a good idea to do so right away.

Interest on debt in the hands of the public at different interest rates (billions)

Total debt in the hands of the public$23,874. 2
Interest rateInterest expense