Posted on 02/04/2011 4:29:34 PM PST by RobertClark
The signs of currency devaluation are all around us. Yesterday (Feb. 4th) commodities surged. Gold surged too. Are we really supposed to believe there is that much extra demand for commodities and gold, or their supply that restricted, that prices have been positively skyrocketing these last few months? Of course not. What has been happening is a devaluation in the underlying currency these commodities are priced in, the US Dollar. Currency depreciation can be tough to spot in an environment such as the current one, as most people will look for currencies to appreciate vs other currencies. What they are forgetting is that we live in a historic period where every nation of economic significance is involved in a no-holds-barred (currency) race to the bottom. That means currency exchange rates may stay stable relative to each other, but not to commodities, nor to the one currency no central banker can create out of thin air, gold (and silver).What is required to stop such runaway inflation in basic commodities? Well, since it is being caused by devaluation of currency, the natural way to stop it would be to ‘revalue’ your currency, or in other words, make it more valuable. In short, the USD needs to appreciate, not depreciate like it has since the crisis in 2008. What is the easiest way to get a currency to appreciate, raising interest rates of course! So even though we clearly see conditions have arisen that naturallyare countered through an interest rate hike it is unlikely the Fed will raise rates significantly (if at all!).
Why is that, you might be asking? Well, that is the rather lengthy set up to this article.
Reason No. 1:
Housing markets.
A steep raise in interest rates will send many families’ mortgage payments through the roof, sending millions into default, especially those who are just scraping by making the current payments. The largest holders of (American) real estate currently, though, are not families or individuals who speculated in real estate, but rather, the banks, who have re-possessed millions of homes since the start of the crisis. At this point it is important to remember that these same privately-run banks run the Federal Reserve! If you held 2 million houses would you be keen to use the central bank you run to plunge the value of those assets? Of course not. Raising interest rates means the value of real estate held by commercial banks plunges. The securities the Fed acquired during the bailouts and early days of Quantitative Easing would also plunge in value.
2) The Stock Market would plunge.
When the Fed raises rates the party in stocks could end in a hurry. There is a lot of speculation that the Fed has spent billions propping up the stock market (through POMO and PPT, primarily) which would make it one of the bigger losers, again. Who needs to hold large caps that pay 1% dividends if savings accounts pay 3.5%? Well, what does the Fed care about the stock market any way, maybe it is a necessary sacrifice? Yes, maybe, but keep in mind the lengths the mainstream media have gone to, to convince the general public that the health of the economy is indicated by the stock market going up or down. To let the market crash would open the Fed up to massive criticism in regards to the ‘economic recovery’ they have been trumpeting the last two years. This is turn would generate A LOT of support to both audit, and END, the Fed.
3) National Debt & Federal Deficit
If interest rates were to increase dramatically, the national debt would become almost unserviceable. The US has a public debt exceeding 13 trillion. Paying 5% interest as opposed to the current rates closer to 1 or 2% would increase interest payments significantly. It is extremely likely money would be borrowed to repay the interest and principal on old debts (rolling over old debts, but at higher interest rates, is not good business) or worse, the interest on existing debt would be monetized. That is, it would be printed out of thin air. If interest payments are being monetized that means hundreds of billions of dollars will need to be printed every year, indefinitely! That is NOT a good sign for the long-term health of the US dollar, that is for sure.
The Federal Reserve also holds ‘reserves’ for America’s commercial banks. These reserves make easy money for their owners, because the Fed must pay interest on them. If rates rise significantly then interest payments on these reserves will also increase dramatically. As noted above, the Fed owns a massive amount of the public debt, and an increase in rates would mean larger interest payments on the national debt. So this would in theory mean an increase in Fed income, but the Federal Government cannot afford to pay higher rates, so it is debatable whether higher payments would be received. Lastly, a significant increase in interest rates would put a lot of pressure on all businesses that rely on short-term financing, which would put the kibosh on any plans to hire more personnel. At worst, 1 in 20 businesses would go under, and unemployment would go up another 5% (to over 20%, using U6).
It has been clear for a longtime that the wrong course of action was taken in September 2008, when the US public voted against TARP and the bailouts, but Congress voted for it. Corporations that took excessive risks should have either been regulated properly to start with, or should have been punished for their risks; the very definition of capitalism. Instead the public took on private debts, which did nothing but reward bankers for failure (they ran their companies into the ground, but got another chance thanks to the US taxpayers, a 2nd chance every small business owner is dying to have) . It is time to face the facts, and realize those debts will never (and should never) be paid off, and certainly not by the US taxpayers, who had these debts foisted on them by politicians and central bankers. It is time for the central banks of the world to be held accountable, and removed from power. It is time for a grand debt restructuring, or as it used to be called, a jubilee.
Or, we could just continue with currency devaluation (which is in essence stealing from people who save their money), record food inflation (worldwide) and debt slavery.
Bernake the Man in the Box. The House of cards is coming down.
Interest rates will sooner or later raise themselves. They are trying to make it later. The outcome will be much worse but those in the know will make out like Bandits.
Ben Loses The Long End
http://www.zerohedge.com/article/ben-loses-long-end
“Dear Ben,
You can either save the bond market or the stock market, but not both.
Your choice, mate.
Love,
The Market”
Fed passes China in Treasury holdings
http://www.ft.com/cms/s/0/120372fc-2e48-11e0-8733-00144feabdc0.html#axzz1D0a2Rtlb
I think it should no longer be called a Market. It is far from free enterprise.
Exactly it’s rigged and in the meantime the Fed is devaluing our dollar and hurting everyone else. Banana Ben is also allowing the socialist spending to continue by monetizing our debt. In the end it will make the crash that much more painful.
‘’The outcome will be much worse but those in the know will make out like Bandits.’’
Can you elucidate? What do I need to know to protect myself or profit?
Amazing is it not.
You sound like me...I read everything and then just get more confused.
The thing I did right years ago was to convert a mortgage to an equity mortgage. The rate is still so low it seems impossible. Based on bank borrowing on district funds it has been great for me.
Each time I am afraid inflation will put me out of ability to pay, I panic, but do not convert it...so far it has been the right decision each time.
I wish I had the ability to actually time the inflation to come. This story confuses the issue, but I agree, now is not the time to act.
Cool. I never bought a house. My Grandpa never did either. He told me not to. I just save cash. I got more now than ever but do not feel secure in it. Anyway. I live like a Millionaire but don’t have to worry about losing my money. I want to die owing the IRS as much as possible with no money in the bank. I figure that is a winner.
Sometimes you can sum up the whole mess in one sentence.
A month of prices REALLY skyrocketing would break mostly everyone who doesn't have supplies to ride it out, becaue their wages would not go up to compensate.
Is your boss going to give you a 100% raise in pay in a month because prices went up 100%?
everything possible will be done to keep interest rates low. At some point the smoke and mirrors will cease working and the interest rates will spike. Watch for that for it will be the sure indicator the game is over and I would expect the government and those responsible for the resulting disaster will be overthrown. First they make the people dependent on the gov’t. Then they tell the people they can’t deliver. When the economy and financial markets are shattered and people don’t have fuel, food, water....they will finally wake up.
Quick.. let me buy some stocks and bonds. I am on the train.
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