If interest rates rose to a reasonable level, then all the new federal debt and all the refinanced old federal debt would become much more expensive. The interest on the debt would become so expensive that the government could longer sell new debt (except to the fed), the government’s credit rating would become such that they could not continue to function and support all those who receive payments from the government.
The scenario you’ve heard about and accepted is theoretical, but if the government stops meeting its obligations in this dependency society, we’d have a sort of anarchy will the tens of millions of people with no means of support.
I’ve heard other financial high flyers make different predictions about what might happen in your derivatives scenario, and several who admit they don’t know what would happen.
Well, if there was an interest rate hike, enough to trigger even a small fraction of the 340 Trillion in notational value of interest rate swaps, that would decimate 9 out of 10 of the large brokerage firms in the country, and probably five out of five of the biggest banks.
They wrote contracts and they don’t have what it would take to deliver.
Just like the silver short position.
They ain’t got it.
Nuff said.
If the Fed, knowing this, can’t raise interest rates, they have no way of attracting foreign investors.
So they are stuck. QE3, QE4, QE5, QE to in-fin-it-eee..