As the country dances along the zero bound, I wonder how many market participants have bothered to do the math. Yesterday, the Federal Reserve extended their zero percent interest rate policy until late 2014. It’s no surprise, at least to me, the Fed keeps announcing that rates will remain low for years. This policy tool has become all too predictable and a real hoot for anyone paying attention.
It was just last summer when Bernanke announced he would keep interest rates at near zero until mid 2013….so now the zero bound policy has been extended another year and a half from that. In the FOMC statements and Q & A yesterday, it’s what they didn’t tell the viewers that matter.
The truth is that the Federal Reserve has boxed itself into a corner with the zero percent interest rate policy and cannot move them much higher, if at all, due to the sheer size and scope of our national deficits, which have surpassed 100% of gross domestic product quite handily. Simply,the debt America owes is greater than our economy.
The reason why the Federal Reserve is boxed in with interest rate policy is if interest rates rise our country’s huge and growing debts become more expensive to fund, exasperating the net deficit problem, something we can ill afford.
Yet Federal Reserve board members stated that they believe by the end of 2014 their zero percent interest policy will be able to normalize to 4 – 4 ½ percent from the near zero percent we sit at now. This is a joke. The Federal Reserve sending the prime rate to 4 or 4 ½ percent by 2014 is very unlikely to materialize, ever.
As it stands today, for every 1% increase in interest rates our national interest payments would increase by $140 billion dollars annually. By the end of 2014, according to the Congressional Budget office, the United States will have accumulated another $3-5 trillion in total debt, so our interest expense costs will be even higher by then for every 1% increase in interest rates.
Back of the envelope math tells us that if the Federal Reserve were to truly raise interest rates to a mean reversion of 4% or so by the end of 2014, our interest expense alone will add another $560 billion a year at a minimum to our annual deficits. In other words, the Federal Reserve cannot truly move rates in a meaningful way without bankrupting our country anytime soon.
The Federal Reserve is in a zero bound trap. Anyone believing they’d be raising rates anytime is off their rocker.
The more significant news out of the Fed was the chairman communicating at least 7 times yesterday he’ll do more rounds of money printing at the drop of a dime for almost any reason at all. With interest rates at near zero for several years, if not forever, and with the Federal Reserve chairman communicating many times yesterday he’ll pump money at will, it’s no wonder Gold and Silver went on a tear with every passing Bernanke sentence. Following is an intraday chart of Gold during yesterdays Federal Reserve Q & A session, it's not hard to guess at what point Bernanke was speaking, eh?
The markets certainly understand that all this jaw boning is nothing more than pure U.S. dollar debasement. Our Federal Reserve is committed to the race to the bottom in the currency wars to try to spur enormous growth, and should Europe stumble badly, which they very well could, I won’t be surprised to see the mother of money pumping as current leadership is steadfast on trying to grow our way of our debt and credit situation.
When the Federal Reserve pumps confetti paper money into the system, there are two assets that are the most favorable to preserving absolute and real wealth. I'll share my favorite of the two in another e-mail.
Stay tuned, I will also send out another e-mail in another week or so explaining to you what is keeping the Fed up at nights—it’s not what you may think, after all corporate profits are just fine thanks to record unfunded transfer payments entering the economy from our profligate fiscal policy.
Expect us to begin to get far more constructive as we get close to more money pumping.
Yours,
Nicholas Green
