The Federal Reserve will raise interest rates December 16th or it won’t. It has been building toward a (very nominal) quarter point increase for a while now; no one should be surprised. But we heard today that panicking Democrats are yelling at (Janet) Yellin, the Fed chief, to hold off on the increase. They fear triggering a stock market crash as folk begin to realize that debtors will have to pay more interest; that leads to fewer loans and more defaults. And in cases of government debt, higher taxes to pay the increased interest. (None of those happify an economy.)
On the other hand, the low interest has put pension plans into insolvency, leaving them no safe bond investments sufficient to earn enough to pay pensions due. And the proliferating debt, government and private, under a cheap money regime will at some point, result in a worthless currency. Rock and a hard place, right?
The Dems want the Fed to hold rates down, spraying money all over to delay any crunch until Republicans are in charge and can be blamed. Republicans will prefer that the collapse occurs before they take over, so that they can arrive as rescuers rather than a source of the problem. We should know Friday which set of interests is being served at the Fed.
A quarter point increase in interest is in fact, almost meaningless in itself; the real impact is in the signal that an end of cheap money is in sight. But that may be an illusion; the Fed could dip its toe in higher rates and then stand pat or even reverse things, depending upon market reaction (and politicians).
Most of the world’s central banks are headed toward negative interest, i.e. a depositor must pay the bank to hold his money. That is supposed somehow to stimulate economies, though of course, it doesn’t. Cheapening money is just another way of saying devaluing it. And that is another way of saying ‘inflation’ though it is now very politically incorrect to say that.
So on Wednesday the 166th, the Fed will raise rates a tiny, ineffectual increment financially but with large psychological and political significance. It has all but promised in lights to do that. Or it will chicken out and postpone again. That decision will tell us whose interests are being served in Washington if you don’t yet know.
We aren’t sure that it matters as we are fairly sure that whichever party holds the White House and/or Congress is unlikely to make much difference. Nor will electing a Trump or Cruz unless there is a major housecleaning in Congress too.
The world financial system is out of control, debt around the world is not repayable and the lineup of declining economies is increasing. Wall Street’s Goldman Sachs just sounded its alarm for Brazil. So now we can add it to Russia, China, Venezuela, Argentina, Japan and others in varying degrees of struggle.
Our reality take: We doubt that what the Fed is at all likely to do will actually accomplish much. We estimate that it has lost what control of the economy it may have had. We expect the governmentally handcuffed market forces to shortly surge up and takeover, leaving desperately bailing central banks helpless.
And most everybody not superrich looking at insolvency of some degree …Well, not the politicians. Watch the Fed.