The 18 Trillion REAL Reasons the Fed Isn't Raising Rates
Many on Wall Street were surprised by Janet Yellen’s decision last week to leave near-zero interest rate policy in place. I wasn’t. Most analysts still expect there to be an interest rate increase in December of this year. I will believe it when I see it.
The Federal Reserve has painted itself into a monetary corner with peak debt and cheap money. This has been going on so long that business models have adjusted around it. To change policy, even though it would be far and away the right thing to do, would be highly disruptive to the bankers and corporate cronies the Fed exists to serve. But even that is just a detail.
Janet Yellen cited China’s slowing growth as a concern, as well as uncertainty in emerging markets, but I’m confident there are 18 trillion more pressing reasons right here at home that are keeping a rate hike at bay. Those reasons are, of course, the 18 trillion dollars of our national debt.
To understand why, you have to take a look at what normalized interest rates would do to the government’s financial position where that debt is concerned. Historically, “normal” is between 4 and 6%. A 5% interest rate would increase our already bloated deficit by around $900 billion per year. We already borrow money to pay interest on the debt we already have. Think about that for a minute. We go into more debt to pay just the interest on the debt we already have. Increased interest rates exacerbate that vicious cycle, such that, all things being equal, by 2035 our $18 trillion dollar debt becomes $85 trillion. Think about what that does to our budget as a whole, to our ability to pay social obligations, or even just basic functions of government.
On the other hand, today’s 0.5% interest rates are decimating savers and retirees, who should be getting substantial returns on their hard-earned savings. That cash flow should be funding a decent standard of living during retirement, but instead, retirees are faced with depleting their saved capital for any kind of standard of living.
At a 5% interest rate, a $500,000 nest egg would more than double in 15 years. Then that $1 million should provide a reasonable $50,000 income per year. Instead, retirees are robbed of the increase in their capital and then the resulting annual returns. At 0.5% interest, your money is simply drained away by inflation. Worse yet, the crazy bubble and bust cycles the Fed is creating through cheap money and debt is causing many retail investors to lose their initial capital altogether!
All of that hard work and security is being appropriated from our working middle class to Wall Street bankers and traders. All because of our already unsustainable debt and the risk of making it even worse!
There is a massive conflict of interest between savers and traders, between government and citizens in this country. Many don’t notice the theft because it happens gradually over time, but nonetheless, their quality of life is being sapped and re-appropriated.
Imagine when the Fed turns to the obvious answer – the only one available to them – more money printing! Imagine how devalued our currency will have to get to cover all this! Where will savers have to turn? They will be forced at some point to save outside the dollar as a defensive position against all this.
Gold and precious metals are one very good option for them. Gold has held its value for thousands of years and has never been worth zero. More and more investors are seeing the writing on the wall and adding this backstop to their portfolios.