Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20
AMD is KILLING Intel as Ryzen Zen 3 Takes Gaming Crown, AMD Set to Achieve CPU Market Dominance - 13th Oct 20
Amazon Prime Day Real or Fake Sales to Get Rid of Dead Stock? - 13th Oct 20
Stock Market Short-term Top Expected - 13th Oct 20
Fun Stuff to Do with a Budgie or Parakeet, a Child's Best Pet Bird Friend - 13th Oct 20
Who Will Win the Race to Open a Casino in Japan? - 13th Oct 20
Fear Grips Stock Market Short-Sellers -- What to Make of It - 12th Oct 20
For Some Remote Workers, It Pays to Stay Home… If Home Stays Local - 12th Oct 20
A Big Move In Silver: Watch The Currency Markets - 12th Oct 20
Precious Metals and Commodities Comprehensive - 11th Oct 20
The Election Does Not Matter, Stick With Stock Winners Like Clean Energy - 11th Oct 20
Gold Stocks Are Cheap, But Not for Long - 11th Oct 20
Gold Miners Ready to Fall Further - 10th Oct 29
What Happens When the Stumble-Through Economy Stalls - 10th Oct 29
This Is What The Stock Market Is Saying About Trump’s Re-Election - 10th Oct 29
Here Is Everything You Must Know About Insolvency - 10th Oct 29
Sheffield Coronavirus Warning - UK Heading for Higher Covid-19 Infections than April Peak! - 10th Oct 29
Q2 Was Disastrous. But What’s Next for the US Economy – and Gold? - 9th Oct 20
Q4 Market Forecast: How to Invest in a World Awash in Debt - 9th Oct 20
A complete paradigm shift will make gold the generational trade - 9th Oct 20
Why You Should Look for Stocks Climbing Out of a “Big Base” - 9th Oct 20
UK Coronavirus Pandemic Wave 2 - Daily Covid-19 Positive Test Cases Forecast - 9th Oct 20
Ryzen ZEN 3: The Final Nail in Intel's Coffin! Cinebench Scores 5300x, 5600x, 5800x, 5900x 5950x - 9th Oct 20
How Soon Will We See Stock Market SPX 4000? - 8th Oct 20
Stock Market Spy ETF Testing March Price Peak – What Do the Charts Say? - 8th Oct 20
5 Consequences of US Debt at $50 Trillion - 8th Oct 20
Long Term Cycles Suggest Stock Price Reversion Pending & Gold Price About To Explode High - 8th Oct 20
AMD Zen 3 Ryzen 5000 Launch - Performance, Prices Skews, Cinebench r20 Scores, 5800x, 5900x, 5950x - 8th Oct 20
Gold vs. Silver – Absolutely No Comparison - 8th Oct 20
Gold: Why You Should Be Wary of the "Consensus" - 8th Oct 20
UK Covid-19 Hospital Admissions and Deaths Since Testing Positive in 28 days Analysis - 7th Oct 20
Amazon Prime Day 2020 Sales Top Tips of How To Get Big Savings! - 7th Oct 20
Want To Win Big In Forex Trading? Leverage Is Your Friend - 7th Oct 20
Why I am Voting for Donald J. Hitler - 6th Oct 20
Markets Chop & Grind: Gold, Stocks & Commodities - 6th Oct 20
Silver Price Great Buy Spot Ahead of Second Big Upleg - 6th Oct 20
Forget RTX 3080 Get Zen 3 Ryzen 5900x / 5950x - GPU vs CPU - PC Bottlenecking - 6th Oct 20
How to Get Budgies / Parakeets to Eat Vegetables for the First Time - 6th Oct 20
How to Pick a Reputable Double Glazing Window Company - 6th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Bernanke Pushing His Luck on U.S. Interest Rates

Interest-Rates / US Interest Rates Dec 23, 2009 - 02:51 PM GMT

By: John_Browne

Interest-Rates

Best Financial Markets Analysis ArticleThe vast majority of economists now say that the recession is over. Many expect nominal GDP growth as high as four percent in 2010. Now, with the economy assumed to be back on stable footing, some in the private sector are starting to talk about inflation.


While agreeing that growth has returned, the Federal Reserve and the Obama administration do not see inflation as a threat. To them, the political costs of ongoing recession far outweigh any medium-term considerations about the value of the dollar, hence their determination to hold short-term interest rates to around zero. This has created unnatural conditions in the U.S. Treasury market and is limiting the prospects for real growth.

The Fed lending at zero enables the major banks to invest in long-term Treasuries at a huge risk-free spread of nearly four percent. In addition, the Fed is - for the first time - paying interest on bank reserves deposited with the Fed. In such a 'la-la' world, why would any bank take the needless risk of lending to small businesses, the main creators of new jobs? For all but the largest corporations, who can also access the bond markets directly, credit is tight. The lack of private-sector bank liquidity has hurt job creation, consumer demand, and is adding mightily to recessionary pressures.

What's worse, this monetary treadmill has disrupted market signals about coming inflation.

When the vast sums lent to the banks are recycled back to the government, the money remains exclusively a part of the monetary base, but never enters the money supply. Only when the banks are induced to lend to the real economy does the 'rescue' money flood into the market and drive up consumer prices.

Currently, inflation appears low. But if the Fed decides to raise interest rates, the risk-free trade between the short end and long end of the yield curve will be eliminated. At that point, banks will have to start lending to small business and to individuals. The whole inflation picture will be changed dramatically.

More importantly, what if Bernanke is not fully in control of interest rates? For instance, as investors grow wary of growing federal deficits, the potential for high inflation, and the looming probability that the Fed will raise rates, they may exert selling pressure, particularly at the long end of the yield curve. Indeed, with some four percent yield differential between short and long Treasuries, the curve is steeper than it has been for years. This selling pressure could force Bernanke to raise short-term rates.

Evidence of increasing inflation could also drive Bernanke to raise interest rates before he plans to do so. If the Fed is compelled follow such a course, several things are likely to occur.

First, there would be a rapid sell-off in overpriced long-dated Treasuries. This would be the 'bond market crash' that we have long envisaged.

Second, American equities will likely experience downward pressure as the discount rate, used to assess the present value of dividends, rises.

Third, a rise in interest rates could trigger a crisis in interest rate-dependent derivatives held by banks, similar to circumstances of the last credit crisis.

Finally, and most concerning, higher rates would increase the debt burden for the U.S. government, which is increasingly sold in short-term notes. With a stagnating economy, the tax base will be unable to shoulder this extra weight. This could potentially lead to the largest sovereign default in history.

Many commentators are arguing that hyperinflation cannot happen in the midst of a second credit crisis. In fact, hyperinflation tends to happen in rapidly contracting economies: Zimbabwe, Weimar Germany, Argentina. These countries have negative productivity growth and thus cannot 'soak up' the excess currency being printed to keep prices stable.

Based on his perceived diagnosis of the Great Depression, Bernanke is betting the house on his War on Recession. Despite the media's faith that he has an ace up his sleeve, it is a foolhardy gamble with the country's economic future.

By John Browne
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

John_Browne Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules