Debt Rattle Aug 19 2014: Rising Rates and The End of Stimuland
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Harris&Ewing Safest driver of Washington DC, 32 Years Without Crash 1936 It’s Jackson Hole week, and we’re going to hear a lot of fairy tales and othe
[See the full post at: Debt Rattle Aug 19 2014: Rising Rates and The End of Stimuland]The big dog central banks will never raise their official target rates except perhaps in a few baby steps. Those rates are ultra short term rates, overnight rates, aka Fed Funds Rate in the US. Those are the only rates they can control directly. They and everyone talks about how the Fed controls interest rates but besides the inter-bank overnight rate all they can do is influence.
Someday that influence will wane. Slowly at first then ever faster. In 1 year or 10 or 20 I can’t say. Nothing will change until rates rise. Nothing fundamental anyway. Then when Treasury rates rise, and/or rates in the EU,or Japan,or the EU or China, against influence and design, everything will haved changed.
(I hold to a bizarre theory that top quality and size corporate bonds and liabilities may for some time be lower than Treasury or other sovereign rates. This is really a goal in the corporate world. However they believe they can just sail along with the devolution of government. Good luck with that. Then too maybe it won’t come to pass. The breakdown in governance because of governments inability to borrow for nothing may be too fast to allow corporations their moment of triumph.)
Incredibly, I think we underestimate the absurdity of the economy. At $100/barrel for oil, the marginal cost in the Bakken is multiples over marginal revenue. Yet oil heads south from $100 and now below $95. Furthermore, the drillers keep drilling, maybe even faster. So, interest rates rising may not cause havoc; a few well placed bankruptcies might. Such insolvencies, though, may not happen anytime soon.
All this talk of rate increases is Jawboning. Doesn’t cost ’em anything to try and instill a sense of “You better get out there and buy houses and cars now before rates rise and you will be left behind for a generation.”
Worked fine back when the huge Demographic Curve that was the Baby Boomers was in it’s maximum spending years, and only knew “Get it while you can, before someone else beats you to it.”
What the Fed doesn’t understand here is, that massive consumer contingent is now entering it’s frugal, conservative, downsizing, saving for the old folks years,,,in a big way, in big debt, at around 10,000 of them per day. That, coupled with other “Fourth Turning” elements, and the fact monetary authorities have so grossly distorted price discovery function.
Jawboning threats of interest rate increases is nothing but Fed PsyOps. As rapier states above, they can’t set or raise rates up through the duration curve. They can only influence them from the very short end. As usual, the credit is available in spades. The Fed is pushing on a string,,,hard. Or, liken it to winding up a Giant Jack in the Box.
Their BS sessions are efforts to trigger the lid and get Jack to jump out of the box,,,,but the lid is stuck, and the spring is wound tighter and tighter,,,until,,,someday,,,BAM! Monetary Jack will jump so high, so quick, money will fall from the heavens for weeks, ultimately destroying the currency, and the debt that is denominated in it, resetting the system.
Our children will thusly be set free, and it all starts over,,,of course with an entirely different political complexion.
That’s my story, until someone can show me why the natural evolution in debt destruction will somehow be different this time, and we will become the first nation ever, with an unbacked fiat currency, brought down by deflation, and debt will be allowed to be defaulted on in that way. I mean, why would the Fed do that? Knowing it has a monopoly on money now, with no cost of creation?/
On Ferguson, that has now become a racially charged political football. Might be a wise decision on Obama’s part not to jump in until some dust settles.
From a “Justice” standpoint, well, he did send his top Law Dog in. For whatever that’s worth.
So many mistakes were made in the handling of that mess from the very start, any resolution that could satisfy all parties is nigh impossible now. It will become the stuff of shouting matches between Red and Blue media pundits for the duration of this election cycle.
ps; Distinctions must be made as to the jurisdiction of law enforcement here. States Rights vs Federal Intervention. Sending Feds in could turn this into a Constitutional Crisis. That could stir up some serious issues!
Yeah, Ken,
That oil price decline, in my view, has more to do with demand destruction than supply increase. What’s your take?
For sure, the money chasing new drilling isn’t as much coming from profits, as it is Wall Street speculation.
In short, liars selling holes in the ground to green horns.
It’s an “Old West” kinda thang.
Rising rates and home prices? I can remember many periods when rates were from high single digits to 14+%. And home prices rose.
In periods of severe currency devaluation, real estate takes on hedge characteristics. “Location, location, location” turns to “leverage, leverage, leverage.”
By the time “snooze you lose” becomes cocktail party talk again, it’s game on for interest rate rises and RE price rises, in tandem.
I believe we have one more final boom left in this thing. Only a matter of time.
The Fed hasn’t begun to really dig into it’s bag of tricks yet.
I think the impossibility of real recovery is illustrated by people like me. I’m completely flat broke. I can’t afford a hamburger at McDonalds or a tee shirt at Walmart and its been forty years since I’ve been this pinched. Nor am I a feckless consumer; my house is paid off and my only debt is my car payment. I got wiped out by medical bills and the horrific heating costs of last winter. The cost of everything (okay not gasoline but that’s probably just temporary) is going up and my salary hasn’t increased in years. Four dollars for a jar of peanut butter? Are you kidding me? There isn’t any ‘cheap food’ left. If I’m tapped out just imagine the financial distress of people who have credit card bills and multiple installment payments. If fiscally prudent mature people like me can’t make retail purchases then this economy is in real trouble.
@ Escribidora
Move. Leave. It’s an option that not many will consider. It’s a big world “out there”, don’t let fear of the unknown keep you from rational decisions for self preservation.
I wish you well…Professorlocknload,
I think you’re right about demand destruction or perceived destruction anyway. Cash flow is so negative even at $100, so a price drop just makes it slightly more negative. For whatever reason, drilling isn’t slowing in the Bakken yet . Finance is a magical, and absurd, thing.
Quite a few shale drillers must be so deep into debt all they can do is go deeper as long as they can borrow even more, and then hope prices will rise, of either the land or the oil they produce. It can’t be a healthy business anymore.
So its the end of stimulus … or are we just getting started.
There’s a button for that, or maybe a fund. The saviour fund to end stimulus and create an arena for the end to ‘to big to fail’. So they are working on the largest biggest financial item to end the to big to fail. Does anyone see the failed logic?
Proper working markets means allowing the to big to fail to fail. Governments have involved themselves to far and its going to get obvious.
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