Skip to content

The Interest Rate Canary

Tags:

canaryIn the early days of mining, miners brought canaries down into mines. The purpose, according to Wikipedia was to signal danger:

If dangerous gases such as methane or carbon monoxide leaked into the mine, the gases would kill the canary before killing the miners, thus providing a warning to exit the tunnels immediately.

Interest rates can be looked at as performing the same function for the economy. This canary is dying or already dead.

Money Abuse

One of the triggers/catalysts for the next economic collapse is likely to be the dollar. The US and the Fed have both abused the privilege of world’s currency. Larger nations are scrambling and making deals with each other that enable them to avoid using dollars. Smaller nations suffer from the inflation that the US dollar policy exports to them.

OPEC’s insistence on dollars for oil trades may be the remaining condition that allows the dollar to continue as the world’s currency. If OPEC begins to accept other currencies in lieu of the dollar, that could end the dollar’s status as the world’s currency. (For a discussion of why this may be changing, see here.)

No existing currency is capable of replacing the dollar because no other country’s economy is big enough. Over time, China may be able to fill that role. Indeed they have signaled their willingness and desire to do so.

All countries are irresponsibly debauching their currencies in the same fashion as the US. A “beggar-thy-neighbor” race to the bottom is underway where no country wants its currency to appreciate in terms of others. The dollar is sinking, but the relative speed at which is deteriorating determines its value relative to other fiat currencies. If all are being debauched at the same rate, then the dollar can appear neutral or strong on a relative basis.

The attractiveness of gold is that no one can debauch its value by creating more of it. create it and it has represented real money for over 5,000 years. In a world of deteriorating purchasing power, it should hold its value (and go up in terms of the deteriorating fiat currencies).

What Is Coming Next

A slow-motion collapse of most fiat currencies is underway. Undoubtedly leaders know what is happening and put in place an alternative when the dollar is no longer acceptable. Unfortunately, it will be a phonier currency than the fiat currencies that are in freefall. It will be a world currency justified as a result of the next crisis.

A world currency (i.e., a world central bank with the power to create money) is the dream of every Statist. It requires a world government. To visualize, imagine Europe, Brussels and the Euro on a world scale.  A world central bank will be a bigger disaster than all of the individual central banks combined. Ditto for world government being worse than national government.

No matter. The powers-to-be in the countries-that-are have backed themselves into a corner from which there is no escape. Setting up a world currency will make matters worse in the long-term. However, it will provide the appearance of a “solution” that enables current politicians to skate through their remaining time before the (bigger) tragedy unfolds. That is what matters to them, not the terror they unleash on citizens.

Currency Collapse

Signs the dollar may be collapsing can be found in this blurb from John Mauldin:

Update 3-China, Japan lead record outflow from Treasures in June

That is the biggest monthly dumping of Treasuries by foreign creditors since 1977!

So which of our country’s creditors are doing the most selling? None other than our two biggest creditors, China and Japan.

China and Japan sold a combined $40 billion of US debt last month, but that’s a drop in the bucket. China and Japan hold $1.27 trillion and $1.08 trillion of US debt respectively, and more selling will lead to even more bond losses.

Interest Rates

Interest rates are rising. This change is equivalent to the canary being asphyxiated in the coal mine.Holding intermediate and long-term bonds becomes a losing investment because bond prices fall.

Interest rates don’t move in a vacuum. They are a signal that the ignoble experiment of The Fed and other central banks has failed. For a while interest rates were successfully held below market levels, sending false signals to investors and economic decision-makers. That fraud is now ending.

The Fed is impotent to overcome market forces. No government or central bank can withstand the power of markets for long. inflationprinting-moneyThe Fed achieved lower interest rates via the creation of new money to buy Treasury bonds. Trillions of new dollars meant the devaluation of each existing and new dollar in terms of purchasing power. While reported (and fudged) government numbers regarding inflation continue to be low, market participants know what is happening. Apparently they have chosen this time and place to make their stand.

Dollar-denominated assets are beginning to be re-priced. Actual and expected losses in purchasing power are now being included in this calculus. The anticipated loss of purchasing power is being reflected in interest rates. Lenders will not lend where they expect to lose purchasing power when the loan is repaid. A premium for the expected loss of purchasing power gets added to whatever the risk-rate associated with the loan. That is why interest rates are rising. Lenders are demanding this premium be increased as the perceived probabilities purchasing power losses increase.

Rising interest rates trump whatever benefits Quantitative Easing was supposed to bring to the economy. The Fed is unlikely to stop its foolish behavior, however. The government is unable to pay its bills without the Fed printing money and giving it to them in exchange for Treasuries. Perhaps that was the hidden agenda after all.

Rising interest rates signal the end of over-priced financial assets. Bonds are already being repriced downward. The last week or so suggests stocks have also gotten the repricing downward message. If there were a wealth effect created by over-priced markets, this effect is about to be reversed.

The real economy will be harmed by rising interest rates. Higher mortgage rates have already slowed the housing market. Autos and other big ticket consumer items dependent upon consumer financing will slow. Ultimately the costs of buying anything on credit will rise and the use of credit will shrink along with the sales of the items purchased on credit.

No economy or government can survive when it is dependent on fooling the public. An economy built on this false basis builds up massive distortions in resources and capital. The basis of economics for the last fifty or more years has been based on fooling the economic decision makers to have them act not in their own best interests. That is the fundamental basis of government intervention and Keynesian economics — produce results that markets would not. It may fool some of the people for some of the time. It cannot fool enough of the people forever.

We near the end of a long-running economic fraud. The rise in interest rates is the precursor that will expose this fraud. The smoke and mirrors economy perpetuated by gimmicks has run out of manipulations. This economy is coming down — and hard! Markets will likely precede the economy in the decline.

Others have taken notice of rising interest rates and the potential they represent for toppling the entire system. Here is one:

The thundering sound of collapse is getting closer and louder. The terrorist threat has been pushed to the four corners of the world and there are warning signs all around us. The US government is getting ready to sign the UN arms treaty, we had a shooting at a school which will then lead to another false flag where the gun bills will be passed. This fall there is the threat of tapering, the Muslim march on 911, the Cyber Threat on Banks on 911 and the power grid drill in November. Countries and investors are starting to take delivery of physical gold. The Thunder has been called down and it’s here.

EMBRY: “THIS SURGE IN INTEREST RATES MAY HAVE ALREADY SERIOUSLY DESTABILIZED THE ENTIRE FINANCIAL SYSTEM”

“I guess I’m always unnerved as a result of what happened in April, the last time the President of the United States had a meeting with all of the bank heads, and two days later the price of gold was trading smashed for over $200. Now, the President is meeting with all of the heads of the various agencies, institutions, the Fed, and all of the other key money entities in the United States today. What’s that all about?But clearly if the President is having this meeting, there is a crisis unfolding somewhere in the background, and it could very well relate to the dollar, interest rates, and the massive derivatives market associated with interest rates….

Rising interest rates are a killer in an over-levered economy, and that’s exactly what we’ve been seeing in the United States.

This surge in interest rates may have already seriously destabilized the entire financial system, and that’s why there is this meeting taking place in the White House today. The fact is that the vast majority of derivatives in the global financial system are related to interest rates.

Now, the entire financial system may be on the precipice of some sort of catastrophic event unfolding because of what we have already seen in the bond market, and how the derivatives are so heavily intertwined. Meaning, we may be on the verge of another disastrous derivatives meltdown.

Extreme caution is in order.

21 thoughts on “The Interest Rate Canary”

  1. Pingback: The Biggest Race to Print Paper Money in History? — State of Globe

  2. @Brett: Whether Abba P. Lerner was a communist or not is irrelevant. I’m just saying that MMT effectively describes the monetary system that we have. I’m definitely not a communist or socialist. If you look at the monetary system using the MMT framework, the MMT paradigm effectively describes how our system functions precisely. Again, just take the time to read Warren Mosler’s work. Warren Mosler actually worked in the banking industry and he starts by merely describing banking operations, which is quite revealing. People with other economic views like the Austrians are trying to super-impose their view on how the monetary system should work, but their paradigm is simply not applicable. I think that the Austrians and Libertarian types just do not like the concept of the federal government being involved in the economy more then they think is warranted. Only MMT gives the framework for an effective understanding our system. Also read Prof. Stephanie Keltons’ work at UMKC – she is really on top of this stuff.

    1. There is a good debate between Warren Mosler and Matt Rognlie here: http://mattrognlie.com/2011/04/29/mmt-fallacie/
      I still have not finished reading it.
      It seems one of the problems with MMT is that many claim it is just a description of how the system works. However, the problem is that there is also a prescriptive aspect to it – the implied theories on what policies need to be implemented to fix the system. This is far mare controversial and also seems to have been hi-jacked by the free-lunch Keynesians. MMT seems to have a PR problem at the very least.

  3. Pingback: Quantitative Easing US, stop ou encore ? Par Pierre Leconte « Le blog A Lupus un regard hagard sur Lécocomics et ses finances

  4. A growing economy requires a growing money supply – this is an economic fact. Again, where do dollars come from? – the US federal government, a monetary sovereign, currency issuer. People should not be getting hysterical and fearful about the U.S. issuing more dollars – I’m not saying there are no constraints, there definitely are, but we are far from approaching them with the current state of the economy. I implore everyone to please educate themselves about MMT and the work by Stephanie Kelton, Randall Wray and Warren Mosler. Why people (even including misguided policy makers and academics) cannot understand these concepts is stunning and beyond belief, and is very harmful to society. I have yet to see a cogent and convincing argument refuting the applicability of MMT. The amount of ignorance about economics from people who should know better is incredible. Go take a look at Mike Norman’s website:
    http://mikenormaneconomics.blogspot.com

    1. MMT acknowledges that excessive government spending will be inflationary. However, I have not seen a good argument on how we go from 5-10% inflation to hyper-inflation. Most of the doomer articles I’ve read make huge leaps of logic. Lots of hysteria. So far, I’ve been amazed at how the Fed has controlled inflation compared to all the government borrowing. It has caused inflation of asset prices to bubble in the stock market, but that has been intentional to pump up the wealth effect.

        1. Mike Norman is delusional or just arguing a technicality to draw attention to himself (or worse a schill like Krugman). Of course we can create money forever with no limits. He ignores what impact that will have on the economy. His position flies in the face of reality. Why does the government even bother to levy taxes if they can print all they want? …becuase everyone with a brain knows that injecting money like that into the system that is not connected to actual production with debase the currency.

          1. Mike Norman is right and he is not crazy. There are a lot of fiscal policies and self-imposed constraints that are actually remnants of a monetary system that we no longer have. We no longer are working under a gold system, yet our fiscal policies assume that we do – I agree, the way the government manages fiscal policy is screwed up indeed. Please keep an open mind, and read Warren Mosler’s work to get a better understanding of this stuff. The Austrian economists are out of paradigm and their views are simply inapplicable to our present monetary system and how it functions. I don’t know if MMT is the best, nor do I endorse it, but it is reality whether one likes it or not.

          2. MMT is economics based on concept fiat currency. That Austrian economics is outdated because we are no longer on the gold standard, is just a red herring. Austrian economics has a full understanding of fiat currency. Fiat based economies are not new. MMT asserts that the government uses taxation not to raise money, but to regulate (remove money from) the money supply. Think about that for a minute. The more the fiat money government creates to fund its operations (almost always non-value add activities), the more it is forced to take away from its productive citizens/subjects via taxation! Sounds like a recipe for poverty and misery.

          3. On further research it appears I nailed it. Abba P. Lerner, the father of MMT was an economic Stalinist and statist. He wrote the preface of “The Economics of Control” and developed a model of market socialism, which extended the planned economy model (see his entry on Wikipedia). The economics of Socialism have yet to bring happiness, prosperity, or equality no matter where they have been attempted.

      1. Oh my, we have an MMT wingnut in the house.. wonderful. While it is true that the US may not have to technically default since it retains it’s monetary sovereignty, that says nothing of what becomes of the buying power of that money. MMT imagines that money is not debt based..but it is, and you can’t change that by your imaginings.

        1. That is an over-simplification. This is what it says on the federalreserve.gov site:
          “Open market operations (OMOs)–the purchase and sale of securities in the open market by a central bank–are a key tool used by the Federal Reserve in the implementation of monetary policy. Historically, the Federal Reserve has used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate around the target federal funds rate established by the Federal Open Market Committee (FOMC).”

          So they set a target and use OMC to buy and sell in order to achieve the rate they want. If they could actually set it “by decree” OMO would be unnecessary.
          Again, I’m not really arguing the end result (the Fed gets what they want), just the process.
          They Fed has a lot of tools and a lot of money to make it all work, but the hypothetical argument is that it could spin out of control since they don’t control it by edict. There are certain factors beyond their control (for example, China decides to sell all of its $2 trillion U.S. debt at the same time).

      2. You must be thinking of the Discount Rate that the fed sets for its borrowing banks. The Fed does not set bond interest rates. The Fed tries to influence the Bonds rates with their FOMC operations, but in a world where the Fed is not the primary purchaser of Government debt, market forces determine bond yields. It is the rising yields that are forcing the Fed to start tapering their Treasury and MBS purchases. If Primary Dealers don’t want to buy treasuries, then yields must go up (again, assuming that the Fed is not doing all the buying like they have in the past). So in a way you are right, they set the rates, but the buyers of the debt are the ones who force them to change the rates if the Fed wants to keep selling bonds.

      3. The Fed sets the interest rate – the author of this article does not appear to understand this pertinent fact. The author does not appear to understand that MMT is the paradigm which explains how the U.S. monetary system functions – we are not on a gold standard anymore. It is IMPOSSIBLE for a monetary sovereign currency-issuer like the U.S. to become insolvent and default (Where do U.S. dollars come from? – think about it, use both synapses this time). And NO, the U.S. is not like Weimar Germany, Greece, Argentina or Zimbabwe, etc. It’s a little more complicated that just: “print dollars = hyperinflation.” – Austrian Econ.’s do not understand this important concept. I absolutely love the U.S. dollar and Treasuries – I do my best to collect as much as I can! Just wondering, is the owner of this site also selling a newsletter and/or gold?

      Comments are closed.

      Return to Top