Why we won't see a repeat of the 1970's Rate Hikes
Interest-Rates / Global Financial System Sep 21, 2023 - 10:28 PM GMTBy: Nadeem_Walayat
Doom merchants continue to run off to the 1970's rate hikes that culminated in eye watering 15% completely miss what's staring them in the face for why that CANNOT happen this time! It can't happen because Debt to GDP is triple that of the 1970's! 120% vs 40%, Raising the Fed funds rate to 15% again would be akin to a 45% rate today.
There is no way debt interest is going to reach such extremes as the following interest burden chart illustrates that the US is already paying an eye watering $1 trillion in interest vs $600 billion a year ago! And despite this huge smoking gun politicians peddle the tripe of seeking to balance the budget, what a con!
There is no balanced budget and falling inflation with debt interest passing $1 trillion, what you actually get is a ratcheting higher of bond market manipulation, the bond markets are the most manipulated markets on the planet, logic would dictate that as the government prints money (bonds) rates should rise, that is not going to happen because the Fed SETS the interest for US bonds NOT the markets where the pressure valve is INFLATION, RISING PRICES! RISING ASSET PRICES! RISING STOCKS AND HOUSING PRICES! EXPONENTIAL!
And it's a lot worse than that in the UK as we have a pin prick of reserve currency of the US, so have no choice but to follow the Fed's lead else pay the price of bond market panic as we witnessed September 2022 when Liz Truss's government had deluded themselves that the UK was an independant nation, free to make it's own decisions, well the Bond Market engineered by the Fed soon dealt with that and both Chancellor and PM were soon gone, replaced with a good pair of lap dogs that since have obediently done their banking masters bidding.
Whilst debt to GDP is hovering at 100% despite deploying the same price deflator con trick, is set to ratchet higher as the Tory government attempts to bribe voters in the run up to next years general election.
That and Britain's financially clueless government sold a lot of INFLATION LINKED BONDS so the interest payments are indexed to RPI which tends to average about 0.7% above CPI, well done Einstein's! They can't even do a proper job of defrauding the public, all they had to do was sell 1% bonds during 2020 instead the morons sold INFLATION LINKED BONDS thus 30% of UK bonds are inflation linked. Of course those who bought long dated Inflation linked bonds will be down due to the fact that RATES have RISEN, just less so than regular Gilts.
The UK Debt mountain continues to grow...
Though of course reality is far removed from the smoke screen put up by the bankster's,effective Debt to GDP is 65%! Yes that's right 65% not 100%! How did they pull this slight of hand? Quantitative Easing, about £800 billion of UK bonds are parked on the Bank of England's balance sheet plus about 200 billion other assets! And the price paid for this con trick is INFLATION!
The upshot of this is that the UK government pays ITSELF interest on about 1/3rd of it's debts because the Bank of England just printed the money and bought the bonds from the bond market, the same way the Fed has in the US, which is why INTEREST RATES CANNOT GO UP because if needs be the Bank of England could buy ALL UK Government bonds thus set whatever interest rate the Bank of England wants it to be, what the Bank of England cannot control is the fx rate and thus inflation, the greater the money printing fraud the weaker the currency. HOWEVER since all governments are perpetuating this mega-scam which means ALL currencies are FALLING together! All you see in exchange movements are the differing rates of falling currencies that gives the illusion of one currency rising against another when in reality they are ALL perpetually FALLING!
Remember what we are witnessing on these graphs is an increase in the SUPPLY of BONDS, the government is printing bonds in response to which the market demands HIGHER INTEREST RATES where the only reason why rates were low over the past decade was due to Quantitative Easing i.e. the central banks BUYING bonds and then RETURNING most of the interest paid on the bonds back to the treasury. This IS the game they will resume playing and in many ways already have to limited extent. Still QE proper WILL resume as soon as the politicians order their central banks to do so. It's as simple as that, the government will order the central banks so monetize debt which will FORCE interest rates lower for the government, not for anyone ese as there is no free lunch, someone has go to pay! in the 2010's it was savers who paid, going forward it will be every borrower other than the government who will pay in higher interest rates. Which means whilst rates on government bonds will come down they won't necessarily for instance for mortgages.
What does all of this mean? It means that whilst inflation is falling (the rate of price increases) it WILL prove temporary and will resolve in another spike higher, probably a lot sooner than most imagine it will given the slowing economy, due to the fact that rampant debt printing not only continues but is set to accelerate that will soon be accompanied by QE debt monetization that will fuel the next inflation wave because given the magnitude of the debt bubble they cannot ever allow it to Deflate! So all those who have been barking about deflation for the past few decades will continue to be wrong because the system WILL NOT ALLOW FOR DEBT DEFLATION! Which is what we see with the likes of QE4EVER, every time the debt bubble appears to be on the verge of bursting they up the anti by INFLATING the DEBT bubble further and with it comes INFLATION where our focus as investors is on ASSET PRICE INFLATION.
So if you take away only one message from this article it is that there will NEVER BE DEFLATION! And thus ASSET prices no matter how far they deviate from their highs during bear markets and corrections WILL ultimately resolve to NEW HIGHS. It is by design, the system cannot allow for any other outcome! Hence my Buy the deviation from the highs mantra.
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By Nadeem Walayat
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Nadeem Walayat has over 30 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.
Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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