Monday, November 2, 2015

Another reason the FED cannot raise rates


When President Obama signs into law the new two-year budget deal Monday, his action will bring into sharper focus a part of his legacy that he doesn’t like to talk about: He is the $20 trillion man.

How can the FED raise rates when there is $20 trillion in debt. Every one percent increase in rates will lead to $200 Billion in interest payments. Every year the US government runs deficits in their budget so the debt just keeps increasing. Eventually the market will figure this out and then we will see a resumption of the decline in the dollar. Currently Japan is further down the road in this endeavour as their debt is over 150% of GDP and the bank of Japan is buying an increasing amount of the public debt.  

The greater issue is Japan’s skewed intergenerational income distribution which conceals policy mismanagement over the past 20 years. Over that period the government has borrowed from future generations. That has caused the nation’s net debt to GDP ratio to reach 150%. I am worried that the economy is near full employment, yet the budget deficit remains 5 to 6% of GDP. In addition the nominal growth rate is at best 2%. This suggests the debt to GDP ratio is heading towards infinity.

Since that’s impossible, there will likely be a breaking point when wealth gets redistributed to the government through the tried and trusted mechanism of inflation. Alternatively, the government could confiscate half of people’s wealth through a one-off transparent wealth tax to write off the nation’s debt. It amounts to the same.

That statement above is from the chief economist at the Bank of Singapore. He is a mainstream economist and he flat out says that inflation (money printing) will be used as the way that the government tries to get out of the problem. There is plenty of warning for what is coming it is only the timing that is in question. Are you prepared?

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