Blog | CB Investment Management

Interest Rate Suppression Leads To Higher Interest Rates And Gold Prices

Liquidity expansion continues for mortgages, Japan, ….

“The Fed is choosing to keep the sovereign debt bubble alive as a priority over reducing inflation.”

Daniel Lacalle

“Decades of interest rate suppression have led to debt traps in both public and private sectors, destroying faith in fiat currencies. It leads to a flight out of credit into gold.”

Alasdair Macleod 

The messages from the Fed and Treasury last week showed a rising priority for keeping interest rates low. They are increasingly concerned about funding the enormous deficit.

As we said last week, Powell’s comments clearly indicated a change in policy. He refused to acknowledge rising inflation, presumably because he would then have to reconcile the easing in policy he was announcing.

Stan Druckenmiller, one of the most successful investors of all time, this week called out Powell’s extraordinary statements over the last 6 months. Video included.

US inflation is accelerating in all segments, especially those that should be stable.

It’s about time that Powell, and the Federal Reserve were held accountable. Here is the Stan Druckenmiller interview.

The market tends to follow policy guidance in the short term, but the fed has a terrible record both in forecasting and in policy decisions. Investors need to recognize the Fed’s signals, but rethink whether the longer-term policy intention makes any sense. More below.

Not just lower interest rates but more and more liquidity is needed to keep the show on the road. Even for Japan!

Not only is policy trying to lower interest rates, but in order to facilitate this it has to constantly inject liquidity in an ever expanding  list of measures. The latest being new dollar liquidity for Japan!

The Fed has to open a swap line and flood them with dollars. Bailouts for nation states. Further increasing global liquidity.

 

We’re bailing out ourselves by making it so Japan doesn’t have to sell their massive hoard of US Treasuries.

Lynn Alden

The US mortgage market is now fully dependent on government financing.

Are $Trillions Of New Loans About To Be Pumped Into The Housing Market?

Melody Wright

Investors, in general, have not woken up to the emerging chaos

Inflation preparation is not apparent in most western portfolios, as discussed last week. But this issue is much bigger than that. In the 1970s debt levels, relative to GDP, were less than half current levels.

Policy makers are already making remarkable decisions to try and cope with the debt crisis, but still in an ineffective expedient way, which creates long term damage to the system.

The message that the FOMC statement sends to the world is that the US public finances are completely uncontrolled and that there is not enough demand for the insane increase in supply of new government bonds.

When the Fed keeps rates on hold and delays balance sheet normalization, it achieves two negatives. The full negative impact of rate hikes falls on the shoulders of the private sector, families, and businesses, and the balance sheet management keeps the public debt bubble artificially inflated, leading to more persistent inflation.

Daniel Lacalle

Investors need to consider not just the inflation problem but the real risk of a debt crisis getting out of control.

The debt trap outcome

The Fed was forced to raise interest rates when the inflationary consequences of the wealth bubble began to undermine the dollar’s purchasing power. In terms of time preference, higher rates compensate holders of dollars for the loss of purchasing power and to dissuade them from selling them. In previous interest rate cycles, the creditworthiness of dollar debt didn’t become destabilised, admittedly with a bit of help from the authorities. But the debt problem has become too great today, with the government itself firmly ensnared in a debt trap.

Foreign holders of US Government debt will be nervous of interest not being paid but continuing to roll up. It is no longer a simple time preference issue but has become one of likely default. For this reason, inflation watchers are monitoring the wrong metric. They should ask themselves what level of interest will compensate lenders to the US Government for an increasing risk of default.

Answer that question realistically, and you realize that there is no level of interest rate which will compensate a holder of US Government debt for the risk. That is the essence of a debt trap.

The US Government has the solution in its own hands. It must stop running budget deficits and maintain sufficient surplus to stabilize the situation. This action must be implemented soonest. Do this, and existing debt will maintain credibility and therefore preserve the confidence of its holders.

Unfortunately, the political class has no intention of addressing this problem. Unless it does, it is absolutely certain that interest rates will continue to rise, even beyond the highest levels in the dollar’s history as lenders refuse to cover lending risk and even try to sell their existing exposure. In the parlance of the market, US bonds will rapidly become offered only.

Alasdair Macleod

Best Practice is a matter of your Best Interest.


Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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