The Federal Reserve Bank has printed trillions of dollars to monetize US government
debt just to keep the government afloat. Any significant rise in interest rates
will probably decimate US government finances, the fragile housing market and
in the bond market it will cause a financial catastrophe through interest rate
derivatives.
This is a solid reason why the Fed will not raise any rates in any foreseeable
future.
The power to create money out of thin air is great! Should we give it to politicians
and secretive central bankers? Will this power be abused? Will those in charge
yield to the temptation for "legalized counterfeiting?" Apparently the answer
is YES.
All that the Federal Reserve has done was to inflate equity markets. They
never solved any of the original financial problems that lead to creating "The
Credit Bubble of 2007". There was as well no financial resolution by our elected
political officials to resolve this serious problem so that it would never
occur again in the near future. This process called "Quantitative Easing" created
a shift of a tremendous amount of wealth from the middle class and the poor
to the rich.
Inflated stock prices, usually held by the wealthy, created a clear "redistribution
of wealth" which will be paid for by future generations to come. The concept
by the Fed was that centralizing the wealth would help in creating new jobs
and increase capital expenditures in their businesses.
The problem with this philosophy is that it never filtered down from the Billionaires
into real economic growth within our economy. Instead, rather than experience
expansion, we have been experiencing contraction which is resulting into an
economic deflationary depression that will appear evident to all by the end
of this year.
The top 1% of Americans hold 35% of the nation's wealth. This inequality has
continued to grow exponentially.
There are several reason that I can refer to why the Fed will NOT raise rates
anytime in the near future. There are interest rate cuts and devaluations going
on all around the world at the moment. Japan and the Eurozone are both implementing
Quantitative Easing. China is resorting to its alternatives to hold its financial
system together and stave off a hard landing. Emerging market economies are
being hammered by commodity price falls, while oil producers are being similarly
hit by oil price falls. There is no Inflation in developed countries. The world
is entering a deflationary slump. Why would the Fed ever even think about raising
interest rates???
The unwinding of QE will have many negative effects in a market that is already
short of liquidity. So, the unwinding that must be delayed for quite some time
will be welcomed by many. The unwinding of QE purchases and the normalization
of bond prices would be extremely negative for the bond markets, so the tin
can will be kicked down the road for quite some time still.
The PBOC has significant room to lower required reserve ratios on banks to
encourage lending. Even after a series of cuts, the RRR remains at 18.5 percent
for major banks which is among the worlds highest. Reducing the ratio by 10
percentage points would free up 13 trillion yuan ($2.1 trillion) of additional
capacity for banks to lend. On the fiscal policy side, the country's $3.69
trillion of foreign-exchange reserves and relatively low national government
debt levels mean it has the ammunition for fiscal stimulus. China is planning
at least 1 trillion yuan ($161 billion) in long-term bonds to fund construction
projects as the economy struggles. Most of the interest payments on the bonds
will be subsidized by the central government. I believe that more projects
of this type will be initiated in 2015. This is a major factor why the Federal
Reserve will continue pumping liquidity in the financial system.
I believe that the FOMC minutes suggest that it is very far from a rate hike,
the US economy is more likely to see QE4 first!
In short, there is no reason to believe that core inflation will rise to the
2% target any time soon and raising interest rates at the moment would jeopardize
the US's fragile recovery.
CPI Continues To Decline
The FOMC members gave the following reasons for caution:
- Wages aren't rising much
- Prices aren't rising much either
- The dollar is strengthening
- Commodity prices are falling
- Economic growth is still pretty weak
- The labor market isn't as strong as the unemployment figures suggest
In Conclusion:
We continue to see the US and global economies struggle. The writing is on
the wall that a collapse in equities is drawing near, but we have yet to see
the broad stock markets breakdown. When they do, there will be a lot of money
made by taking advantage of falling prices, which is what my focus will be
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