Mar
10
Crashof2008
In this video Mr. Fed describes the endgame scenario that central bankers around the world are attempting to avoid, ie when a sell off in Treasuries causes the Fed, against their will, to RAISE interest rates. Although this endgame scenario is rarely discussed in the United States, it is nonetheless a cause of deep concern and anxiety in financial circles. RAISING interest rates in this fragile economic environment would have profound deflationary implications for all of us. Part of a series …
Comments
25 Responses to “#7 THE ENDGAME: When the Fed RAISES Interest Rates”
You assume a fact not in evidence, that the US will default on its debt. That isn’t going to happen while Volcker is in charge.
But it’s impossible to convey this to most Americans. Europeans understand it, but Americans can’t seem to grasp it.
Yes, if rates rose dramatically, it would be extremely deflationary at the moment. It would also create massive defaults and ultimately a default on US govt debt - either directly or behind the scenes thru the necessity of buying up our own T bills offshore. So once the US had in effect defaulted on their debt obligations you would have currency collapse. Either way, the dollar ultimately loses in value - looking at the big picture, you can’t run up debt and not hurt the currency.
Look at the enormous capital gains made by holders of Treasuries over the last year. Bought on margin, they have made money hand over fist.
If you don’t feel comfortable riding the yield curve, that’s your choice. But that is how fortunes are made. And not many fortunes will be made in this Depression.
Yes, if you could guess when the recession would start and stop better than bond traders you could jump in and out of the bond market at the right time - obviously. You could have done the same thing in the 2001 recession. Problem is, you have to time it right or you get stuck with rapidly devaluing T bills just like after 2002.
thank you, been watching your clips with great interest, insightful and good (if not light/optimistic) analysis.
hello Mr Fed ,..thankyou for your videos they are much appreciated ,they are as good as doing a course and are a timely reminder to us all.. please could we have a new video ? as this would be appreciated by all.thankyou.
Mr fed you are so correct,george soros forced
norman lamont to raise interest rates to 15% to support the pound when traders shorted it,but it only was forcing the UK into recession,and he had to reduce interest rates by 5% or so which led traders to sell the pound,the BoE was definately following the markets lead,and got beaten, i hope you make some more videos,as a former market maker you have a lot of insight. I hope to purchase JP morgan for 30p per share in the next few years, hehe!
This guy rocks. I love his videos.
I agree. In fact, I think right now we just entered disinflation (slowing rate of inflation) that will soon turn into deflation. Gold has topped and so has oil; the dollar has bottomed and is set to soar; credit is collapsing; banks are collapsing; stocks are collapsing. Got treasuries?
The accounting reports and financials are only AUDITED once every year, those arrive in January.
That’s when there are FAR FEWER accounting tricks at work.
with the dow hitting 11600 region,the fed held the 2 percent level, oil is way down since the 147.level,even the dollar is re-bounding (A bit) most people agree the credit crunch has only just begun……so is a 1000 point correction in order or is the market going to continue to plug along “sideways” ?? And are we in a recession or not? Forcast for 3q and 4q is less then 1 % are we on the edge of a great storm or what?
if you watch msbc market watch, they make it out to seem that the FED is the supreme controllers of the economy, like you said, they can guide or influence the market, but i believe you, the fed does not solely control the entire economy.
So if interest rates were to go much lower from here, then is that hyper-inflationary? It seems that has been the Fed game for a good part of the last decade, which has also lowered the USD against commodities and other currencies. So if interest rates were to go sky high, one could only assume the transverse environment?…Really enjoy your videos. Thank you.
Thanks Dr. Fed (I give you this title of distinction since your analysis is brilliant…)
You have explained the endgame very simply and very succinctly…
This man is brilliant. I think I have learned more from his videos today than any class I have taken in school.
“2. If hyperdeflation is so imminent, why is there commodities bubble? You think it will just massively correct?”
What commodity bubble…
How can there be a commodity bubble when supply and demand are out of whack?
Actually, the EU response to this crisis differs markedly from the Fed response. Check the FT. Rates are high in EU comparatively, exacerbating dollar weakness and slowing down EU growth.
But Trichet could change.
Coordinated policy intervention has a better chance than unitary. It won’t work if macroeconomic fundamentals are going against you.
But even the G8 is much smaller than stateless capital flows.
Such coordination is exactly what BOE and Fed talked about last week.
I agree extreme hyperinflation of dollar is most likely not possible cuz its like nuclear winter! hyperdeflation is like US taking penance for sins.
But the real result may not be extremes on both, its clear Bernanke is trying to navigate between a rock and a hard place.
Whats your thought on ultimately hyperdeflation vs coordinated worldwide inflation of ALL currencies so so its transparent. After all, eu is having similar problems.
Thanks for your responses!
Bigwig, without tooting my own horn too much, I’d like to invite you to watch my video I’ll post this weekend on Treasury auctions and a day in the life of the Open Market desk of the NY fed.
When I ask you to define “printing money”, what is the precise mechanism whereby that is accomplished? Can you make a schematic of it?
I’ve always found that people using that phrase are unfamiliar with the Treasury auction process and the way the Fed works daily with their primary dealers.
Sorry for incoherent earlier posts - in too much of a hurry.
Print money is what happens when governments get desperate. Are you assuming that the rules won’t change? Politicians always change the rules when expedient!
My contention is that under your scenario as interest rates rise (which I agree will happen) the govt will be between a rock and a hard place. Do you think they will accept the strictures of the market and downsize - or will they change the monetary rules?
Bigwig
My series of videos on the endgame were more to advise people why hyperinflation is quite unlikely, given the realities of the Treasuries market and the relatively small size (in holdings) of the Fed.
We share a similar assessment that this round of interest rate lowering in the US may be ending and the EU may well be poised to lower rates.
But this proves my point. That the Fed is intent on preserving the bull market in Treasuries, no matter what.
Hello, thanks for the good questions.
Like the Fed, I only deal in probabilities and likelihoods across a range of outcomes.
In #4 of this series, I stated that the risks of a hyperdeflationary burst have abated somewhat from the extreme weekend before the crash of Bear Stearns. It is still problematic, but somewhat less likely, although certain segments are still frozen up and there is an enormous amount of bad debt out there.
So the risk of a run on Treasuries has diminished somewhat
Thanks for response
More concerns:
1. Dollar may be at bottom, Fed done lowering, other countries just starting. Higher dollar = more demand for treasury = no demand crash on treasury bubble?
2. If hyperdeflation is so imminent, why is there commodities bubble? You think it will just massively correct?
3. Fed funds = 2.25, long term loan/mortgage still 5+, there is ALREADY a major difference in long term rates discounted, you theorize this spread will rise even more?
Your post limits itself unnecessarily to competing roles of sovereign central banks. This is outdated.
The capital flows from stateless actors now dwarf the sovereigns and must be included for accurate predictive analysis.
These are not my premises.
What is clear is that the relative strength of the sovereigns, either through unitary or coordinated intervention, is rapidly shrinking relative to stateless capital flows.