Fed makes no move, again

September 18, 2015 11:23 AM

The Federal Reserve has just announced that its target for the federal funds rate will be kept at 0%. It has now been at 0% since Dec. 16, 2008. I stated as far back as 2010 (and often since) that the Federal Reserve can never allow interest rates to rise again due to the massive amount of debt that this system has created. Most people called me crazy.

Since the financial crisis in 2008, which was what prompted the Federal Reserve to take such an extreme measure of lowering rates to 0%, the total debt of the U.S. government has nearly doubled.

In 2008, the U.S. government closed their fiscal year with $10,024,724,896,912 in debt. That’s $10 trillion. What is the total U.S. government debt now?  Well, actually, no one knows. On March 13 of this year the total debt hit the “debt ceiling” mandated by Congress when it stood at $18,112,975,000,000.

On July 30, Treasury Secretary Jacob Lew sent a letter to the leaders of Congress informing them that he was extending a “debt issuance suspension period” through Oct. 30.

That suspension still remains in effect. In the meantime they siphon money from other areas (including pensions and other entitlements) to remain afloat. And, as of today the total debt officially issued by the U.S. government remains at $18.1 trillion.  It it were not frozen it would be approximately $18.5 trillion or higher at this time…which means total U.S. government debt has nearly doubled in the last seven years and has more than doubled since it stood at $9 trillion in 2007.

And herein is why the Fed can never raise rates significantly (more than 1-2%) without collapsing the whole system.

If, for example, they were to allow rates to rise to a very, very low number, like 3% that would entail unknowable wreckage.  Certainly the U.S. housing market would be wiped out… which would lead to the banks being wiped out… which would mean 2008 again but far worse due to the massive amount of debt added to the system since then.

And if the Fed were to move to a 3% interest rate that would mean government bonds currently offering a 2.5% yield would have to offer well over 5%. But at even just 5% that would mean interest payments being paid by the U.S. government would be $900 billlion… or nearly $1 trillion per year.

The total amount the U.S. government takes from its “free” citizens is currently near $3 trillion. Which means, even an interest rate rise to 3% would have the US government paying out more than 30% of its tax “revenue” just to cover interest payments alone.  Not to mention that the rate hike would cause such a depression, like in 2008 but far worse, that tax receipts would plummet… likely meaning that nearly every dollar of tax revenue would go to pay interest and there would be $0 to spend on its expenditures that currently cost $3.8 trillion (2014).

In other words, if the Federal Reserve wants to keep the economy and the U.S. government afloat for even a little while longer they will have to keep interest rates at or near zero into perpetuity.

Which is what I have been saying for years.

Consider this, the last time the Federal Reserve raised rates was over nine years ago. Back then, The Dollar Vigilante was still four years from being started, there was no such thing as a smartphone and no one had heard of that little startup, Facebook.

Today, Janet Yellen was asked if the Federal Reserve might keep interest rates at 0% forever. She responded, “I can’t completely rule it out but really that’s an extreme downside risk that in no way is near the center of my outlook.”

She can’t completely rule it out? She can’t completely rule out that the Fed may never raise interest rates again? That’s very telling!

The markets were flat up until the announcement today as the entire financial world waited to hear what Janet Yellen was going to do to them. The Dow has been up and down about 100 points and currently sits slightly negative at the time of this writing while gold and silver got a quick pop after the announcement and have stayed at those levels. What is perhaps of most interest is that in past times the Fed keeping rates at 0% have resulted in the markets rallying. This time markets faded on the announcement. You can only imagine what would have happened if they raised rates by 0.25%!

And so, we carry on down the same Keynesian path, for now, with ever building malinvestment and massive distortions in the economy. Only guaranteeing that when the next crisis comes it will be far worse.

With China selling U.S. Treasuries like they were autographed photos of Donald Trump and Russia and numerous countries moving away from using the dollar this system is on increasingly shaky ground. Those events are coming up in the next few weeks and still have us very comfortable for our call on a fall financial crisis. Afterall, fall has not even begun yet. Keep your eyes peeled come Sept. 23 when we do enter into autumn and in the weeks following including the coming U.S. government shutdown on Oct. 1.

The summer, especially August, with more than 20 stock market collapses globally including the Dow’s record intraday point drop of over 1,100 points still remains a harbinger of more chaos and crisis to come in the fall.

About the Author

Jeff Berwick is the founder of The Dollar Vigilante, CEO of TDV Media & Services and host of the popular video podcast, Anarchast. Jeff is a prominent speaker at many of the world’s freedom, investment and gold conferences including his own, Anarchapulco, as well as regularly in the media including CNBC, CNN and Fox Business.