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Federal Reserve is losing control. They cannot keep interest rates low forever. Nobody can. And when rates rise, the results will be devastating

Dollarpocalypse Now



In the 1979 film Apocalypse Now, Colonel Walter E. Kurtz (played by Marlon Brando) utters, “the horror, the horror,” on his deathbed. He might as well have been talking about the U.S. dollar.
Central banks maintain a nation's currency. As the world’s largest central bank, the United States Federal Reserve, or “Fed,” sets the rate of interest in worldwide lending. It also has major influence on monetary policy. For instance, the Fed’s $85 billion per month in asset purchases, known as Quantitative Easing, or “QE,” caused other banks to do the same. This is a bad thing. What's worse is keeping interest rates artificially low for long periods of time. The Federal Funds rate has been at zero since 2008, and QE is one of the tools they use to hold rates down. “We're not going to allow our American friends to melt the dollar,” said Brazil's finance minister Guido Mantega in 2011, obviously frustrated over the rise in the real due to speculative capital inflows. The European Central Bank and Bank of Japan have also embarked on asset-buying to keep pace with America's easy-money, while the Swedish krona hit a four year low versus the dollar on Tuesday after that country's central bank cut rates to zero. “The Fed is exporting this lunatic policy worldwide,” says former U.S. Congressman David Stockman. “Central banks all over the world have been massively expanding their balance sheets and as a result of that there are bubbles in everything in the world. Asset values are exaggerated everywhere.” The Fed recently ended QE, but the damage is done. Rob Kirby of Toronto-based Kirby Analytics is Canada's leading expert in macroeconomic forensics. Here's what he told Greg Hunter at USA Watchdog regarding the Fed's malfeasance:

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“There are people in the world who don't like this. They don't like the idea that one country in the world can arbitrarily assign a zero rate of interest to money. Zero interest rates trivialize labor. They trivialize effort. They trivialize human contribution to things. It pillages the capital stock of countries. Where rates are zero, nobody has any incentive to save money, and the capital stock comes from savings, not from consumption. Consumption destroys the capital stock. The fraud and the deceit of reporting inflation at less than two percent when it's really at nine percent, it makes people want to spend money as opposed to save money. When you print infinite amounts of money and when you live on a finite planet with finite resources, the two don't mix. It's not sustainable and it doesn't look good for humanity.”
Buyers of U.S. Treasuries are essentially funding a Ponzi scheme. In fiscal year 2012, the Treasury redeemed $6,804,956,000,000 in securities, but issued $7,924,651,000,000 worth, a net increase of $1,119,695,000,000 in debt. In 2013, the U.S. Treasury Department was indebted over $2.5 trillion to Social Security. So even if the checks go out, what arrives in the mailbox might not buy much. Serial deflator Argentina saw inflation at over 400% in the 1970's, and private analysts in Buenos Aires pegged it at 28% for 2013. Inflation in Venezuela is running at 63% this year, with a bolivar fetching around one hundred to the dollar on the black market. Don't think it can't happen here? “Simply going out and buying a U.S. Treasury is becoming a much more dangerous activity than it used to be,” says Russ Koesterich, Chief Investment Strategist at Blackrock, the world’s largest money manager. “Buying Treasuries is like picking up pennies in front of a steamroller,” says John Brynjolfsson of hedge fund Armored Wolf. The United States borrows over $4 billion per day by issuing these securities. At the close of 2014, the United States will have over $18 trillion in debt, a sum larger than the entire economy, and one that can “never be re-paid,” according to former presidential candidate Herman Cain, a onetime Chairman of the Federal Reserve Bank of Kansas City. British historian Niall Ferguson knows a thing or two about sovereign debt calamity: “This is how empires decline. It begins with a debt explosion. The idea that the U.S. is a 'safe haven' is nonsense. Its government debt is a safe haven the way Pearl Harbor was in 1941.” So if you have a few greenbacks left over from your last trip to America, cash them in right away. They're not going to be worth much in the near future. “In my view, the dollar is about to become dethroned as the world's de-facto currency,” says Canadian billionaire Ned Goodman. “In the 'thirties, everyone wanted U.S. dollars. Today, everyone wants to get rid of them.” The world may be waking up to this new economic reality. Share of global currency flows being stashed in U.S. Treasuries slid to just 14% in the first quarter of 2014, less than one-tenth its market share in late 2012 according to Stephanie Pomboy at research boutique Macro Mavens. With interest rates so low, “foreign creditors no longer have any reason to continue to plow money into our markets,” she says.

Federal Reserve is losing control. They cannot keep interest rates low forever

The Federal Reserve has over $3 trillion in U.S. government marketable securities on its balance sheet, ranging from 2-year bills to 30-year bonds. Someday, they will have to start selling. When they do, the flood of cash will cause massive inflation, virtually wrecking our economy. “I say it will be impossible to liquidate $3 trillion in any short-term or medium time period without causing the bond and stock markets to crash,” wrote Robert Lenzner in Forbes. While keeping rates at zero these past six years, the Fed has at the same time increased the base money supply by over 400%. Talk about devaluation. The only reason hyperinflation has not happened is because most of the money created since 2008 has been sitting on deposit at the the Fed's various member institutions. Hoarding cash may act as a dam, but what happens when that money floods out into the economy, i.e., the hands of consumers? This Federal Reserve is losing control. They cannot keep interest rates low forever. Nobody can. And when rates rise, the results will be devastating. The 10-year note bottomed out at 1.8% this month and has since crept higher to around 2.3%. “This economy, with its debt structure, could not support a 4%-plus Treasury yield. In fact, the overall nonfinancial business sector debt-to-output ratio is higher than it was at the beginning of the 2008 recession. So this is not an economy that would tolerate high rates without a lot of things breaking down,” says David A. Levy, chairman of the Jerome Levy Forecasting Center in New York. The horror.


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Anthony J. Tarquinto -- Bio and Archives

Anthony J. Tarquinto is an independent financial adviser based in Aliso Viejo California. Anthony is the author of “The Real 40 Year-Old Virgin of Orange County.” (Xlibris 2010) which is available at Google Books.


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