FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 07 April 2016

Why Yellen Can Never Normalize Interest Rates

by Bill Bonner, Daily Reckoning

Tuesday, the Dow sold off - down 133 points. Oil traded in the $36 range.

And Donald J. Trump lost the Wisconsin primary to Ted Cruz.

Overall, world stocks have held up well, despite cascading evidence of impending doom.

U.S. corporate profits have been in decline since the second quarter of 2015.

Globally, 36 corporate bond issues have defaulted so far this year - up from 25 during the same period of 2015.

Economists at JPMorgan Chase put the U.S. economy growth rate for the first quarter at 0.7% - down by over one-third from earlier estimates.

And there is $1.7 trillion in junk bonds outstanding - a trillion more than in 2008. Some of these are sure to default in the months ahead.

Speculators are already shorting the banks with the biggest piles of these grenades in their vaults.

No Return to Normal

Over the last few days, we've been trying to coax out an insight.

It concerns whether Fed chief Janet Yellen really does have investors' backs. Not that we have any doubt about her intentions.

Her career has been financed and nurtured by credit and the people who provide it. Crony capitalists, corrupt politicians, and Deep State hustlers paid good money for her; she'll do all she can to avoid letting them down.

But something isn't working. Not for her. Not for Bank of Japan governor Haruhiko Kuroda. Not for the president of the European Central Bank, Mario Draghi. Not for People's Bank of China governor Zhou Xiaochuan.

Their tricks no longer work.

What is the Income Play Rich Investors Love? (Hint: It's Tax-Free)

We're on record with a bold prediction: The Fed will NEVER normalize interest rates.

Readers may wonder how that jives with our deeper insight: Nobody knows anything.

And of course, we don't know whether the Fed will normalize or not. But let us further explain our reasoning; you make up your own mind as to where to place your bet.

The short version of our argument: For the last eight years, the Fed has tried to stimulate the economy with ultra-low interest rates. Business, consumers, and government now almost all depend on credit... and most need ultra-low rates to make ends meet.

Consumers are in better shape, generally, than they were in 2008. But corporations and governments are in worse shape. Raise the cost of funding, and you will push many of them over the edge.

Banks, pension funds, and insurance companies are especially vulnerable. They're now stocked up with low-yield government bonds. Should interest rates rise, those bonds will go down in price.

In other words, raising rates will provoke the very calamity the Fed was trying to avoid: the bankruptcy of the financial sector.

The Triumph of Politics

But wait...

How did Bernanke, Yellen, Kuroda, Draghi et al think they would ever get away with it?

How could they believe - even for a minute - that a debt problem could be solved by adding more debt?

And yet, they always got away with it before.

After World War II, for example, the feds had a higher debt-to-GDP ratio than they have now. But after the war, the economy boomed, inflation rose... and soon the debt was no problem.

Again, at the beginning of President's Reagan's first term, economists worried about large government deficits.

The job of colleague David Stockman - director of Reagan's budget team - was to bring those deficits under control. He failed... a story well told in his book The Triumph of Politics: Why the Reagan Revolution Failed.

Conservative economists thought the U.S. would sink into another slimy pool of deficits and debt. But once again, a spurt of growth (with low deficits) during the Clinton years reduced the debt to a more manageable level.

So, why worry?

Because this time, it's not working. Growth is slowing. Productivity has stalled.

As former Goldman boy Gavyn Davies put it in the Financial Times: "The slowdown in labor productivity accounts for most of the massive disappointment in global output growth since just before the 2008 crash."

Professor Robert Gordon at Northwestern University believes there is more to it than just a cyclical downturn. He maintains that the extraordinary growth of the Industrial Revolution had played itself out by the 1980s. And it can't be repeated.

We have another hypothesis (which we'll talk more about tomorrow): Either way, the debt can never, voluntarily, be brought under control. And the Fed can never "normalize" rates.

More to come...

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Opinion Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Opinion


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
Taking a Wrench to Healthcare
Rising Tide Does Not Lift All Ships
News Blog
Acupuncture Is Useless
September 2016 CFNAI Super Index Moving Average Declines
Consequences Of Rising Income Inequality
America's Most Competitive Renters: Why Many Are Choosing To Rent
Historical Echoes: The Bank Teller Action Figure, Or It's All In The Packaging
Infographic Of The Day: The Oil Market Is Bigger Than All Metal Markets Combined
U.S. 2016 Election Divides Advanced And Emerging Economies
Which Countries Read The Most
The World's Most Expensive Retail Locations
How To Help Energy Demand Match Renewable Supply
Music Subscriptions Revive Revenue
How The Space Station Avoids Junk In Space
Infographic Of The Day: The Most Popular Jobs In A Decade
Investing Blog
FinTech Is Taking A Bite Out Of Banks
Options Early Assignment - Should You Worry?
Opinion Blog
The Beer Goggles Stock Market
US 2016 Election: Will US-China Relations Change
Precious Metals Blog
Preparing For Post-Election Social Unrest
Live Markets
24Oct2016 Market Close: Wall Street Closes Higher, Quietly On Low Volume, Crude Back Up, US Dollar Trading At Resistance, Investors Remain Skeptical On Continuing Bullish Market
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

Crowdfunding ....



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved