The impication on PM's to a normalized 3% feds fund rate?
MGLICKER
Posts: 7,995 ✭✭✭
*Janet Yellen awakens Monday and realizing the devastating repercussions from 6 years of indiscriminate monetary policy, immediately raises the fed rate to an historic average 3%.
What will be the effect on Gold and Silver prices?
..........Equities?
..........10 and 30 year interest rates?
...........retail sales?
*this is a hypothetical of course as the Obama appointed Yellen is a free money creating liberal.
What will be the effect on Gold and Silver prices?
..........Equities?
..........10 and 30 year interest rates?
...........retail sales?
*this is a hypothetical of course as the Obama appointed Yellen is a free money creating liberal.
0
Comments
I guess my answer is - it would be devastating to the economy.
I knew it would happen.
<< <i>If rates went to even 1% dosen't the US go bankrupt immediately just from paying that much interest on 17 trillion in debt?
I guess my answer is - it would be devastating to the economy. >>
We already pay more than 1% on most of the national debt. Though Bernanke did his twist a few years ago to shorten maturities, most of the debt is locked in for 5 or more years. As those maturities come due though, the interest obligation would become enormous as rates rise.
<< <i>Probably the same scenario would be applicable if the Moon unexpectedly changed it's orbit or pigs learned to fly
I know that it takes a bit of imagination, and doubtful that the rate would rise to 3% in a single move, but the effects of $4,000,000,000,000 of freshly minted FRN's will no doubt force a rise to 3% (or higher) in relatively short order.
Liberty: Parent of Science & Industry
<< <i>
<< <i>Probably the same scenario would be applicable if the Moon unexpectedly changed it's orbit or pigs learned to fly
I know that it takes a bit of imagination, and doubtful that the rate would rise to 3% in a single move, but the effects of $4,000,000,000,000 of freshly minted FRN's will no doubt force a rise to 3% (or higher) in relatively short order. >>
Your letting your imagination run wild on you. Some conspiracy advocates and Wall Street "whiz kids" have been predicting doom & gloom for the bond market since 2011. And so far, it's just dust in the wind. Not doubt rates will rise over time, but I suspect it will be a gradual increase, orchestrated by the Feds.
<< <i>*this is a hypothetical of course as the Obama appointed Yellen is a free money creating liberal. >>
^^Key Point^^ For the next 2 to 3 years we won't have to worry about that question......
<< <i>
<< <i>*this is a hypothetical of course as the Obama appointed Yellen is a free money creating liberal. >>
^^Key Point^^ For the next 2 to 3 years we won't have to worry about that question...... >>
Markets have a way of forcing the hand of even the most idealistic liberals.
<< <i>My brain nowhere near big enough to comprehend the question, never mind finding the mental capacity to worry about it. >>
Worrying and preparing are two different things.
I rarely worry......
Also, as long as one is able to freely print money to pay debt, debt is just another dirty word. Imagine being able to do the same with your personal debt. Would YOUR spending increase?
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
<< <i>
<< <i>My brain nowhere near big enough to comprehend the question, never mind finding the mental capacity to worry about it. >>
Worrying and preparing are two different things.
I rarely worry...... >>
I remember well, when in 2009 numerous forum posters were preparing for a SHTF scenario, by stocking up on 1 years supply of food, guns, ammo, building fortresses or bunkers for the imminent collapse of the U.S. as we know it. (what a waste of money and sleepless nights). What are your plans for your nightmarish scenario?
<< <i> What are your plans for your nightmarish scenario? >>
First off, why would you consider a 3% fed funds rate to be nightmarish? It would return a bit of interest to hard working savers that have been hurt by artificially low interest rates, conspired by the federal reserve. I suppose your fear is that the frail economy would falter and collapse under such historically moderate rates. That is of course a concern as three decades of fiscal irresponsibility has left us economically vulnerable.
I do not own a bunker. I suggest to my friends that they store a least a few months worth of food and potable water in the event of man made or natural disaster. Taking steps to protect these assets is also important for those who are capable.
<< <i>
<< <i> What are your plans for your nightmarish scenario? >>
First off, why would you consider a 3% fed funds rate to be nightmarish? It would return a bit of interest to hard working savers that have been hurt by artificially low interest rates, conspired by the federal reserve. I suppose your fear is that the frail economy would falter and collapse under such historically moderate rates. That is of course a concern as three decades of fiscal irresponsibility has left us economically vulnerable.
I do not own a bunker. I suggest to my friends that they store a least a few months worth of food and potable water in the event of man made or natural disaster. Taking steps to protect these assets is also important for those who are capable. >>
You are the one who brought on this overnight nightmare, not me. In addition, I never indicated that a 3% rate is a nightmare but only if it occurred overnight. As a retiree, I welcome higher rates, but only if they occur in a gradual and orderly fashion. Lets face it, your nightmare is never going to happen and posting such hypothetical nonsense is a waste of our time.
Knowledge is the enemy of fear
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
My Adolph A. Weinman signature
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
Yup, and if the economy is mostly static while the money increases, the winners and losers simply get shuffled around. This works great until the worker bees stop working because it's easier not to work anymore. And this happens on the margins all the time now.
The biggest problem is not the debt, it's the derivatives.
Which is why the 3% rates being talked about in this thread isn't the same as your father's 3% rate scenario. Because the debt has mushroomed so much, any increase in rates now will automatically begin an exponential increase in the government's monthly bills - which in turn forces the issuance of more Treasuries to pay for it all. Most of the derivatives are interest rate swaps, much akin to the design of QE Twist program, which traded short term for long term debt obligations (for a price of course - see JP Morgan, Goldman Sachs).
This strategy works for awhile because there is a much larger pool of long term debt, so a little trading doesn't affect rates much. The problem with long term debt is that it is much more sensitive to market conditions than is short term debt. The associated problem is that long term debt is tightly tied to the real estate market. So, when market conditions dictate that long term debt increases, it affects housing prices and housing affordability in a big way. This was the crux of the 2008 financial crisis in the first place. And it's never been solved. And it won't ever be solved in a good way.
At some point, the derivative contracts will have to be rolled over, just like the long term Treasuries will be rolled over. At that point, nobody wants to buy longterm debt from a government that devalues the currency so quickly. All of this implies a crash in long term Treasuries because of the low rates currently in place - no reward for a certain guaranteed rate of value destruction.
If rates rise, it destroys the whole structure of the housing market and the market for government debt along with it. The alternative is what they always do, increase the money supply in as many sneaky ways as possible i.e., continuing to make the problems ever more intractable.
Got metals?
I knew it would happen.
<< <i>3% of $17 trillion is a lot of money. If interest rates went up significantly, just paying the interest on the government's debt would blow a huge hole in the budget. >>
The budget would get a lot more income from increased economic growth.
Knowledge is the enemy of fear
<< <i>The biggest problem is not the debt, it's the derivatives. >>
Myth.
Knowledge is the enemy of fear
Any dividend paying stock would immediately be sold off to properly reflect the risk factor of holding it.
Utilities would get hit hard as they exist on borrowed money for operations which would create a necessity to raise dividends with no revenue to do so.
We've given away our future and only continuing the farce will keep it rolling a bit further before ultimate collapse.
IF.... there's ever any return to be had on bonds.
<< <i> Lets face it, your nightmare is never going to happen and posting such hypothetical nonsense is a waste of our time. >>
Sorry for stealing your precious time.
Doubtful that it would happen, but a huge dump of foreign held US debt could crash the dollar and cause such a reaction by the fed.
Russia recently cranked up their short term rates dramatically as the Ukraine situation caused an exodus of assets out of the country.
Point of the thread was to demonstrate that the so called recovery is a function of heavy government stimulation. Looking for responses to how the economy would react in the absence of "free" money. Posts on both sides have been intelligent and informative.
<< <i>3% of $17 trillion is a lot of money. If interest rates went up significantly, just paying the interest on the government's debt would blow a huge hole in the budget. >>
Unless the Fed were to buy all the new government debt and return the "interest" to the U.S. Treasury, as it is doing to some extent now.
To me, this policy is equivalent to printing large amounts of unbacked paper money that pays no interest. Not a good policy for the long term.
My Adolph A. Weinman signature
<< <i>
<< <i>The biggest problem is not the debt, it's the derivatives. >>
Myth. >>
Really?
Old story, but relevant. Derivatives were a huge part of the 2008 bailouts, and they're still a huge part of today's global financial risks.
My Adolph A. Weinman signature
The federal reserve open market committee policy, now led by
Janet Yellin, is hardly 'indiscriminate' ......IMO.
So the basis of your question has no truth.
I give away money. I collect money.
I don’t love money . I do love the Lord God.
stronger economy, the Fed would be increasing interest rates, but tax receipts would also
be higher.
Real estate would be increasing in price, improving the value of the mortgage backed securities owned
by the Fed and speeding up the rate of prepayments.
The higher tax receipts would more than make up for the added interest cost to the US Treasury.
In theory this would be good for metals (especially base metals like copper and nickel), slightly positive
for stocks, and negative for bonds.
<< <i>
<< <i>
<< <i>The biggest problem is not the debt, it's the derivatives. >>
Myth. >>
Really?
Old story, but relevant. Derivatives were a huge part of the 2008 bailouts, and they're still a huge part of today's global financial risks. >>
Risk is not a problem until it goes bad. Derivatives will be a later problem.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
<< <i>The Fed Funds rate cannot rise to 3% without a much stronger economy. With that
stronger economy, the Fed would be increasing interest rates, but tax receipts would also
be higher.
Real estate would be increasing in price, improving the value of the mortgage backed securities owned
by the Fed and speeding up the rate of prepayments.
The higher tax receipts would more than make up for the added interest cost to the US Treasury.
In theory this would be good for metals (especially base metals like copper and nickel), slightly positive
for stocks, and negative for bonds. >>
How can a mortgage backed security go up in value? Even in a good market they decay in value as the mortgages are paid down. This isn't a good market and the ones the Fed owns are diseased examples to begin with. Every foreclosure or stoppage in payments of a property within it decreases its value permanently.
The chance that the MBS that the Fed bought were the "good" ones is somewhere between slim and none . The non treasury portion of that balance sheet is stuffed full of the most rancid garbage you could imagine.
<< <i>'Indiscriminate monetary policy' is your opinion.
The federal reserve open market committee policy, now led by
Janet Yellin, is hardly 'indiscriminate' ......IMO.
So the basis of your question has no truth. >>
...everything is opinion I suppose.
$4 Trillion Dollars of fresh, new money is prudent and responsible in many circles. Paul Krugman wants the fed to print it even faster, and he has a Nobel prize. But then, so do Jimmy Carter and the late Yassar Arafat.
<< <i>
<< <i>
<< <i>The biggest problem is not the debt, it's the derivatives. >>
Myth. >>
Really?
Old story, but relevant. Derivatives were a huge part of the 2008 bailouts, and they're still a huge part of today's global financial risks. >>
BAD derivatives were a major component, not derivatives in general.
Knowledge is the enemy of fear
<< <i>BAD derivatives were a major component, not derivatives in general. >>
By virtue of the extensive leverage, all have a potential to become bad.....real bad.
<< <i>
<< <i>The Fed Funds rate cannot rise to 3% without a much stronger economy. With that
stronger economy, the Fed would be increasing interest rates, but tax receipts would also
be higher.
Real estate would be increasing in price, improving the value of the mortgage backed securities owned
by the Fed and speeding up the rate of prepayments.
The higher tax receipts would more than make up for the added interest cost to the US Treasury.
In theory this would be good for metals (especially base metals like copper and nickel), slightly positive
for stocks, and negative for bonds. >>
How can a mortgage backed security go up in value? Even in a good market they decay in value as the mortgages are paid down. This isn't a good market and the ones the Fed owns are diseased examples to begin with. Every foreclosure or stoppage in payments of a property within it decreases its value permanently.
The chance that the MBS that the Fed bought were the "good" ones is somewhere between slim and none . The non treasury portion of that balance sheet is stuffed full of the most rancid garbage you could imagine. >>
I can think of 4 ways a mortgage can improve in value:
1) The value of the underlying property increases so that the mortgage is
better collateralized. (think underwater to positive equity)
2) The borrower's credit can improve.
3) The property value can increase to the point where it makes financial
sense for the mortgage holder to foreclose.
4)The balance gets paid down to the point where the equity is no longer negative.
Since a MBS is just an aggregation of mortgages, what benefits some benefits the MBS.
As balances get paid down, the credit quality of the remaining mortgages in the pool should
improve.
Right now the economy is improving, real estate values are increasing, mortgages are
being refinanced and paid down.
They slice and dice all these mortgages and generate a basket of securities.
Say version A takes all the interest payments from every mortgage in it , shaves off a fee and send them to the owner of the security. It's an income stream that pays high at first and declines.
Version B sends you the portion that is applied to the principle every month. It's an income stream that starts slowly like a snowball rolling downhill it gets bigger.
Every default , where the mortgage holder stops paying tears a chunk out of the whole security, both kinds. Maybe there are 20 different kinds , it doesn't matter defaults hurt them all.
A security stuffed full of downtown Detroit mortgages will never be worth anything long term , if property values improve there they don't load new mortgages back in .
They lied about the strength of the loans and concealed what they put in the security. Then they sold them.
If goldman is offloading MBS to the Fed they aren't fire selling the good ones. They keep those they know are good. The Fed gets the dregs.
Who gets the underlying real estate?
Knowledge is the enemy of fear
There is a layer of abstraction . The MBS owner has no say in the actual property. If a mortgage defaults its out and the face value of the security drops. It's not a bundle of loans , not a bundle of property either . It's a derivative .
The servicer gets a percentage of each payment it forwards . If it sends less payments it gets less in total but it won't go to zero until the last loan ceases to exist. They do no actual work other than forwarding payments.
Mortgages that are paid off early also disappear from the security. If you refinance then the new mortgage doesn't substitute for the old. It's gone.
The principle payment based security MBS would seem to be an ideal long term investment , no?
If the creator of the security seeds it full of garbage loans then 30 years down the road its worthless In the first 5 years of a boom no defaults ok fine , but you make nothing because the individual mortgage payments are mostly interest.
If you are a "good" customer maybe you get steered helpfully into a"good" security. If you are a muppet you get Corizined .
Now the Fed incidentally is grouping the MBS they own into new super securitys. The old CUSIP numbers will go away so even whatever little you could learn from that will be a dead end.
Why are they repackaging them? to disguise how bad they are ,or for future sale?
Someone is going to get to find out what happens when you run sausage through a sausage maker
Knowledge is the enemy of fear
Halfway down this article is a chart showing the fanny and freddie slice of the market.
not sure how to just steal the chart but the article provides some info anyway
A crib sheet on MBS from Nomura securities
is the plan to nationalize franny and freddy on the sly?