FED raises interest rates on loans to banks ... fallout expected
(snip)"When on any given morning you see consecutive headlines that read
1."US bank lending falls at the fastest rate in history",
2."Lending to British businesses falls at record pace",
3."UK mortgage lending falls to 10-year low ",
4.”Shock as British deficit equals that of Greece" and
5."Britain posts first deficit for January since records began"
is your first thought that the economic recovery is nicely on pace? If so, perhaps a Tiger Woods press-op is more your thing.
How about we add this one:
"Fed raises interest rate on emergency loans to banks"
Think perhaps that would switch on the light?
See, what those headlines tell us is that the spigots on the private sector are not just closed, they’re still tightening ever more. While at the same time, government debt keeps rising. There can be only one conclusion. The only thing that lets our economies continue to exude a semblance of normality is the dwindling rests of our own remaining wealth, and we are not only not adding any, we are spending what is left, and fast. Our governments, eager to stay in power and remain wealthy, keep us thinking we’re doing just fine, borrow enormous amounts of money in world markets that is not used for any sort of recovery, but instead to pay for the debts of a small group of people who gained access to our full faith and credit by buying the representatives we elect.
And once the Federal Reserve starts raising interest rates, while simultaneously drawing down its purchases of Treasuries and mortgage-backed securities, we will come to understand that we have been living in a soapbubble of our own making, built at the expense of many trillions of dollars and that this bubble is about to pop. That is true in the US as it is in the UK, and all the attention presently squandered on Greece and Ireland is but a trick to make us look the other way for a little bit longer, until everything of value has been stripped from around us and we can wake up one day to find all support and stimulus measures vanished into thin air, a bad moon rising, and a cold wind blowing through the cracks of our unheated MacMansions, with no gas stations able to supply us with the fuel to get out and get away.
That’s what these headlines say. With all the money thrown at the issues, everything keeps reaching record lows. And all our governments can think of is to spend more. Until they don't.
One year ago, stock markets had almost reached their then low. The amount of public funds spend since to lift those markets are truly mind-boggling, and their effect now, predictably, turns out to be short-lived. The rich have gotten richer, and the poor have gotten an awful lot poorer in that year. They just don't know it yet, or at least not the full and true extent, but once the numbers are crunched on government and central bank purchases of lenders' defunct mortgage loans and their own sovereign debt (how's that for a Ponzi scheme?), you will know just how destitute you've become. And it'll be too late to do anything about it. You'll have let yourself be fooled for too long. And, to use an ancient metaphor, find yourself one too many mornings and a thousand miles behind. Or is that a thousand debt payments?"(snip)
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Re: FED raises interest rates on loans to banks ... fallout expected
(snip)"To size the scope of the problem, let’s have a look at the government’s interest cost at interest rates more in keeping with history:
http://www.lewrockwell.com/orig11/slide1.gif
On the positive side, it’s apparent what these low interest rates have meant to the U.S. government. Despite an 8.5% annual growth rate in government debt since 2000, the government has been able to increase its coverage ratio from 2.8 to 5.5. The reason, a 52% fall in the composite interest rate it pays on its debt, from 6.25% to 3.22%. Unfortunately, with interest rates having practically nowhere to go but up, that may be as good as it gets.
Observe, if interest rates simply return to the long-term average rate in this study (a good long-term mean proxy as it spans one full bear and one full bull market), we are looking and an interest cost of $738 billion on 2009 government debt levels, 92% higher than in 2009. That would put the government’s ability to pay for this cost, as measured by the ratio of receipts to interest cost, at 2.9 against a current ratio of 5.5. Said differently, 35% of the government’s receipts would be going to pay the interest on the government’s debt.
And if interest rates were to overshoot that long-term average rate and return to the rates seen during the inflationary 1970s and early 1980s, we are looking at an interest cost of a huge $1.2 trillion, 219% higher than in 2009 and giving us a lowly coverage ratio of 1.7. That would mean near 60% of the government’s receipts would be going to pay the interest on the government’s debt.
In other words, not much left to spend on anything else.
Now, with projected government deficits in the trillions for years to come and according to some reputable sources as much as $100 trillion in unfunded liabilities yet to be transformed into even more spending and in turn into even more government debt, we could be looking at a virtual explosion in the government’s interest cost.
Using the Obama administration’s own conservative debt projections, take a look at what the government’s interest cost could look like in 1 year, 3 year and 5 year’s time:
http://www.lewrockwell.com/orig11/slide2.gif
Even with conservative debt projections and simply a return to long-term interest rate averages, we are looking at a coverage ratio of 1.8 in 2014 on 2009 tax receipts. That’s 57% of the government’s receipts going to pay the interest on the government’s debt. And if we see a return of the inflationary 1970s and early 1980s, a startling 91% of the government’s receipts will be going to pay the interest on the government’s debt.
Ouch!
Yes, I know, I haven’t allowed for any growth in government receipts. But I can safely say, raising tax rates and growing the size of government, like the Obama administration currently plans, is not going to help grow the private economy; you know, the people that have to pay for all this stuff. And as a result, it will only hamper the ability of the government to grow its tax receipts, possibly even enlarging Obama’s already huge deficit and debt projections.
OK, you say. Yes, the U.S. government is exposed to rising interest rates. But the Federal Reserve, isn’t it committed to keeping interest rates low, as it loves to say for an extended period of time? Low rates mean problem solved, right?
Well, that is exactly what Bernanke and the Federal Reserve, along with the U.S. Treasury, would like you to think. And it is indeed what they are trying to do. The question is, how long can they do it? Certainly not forever, for the market is bigger than even these mighty institutions"(snip)
from
In simplest terms, if the US gov'ts interest costs surge from the current 9% of total tax receipts to the ~50% level the future debt service scenario indicates, a DOUBLING of present de-facto tax rates would be necessary in order for the gov't to continue offering the same services it does right now - with the additional tax money having to be spent paying interest on US Treasury bond debt !!!
Re: FED raises interest rates on loans to banks ... fallout expected
more 'professional' opinion on the FED hike in the discount rate ...
http://www.zerohedge.com/sites/defau...ate%20Comp.jpg
(snip)"Stone McCarty points out "It is also probably not an accident that the announcement of tomorrow's discount rate hike (and next month's shortening of loan maturities) comes just after the release of the January 26-27 FOMC minutes. The discussion in those minutes further serves to underscore the technical, as opposed to policy, nature of today's move." Yet we think that there is more to this, as the Fed will sooner or later be forced to come face to face with a broken monetary system, in which it stands to lose all control should it not tighten in advance of a potential monetary supply explosion which would lead not only to hyperinflation (should the Fed gets its way, and consumers finally start borrowing), but also to full loss of the Fed's control over the American monetary system. Keep a close eye on this chart: we are confident that the Fed Funds will be hiked before there is another unsymmetrical increase in the discount rate. Alas, the economy is far too weak to sustain a tightening posture at this point. As to what kind of aberrations in the market this action could lead to, we will investigate in the coming days and weeks. "(snip)
from
Re: FED raises interest rates on loans to banks ... fallout expected
Sigh, I know this will come as news to you, but raising the discount rate doesn't mean much, except that the FED is trying to head off some inflation in the future. It's not turning off any
lending spigot now. Why? Because the banks have over a tillion dollars more in excess reserves, than they had a year and a half ago. They don't need access to the discount window.
In fact, that trillion dollars of excess reserves is about the only inflationary pressure in the entire economy. By acting now, the FED is reducing that pressure point. Unless and until the congress exercises some control over Obama's spendthrift ways, the only way to really control inflation is with monetary policy. If the GOP or at least more centrist Democrats gain control of congress then we may be able to apply some fiscal restraints. But right now, Obama seems hell bent on triggering some major inflation in out years. (In his presumed second term.)
HTH
Z
Re: FED raises interest rates on loans to banks ... fallout expected
^^^ this may come as news as well ( especially if your only news sources are American MSM ) ... Fed Chairman Ben Bernakke's own comments about the increase in the discount rate !
(snip)"Ben Bernanke, Fed chairman, said the move would not lead to tighter financial conditions for consumers and businesses, as the "US economy continues to require the support of highly accommodative monetary policies,' but should be viewed as "further normalisation of the Federal Reserve's lending facilities."
However, an increase to the 0.5pc discount rate – which is charged on direct loans to commercial banks – would raise the cost of bank liquidity and fire the starting-gun on the Fed's tightening of monetary policy over the long-term. (snip)
(snip)"Mr Bernanke made the comments regarding the potential rise in prepared remarks intended to be read before the House Financial Services committee on Capitol Hill, a meeting which was cancelled due to the severe snow-storm which battered the US's eastern seaboard on Wednesday. He also hinted that the Fed may begin to pull back some of the $1 trillion-plus it has pumped into the US economy since the financial crisis began in late 2007, by testing mechanisms to absorb the amounts it has pumped into the banking system.
In the testimony, issued by the Fed in spite of the committee's cancellation, Mr Bernanke also discussed the possibility of temporarily replacing the benchmark Federal Funds rate were it to become a "less reliable indicator than usual." (snip)
from
The international take-away from Mr. Bernakke's testimony was that, while giving obligatory lip service for a need for continued accomodations toward a weak US economy, in point of fact Fed actions will begin to reverse past accomodations in order to 'defend' the US dollar's exchange rate. Those Fed actions were arguably prompted by by recent Chinese / Japanese sell-offs of a few of their US treasury bond holdings in addition to being no-shows at recent US treasury auctions of newly printed bonds.
There is also a fairly large body of financial opinion that America won't have to wait until 2012 to see the inflationary effects of recent money printing / monetization of US gov't debt either, given that US dollar denominated world market commodity prices, oil prices and even gold prices all seemingly refuse to take a dive despite some concerted efforts to drive them down.
The REAL test of a Fed policy change will of course be the cessation or extension of Qualitative Easing i.e. future de-facto Fed purchases of yet more Fannie / Freddie / Wall St. 'toilet paper'. QE was scheduled to cease at the end of March ... so we will see !
Of course the 'gold foil hat' crowd would point out that the Fed's underlying priority is NOT continued stimulus of the weak US economy, but maintaining international credibility of the US dollar in order to continue being able to fund the massive new deficit spending requirements of US gov't programs through the balance of 2010 via the salability of record numbers of newly issued US Treasury bonds at an 'affordable' interest rate. Like the recent Grecian example, if the international community / China / Japan were to start questioning America's future ability to repay US Treasury bonds / repayment in future US dollars that are still 'worth something' versus the Yen / Yuan, US Treasury bond interest rates could be driven 2-3-4% higher in a matter of weeks. This in turn would tank what remains of the US housing market, would tank what exists in the way of actual corporate profits recovery, and of course would greatly exacerbate US federal and state gov't debt service costs on existing bond debt ( to say nothing about the ability to sell additional bonds in order to continue funding US federal / state program spending ).
~
Re: FED raises interest rates on loans to banks ... fallout expected
also ...
(snip)"Feb. 22 (Bloomberg) -- Treasury yields [ = interest rates - sic ] were near the highest level in six weeks as the U.S. prepared to sell a record $126 billion of securities in the space of four days, starting with 30-year inflation-protected securities today.
“The deficits are going through the roof and the Treasury auctions are not getting any smaller,” said Hans Goetti, who oversees $10 billion in Asia as chief investment officer at LGT Bank in Liechtenstein (Singapore) Ltd.
The prior record for a single week was $123 billion in October. The U.S. budget deficit will grow to an unprecedented $1.6 trillion in the fiscal year ending Sept. 30, the government predicted Feb. 1. "(snip)