Tuesday, April 17, 2012

As the Empire Crashes (Or One Reason Interest Rates are Headed Higher)

No matter how you slice it, by working age population, labor force or household employment, per capita government debt is going parabolic. If Bernanke prints to support this debt, price inflation will boost rates, if he doesn't support the debt via a buying spree, interest rate will based on the increasing size of the debt.

Bottom line: Only one way for interest rates to go, up, way up.


  1. >if he doesn't support the debt via a buying spree, interest rates will rise based on the increasing size of the debt.

  2. Robert,

    Give me an idea of where you see the 10 year and 30 year bond in the next six months, 12 months and 2 years from now. I am trying to understand how large the increase will be that you are calling.


  3. So how long can inflation last? If the CPI starts rising rapidly, inflationary expectations will also push interest rates up. But that means that banks, hedge funds, insurance companies, pension funds, etc. will go bankrupt in massive numbers. That will collapse the money supply and lead to depression. I think the collpase of the bond market is the bigger story. Inflation will just be a desperation move that would surely fail.

    From what I have read, a half percent increase in interest rates would even make the Fed technically insolvent.

    1. Great point Rob. I have been making this same point with Wenzel for the last 18 months. The FED will not allow interest rates to climb.

      With the existing debt of 15 Trillion and the 1.5 Trillion dollar annual deficits, any significant rise in rates would make the debt service impossible.

      Tax increases could not happen fast enough to keep up with rising rates. And there is no way that new taxes would come in with an election later this year.

      States like California that need to roll over existing debt could never handle the debt service.

      There will not be any significant increase in rates over the next year.


    2. The FED ultimately has no control over interest rates. But the FED will keep printing. The end game is approaching. Hyperinflation is in our future.

  4. One more reason rates will not rise.


    Note paragraphs 8 and 9


  5. I think Craig has misunderstood my point. Interest rates have to rise, and therefore the economy has to crash. Current rates are below the CPI so effective rates are negative. Attempts to keep the rates low will lead to inflation, but inflation will also lead to higher interest rates. Those higher rates will bankrupt a whole lot of institutions including some Wall Street banks. That will collpase the money supply and lead to depression. Where I question Bob Wenzel is only on his emphasis on inflation. I suspect that the inflationary part simply won't last very long. The real danger is the bursting of the bond market bubble that that inflation will precipitate.

  6. From what I have read, the fed cannot control the long end of the interest rate curve for long only the short end (overnight)

    Also foreign central banks are not buying US debt to the extent they did in prior years but they are still buying it. World central banks play ball with the Fed. They want a slow bleed of inflation and not a hyper one.

    If domestic purchasers slow their buying and foreign buyers slow theirs, then rates will rise.
    I would have thought rates would be higher by now, so maybe we need to see the above occur before rates rise. After all, everyone knows uncle sam owes a growing enormous debt.

  7. An interesting and not unlikely scenario will be that the Fed buys 70-90% of government debt and gifts the interest back to the government.

    What will this look like though, when principal roll-over alone requires 20%+ of global GDP?

    Currently Europe is on the edge of implosion with Greece, representing 3% of the Eurozone, in trouble. That is like Los Angeles going bankrupt imperiling USA's viability; consider the existing leverage needed for that to happen.

    But USA is much larger than Greece. It is about 27% of world GDP. Forget interest rates for a moment. Who will buy the debt principal?