Tuesday, September 22, 2015

Yellen Has Inherited A Complete Nightmare. ............

Yellen Has Inherited A Complete Nightmare.  

Thursday's decision to delay yet again the long-awaited liftoff from zero interest rates is illustrative of the fact that the world economy is totally screwed.

There is a lot of speculation about why the Fed seems so reluctant to "normalize monetary policy". There are of course the typical domestic issues that there is low inflation, weak wage gains in the face of strong job growth, a hike will increase the Federal deficit and then there is the argument that corporations that now have $12.5 trillion in debt. All that is true, but with corporate debt, many are locking in long-term at these levels, not funding anything short-term. Those folks who understand are preparing for what is to come unlike government which has been forced to shorten the average duration of their debts blind to what happens when rates rise, which will be set in motion by the markets – not Yellen.

The Fed is really caught between a rock and a very dark place. 

Yes, they have the IMF and the world pleading with them not to raise rates for it will hurt other debtors who borrowed excessively using dollars to save money.
 
The Fed is also caught between domestic policy objectives that dictate they MUST raise rates or they will bankrupt countless pension funds and international funds where emerging markets will go into default because commodities have collapsed and they have no way of paying off this debt that has risen to about 50% of the US national debt.
 
By avoiding the normalization of interest rates (hikes), the Fed has encouraged government to spend far more than they realize because money is cheap. This will eventually light the fire under the economy helping to fuel the Sovereign Debt Crisis. There appears to be no hope for the Fed and they will be forced to raise rates.
 
This is the worst possible mess and the longer they have waited to normalize interest rates, the worse the total crisis is becoming for they will have zero control over the economy and once that is seen, and all Hell will break loose as this plays out.

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