As Short-Term Rates Hit Levels Not Seen Since 2008 – Trillions Are At Risk
Readers know that I haven’t shied away from stressing over the Federal Reserve’s tightening.
As a firm believer in the Austrian Business Cycle Theory – first drafted by Ludwig Von Mises in early 1900’s – I believe that artificially moving interest rates away from the markets natural rate is opening Pandora’s box.
Sure – lowering rates across the yield curve is good for stimulating the economy. And like John Maynard Keynes explained, it’s a good tool for ‘papering over’ a slowdown – a quick fix.
But like Mises said – it’s not the boom that matters (from lowering rates). It’s the bust that will follow (from raising rates).
Suddenly and artificially raising short-term rates – which the Fed does when they hike – disrupts the current equilibrium.
Think about it this way: all those borrowers – whether having mortgages, student loans, car loans, credit cards, and even corporations – now must pay more in interest.
Business projects that were barely economic at a 3% interest rate are completely uneconomicat 5%.
And mom and dad barely affording their mortgages at 5% won’t be able to at 7%.
Of course these are just a couple of examples. There are many things throughout the economy that will be negatively affected by suddenly raising rates – which will all trigger their own unintended consequences.
That’s the problem with complex systems like the U.S. economy and financial system. Everything’s interconnected.
But there’s one thing from the Fed’s tightening that’s worth mentioning yet again. . .
And that’s rising short-term dollar funding costs – which is slowly popping this worldwide debt bubble.
First and foremost, the global dollar shortage – which I’ve written about many times (read hereand here) – is a huge threat to the global economy. In fact – I believe it’s the number oneoverlooked threat out there today.
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