The Fed gave us another quarter-point rate increase yesterday. That makes the third such hike in the last 10 years!
Whoa! Hold on… We can’t take that much excitement.
But wait… The Fed also signaled that it may abandon its “data dependent” position and take the lead.
Instead of reacting to the news… it may lead the world’s interest rate levels back to normal, regardless of what the headlines tell it.
Oh, dear reader, you already know this is not going to happen. The Fed can never voluntarily return to sound money and market-set interest rates.
It presides over the biggest bubble in stocks and bonds the world has ever seen. Without underpriced credit, the whole thing would collapse.
That’s why the Fed can only take baby steps toward normalization… and only so long as they don’t matter.
We’re entering our ninth year of near-zero interest rates. During that time, businesses, investors, speculators, and consumers have adapted to extraordinarily cheap credit.
They’ve used it to refinance their debts… and drive up their stock prices. They’ve used it to sell automobiles and buy houses.
The big players have gotten used to gambling with money that is almost free. And if they get into trouble, they can borrow more.
If the cheap-credit system were to end – or even if people were to think it is coming to an end – it would take about two minutes for the whole capital structure to fall apart.
Businesses couldn’t refinance. Bonds would crash (except for U.S. Treasurys… which would get a temporary boost on “safe haven” buying).
Stocks would repeat their move of 2008–’09, but probably worse.