Here We Go Again! Or Is This the End?

FedLet’s see now. How many years has it been since the Fed promised to normalize interest rates? Didn’t Bernanke start to talk about doing it before he left the Fed Chair? Why in the world, given continuous upbeat economic statistics from the government and the Fed, has the Fed not raised rates? Could it be that all along policymakers have been feeding us one big lie after another regarding the economy’s performance and the need for the destruction of price discovery for capital, starting with the 2009 bailouts when they told us it was for our own good?

We savers of the world have been promised that we will start to get just a little of what is due to us next week when the Fed is “certain” to lift rates ¼%. The same kind of adamant promises were made back in August but something happened that caused Ms. Yellen to “chicken out.” Do you remember what it was? It was the devaluation of the Chinese currency. With that, all hell broke loose, in part because of what is known as the carry trade.

With dollar rates at around zero and with the Fed always chickening out or at least taking the easy way out whenever the stock market has a down stretch, the world has grown accustomed to a monetary heroin that has convinced people they could continue to borrow in low-interest-rate currencies, the dollar being the most prominent among them. So trillions of dollars have been borrowed at low rates and then converted into other currencies of higher rates. Leverage up and already filthy-rich investors were getting even more filthy rich. As long as the U.S. didn’t raise interest rates and as long as the dollar didn’t gain value, vis-à-vis other currencies, this game could go on indefinitely, helping the 1/10 of 1% of Wall Street thieves get richer and richer. There is nothing capitalistic about this game. It is unabashed ECONOMIC FASCISM! Wall Street loves it because it is making them rich! And why not? For them it is a one-way street. Privatize gains and socialize losses. If the system implodes they know they will get bailed out by the middle class that is rapidly disappearing.

Interestingly enough, right on the eve of the August 2015 anticipated hike, the Chinese devalued their currency, which, along with anticipated higher interest rates, caused fear in the credit and equity markets. Sure enough! Days before we are assured that the Fed will normalize rates, the Chinese devalued their currency once again! Bingo! Again, riskier assets were slammed really hard and today stocks had one of their worst days in quite a while with the Dow losing over 300 points.

Why does such a small potential dollar rate rise combined with a devaluation of one of the more important global currencies—the RNB—cause so much havoc on the world markets? At least part of the answer has to do with the fact that higher dollar rates combined with a weaker RNB means massive amounts of dollars borrowed become much more expensive to repay, so that hundreds of billions of dollars of trades—many of which are highly leveraged—are under water and leading to huge losses. Those who engaged in the carry trade suddenly have to unwind those trades, setting off a snowball effect of massive selling of risky assets and a flight to quality. Today that meant the U.S. Treasuries and to a lesser extent gold. It will be very interesting to see how the markets shake out on Monday and into next week.

I had been saying for the past year that the Fed cannot raise rates exactly because of the dynamics noted above. But the longer it waits, the sicker and more out of balance our global economy becomes, such that when the day of reckoning finally arrives, it will bring all the more terrible consequences. I had relented in my argument of late simply because I felt the Fed had to raise rates, lest it lose what credibility it still has in the eyes of the masses of Wall Street traders and in the eyes of a massively ignorant American public. Now, once again as we sit on the edge of the abyss, one can’t help but wonder if the Fed won’t once again back off from a rate rise.

We may well be facing that final day of reckoning for the Fed, which may be damned if it does and damned if it doesn’t raise rates. If it raises rates it could set off a terrible financial market collapse. But if on the other hand it recants once again, only the most dimwitted, passively-compliant, brainwashed Americans will believe the Fed is the least bit competent. I just can’t get away from the heroin addiction comparison. The global economy is a living organism but Keynesian ideologists are doing their best to kill the patient. Thankfully I don’t know firsthand about overcoming heroin addiction, but from what I understand, it is pure torture and something many if not most addicts do their best to avoid dealing with until their system shuts down. We will find out next week if our Fed has any courage to deal with the reality of the pathological carry trade they created.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.