Friday, April 1, 2011


"The president of the Minneapolis Federal Reserve Bank said Thursday the Fed may need to increase short-term interest rates by year's end if underlying inflation rises as he anticipates.

In a interview, Narayana Kocherlakota said he expected "a big upward movement" in core inflation—inflation excluding volatile food and energy prices—from about 0.8% late last year to about 1.3% by year-end.

As a result, he said, it's "certainly possible" the Fed's target for short-term interest rates, now near zero, would be lifted by more than half a percentage point late this year."
Wall Street Journal

Does anybody remember the Carter years? We're about to go back to them again, but this time around it'll feel like steroids have been shot into the monster.

The Fed seems to have two possible reactions to most any economic problem. The first is to create money out of thin air, lend it into the system, profit from the transaction and in the process devalue the dollar, causing more dollars to chase fewer goods and creating inflation.

They respond to this by invoking action number two. They raise interest rates to pull excess money back out of the system which, of course, allows them to profit once again.

Now, if the inflation we are just beginning to experience, and which is going to get much, much worse before it gets better, were caused by expansion in the economy due to the injection of capital then perhaps the Fed would be justified in raising rates and could do it without causing too much pain. But our inflation is only partially caused by the increase in the money supply this time. You see, most of the money created by the Fed has never been put out into the economy. It's been held by banks to make their balance sheets look good and to cover the defaults and other problems brought on by a nearly historic high in unemployment and underemployment. It's been used to play games in the stock market, keeping stock values artificially inflated, most likely to cover the true ugliness of our economy. Most people I talk to use the market values as a reason to believe that everything's just fine, even though they're working less and spending more for basics. The inflated market is the crutch they can lean on to support their financial fantasy world.

So, just like the Carter years, we've got people making less money and the cost of goods, mostly energy and food, going through the roof. And now interest rates will begin to rise, squeezing everyone even tighter. And as the cost of borrowing rises businesses that rely on loans to function will begin to cut back even more, increasing employment woes across the land.

One really big difference between the Carter years and today is the number of people that have mortgages tied to the current rate of interest and not a fixed interest rate. As rates rise and their mortgages become increasingly difficult to meet more and more will just simply walk away from their homes. And the number of empty houses. already numbering in the millions, will continue to grow.

Speaking of loans that are tied to interest rates, what about our Treasury Bonds? America can't meet her obligations with interest rates at near zero. And the world is slowly beginning to abandon our bonds because they're considered way to risky for the little potential upside. So we'll have to raise interest paid on them to try to make them more attractive to investors, which of course most will realize we'll never pay back anyway, so the rates will have to continue to climb and with every increase our ability to pay will fade further over the horizon.

I wonder if this is the real reason the Fed is talking about raising rates? Are they trying to lure investors back in? Maybe they're using inflation as an excuse because they don't want to admit publicly what most of us already know, that America is on it's last leg and falling quickly and that higher interest rates are essentially a Hail Mary pass attempt, one last shot at bringing us back that stands little or no chance of success.

Whatever the reason, it appears higher interest is on the horizon and times will get tougher for the average American. Buy food and other essentials now, while you can still afford it because this year has the potential to be a year unlike anything most of us have ever experienced.

Get ready and pray.

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