How high are the interest rates?
Last week’s comment asked how high the dollar can climb before it snuffs out inflation and the escalating hysteria that has accompanied it. Inflation is supposed to depreciate the dollar, but that’s not what happened. Instead, it rose sharply against all other currencies. Experts were unable to explain this, or why the rally started long before the Fed even thought of tightening. It’s simple, however, if you understand deflation and its main symptom, an increase in the real debt burden. The dollar has gone up because it “knows” there is more debt than it can ever pay off. This can only lead to massive waves of bankruptcies that will make us nostalgic for the consumer inflation that is in the headlines today.
Of course, the Fed could print enough money to pay off everyone’s debts, including its own: student loans, our collective liabilities for Social Security, Medicare and private pensions, and so on. – but also car loans, mortgages and credit card balances that have exploded. The resulting hyperinflation would solve nothing, however, even if it destroyed lenders as a class and all institutional conduits for borrowing. The megabanks would be ruined, leaving no one to lend to you, me or anyone else. It could take a generation or more for credit to take root again. Do we really want to go down this path?
No more unnecessary tightening
This week’s question ties into the question about the dollar: how high can interest rates rise before snuffing out inflation and the increasingly acute hysteria that accompanies it? Economists and pundits seem to think the Fed has only begun to tighten. It is more likely that interest rates are already high enough to have pushed the US and global economies into a deep recession. It was going to happen anyway because of all that unpaid debt, but the brutality of the Fed has unleashed market forces that have already spoken of the need for further tightening.
My long-term forecast calls for a high of 3.24% for the US 10-year note. On Friday, the rate hit 3.13%, just an inch from the target. The rally was so fierce that I double-checked my calculations to determine if an overshoot could occur. I’ll stick to the target for now, but even if it’s exceeded, rates for homebuyers in particular have reached levels that froze the economy and crushed real estate in 2007. If you’ve been a large-scale buyer of long-term Treasuries in In order to implement the Gold-versus-T-Bonds “barbell” hedging strategy that I’ve been advising for the past couple of years, it’s time move more aggressively to the bond side of the hedge.