kingworldnews.com
As
we kick off the third week of trading in December, today James Turk
told King World News that central banks are finally losing control of
global markets.
Central Banks Are Losing Control
James Turk: “Everybody needs to be focusing on what is happening with interest rates, Eric. The yield on the 10-year Treasury Note is flirting with 2.50%. The last time we saw a yield that high was over two years ago. But
rising yields are not just happening in the US. Yields are rising in
Europe and Asia too. The upward pressure on interest rates is global,
and more to the point, central banks are losing control…
For
several years the financial repression foisted by central banks on
savers around the world has kept interest rates artificially low. In
most countries interest rates are below the true inflation rate, so
savers have been badly hurt. The currency they saved lost more
purchasing power than the interest income they earned. While
central banks are powerful, they are inevitably overpowered when the
distortions in markets and asset prices caused by their actions
eventually become too great.
It
looks like Mr Trump’s victory is becoming the trigger that is going to
force an end to central banks’ zero interest rate policy. So here is the
question that we need to be asking: Will
the lower taxes and less regulation promised by Mr Trump really
revitalize the US economy enough to offset the impact of higher interest
rates?
Rising Interest Rates And The $100 Trillion Problem
There is about $100 trillion of debt in the US carried by governments
and private sector borrowers. Much of this debt has been borrowed at
fixed interest rates, so the borrowers who have locked-in fixed interest
rates may not be affected. But
borrowers with adjustable rates will of course eventually feel the
brunt of higher interest rates. So too will the institutions that own
the bonds and other fixed rate instruments purchased in the recent past,
like fixed rate mortgages.
As
interest rates rise, the market value of fixed-rate paper declines. It
is worrying that much of that paper is owned by banks, many of which are
already over-leveraged and stuffed with non-performing loans,
particularly the European banks. Yet
the stock market seems to be saying there are blue skies ahead, just
like – I would like to emphasize – the post-election euphoria after the
December 1972 presidential election. But during 1973 – 1974, the Dow
Jones Industrials had lost nearly 50% of its value, the dollar tanked,
and gold soared to what was then a new record high.
Will history repeat? As Mark Twain warned, this time it might just rhyme, rather than repeat. After all, in 1972 the US was the largest creditor nation in the world, and now it is the planet’s biggest debtor. Last
time around the dollar was eventually saved by Fed chairman Paul
Volcker and sky-high real interest rates. But given the huge debt load,
this time rising interest rates are the problem, not the solution.
The
bottom line, Eric, is that rising interest rates mean higher inflation.
But they are not the only sign that inflation is going to worsen. Look
at base metal prices. Oil is back above $54, a new high for this year.
Gold is up 10% this year while more-sensitive and less-manipulated
silver has soared 23%. And then there is the stock market, and these always go parabolic when hyperinflation is about to hit. There is no doubt, Eric, that inflation is back. And it is going to get worse in 2017.
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