E The False Economy; R-Star Estimates Bleak

It would not hurt if American citizens were all familiar with the conundrum, which is that raising rates on the low end does nothing to push rates up on the long end. It would be good for citizens to be familiar with the Fed's limited ability to raise interest rates in the face of a massive derivatives market that has pushed demand for the long bond way, way up and yields way, way down.

It would be good for the masses of American citizens to know that the Fed cannot allow a booming economy because it cannot raise rates like it could before the derivatives markets took the world over. There is a solution given as you read on. But it would require a change of rules that is unlikely to occur.

Don't get me wrong, I wish that the Donald could fix this problem. But in order for it to be fixed, at least two things would have to happen.

1. Treasury bonds would have to be banned from the derivatives markets for use as collateral. That would require moving heaven and earth in the financial world. Without suitable substitutes, it would be almost impossible to replace treasuries with other financial assets.

2. Asset-based securities and corporate bonds would have to replace those treasury bonds. Asset-based securities, privately originated, like MBSes, are riskier than treasury bonds, which are gold to the derivatives markets.

It could be necessary to use more commodities, like gold and copper, as collateral, but their price fluctuates even more than treasury bonds. They would cost more to use, and corporate bonds as well. Haircuts to the value of that collateral would prove to be very expensive and could drive derivatives trading into the shadows and away from the clearing houses. That didn't work so well leading up to the Great Recession.

An article discussing the natural rate, R*, and that it is predicted to decline to 1 percent in the next 10 years.That prediction does not bode well for the real economy. Michael Ashton on Talkmarkets has pointed out that John Williams of the SF Fed has stated that a savings glut has caused the slow down in economic activity.

View single page >> |

Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.