Given Obama’s meteoric rise to power – evidence that he possesses a certain drive and competence in the game of politics – it seems safe to assume we’ll soon witness a redoubling of his efforts to keep interest rates down… to make it easy and cheap for strapped consumers and businesses to keep borrowing… and to otherwise flood the economy with money. As such, we see devastating inflation and a stunning rise in interest rates [on the horizon]. Words: 968
In further edited excerpts from the original article* David Galland (www.caseyresearch.com) goes on to say:
With the economy continuing to struggle, the only reasonable assumption that can be made is that the Fed – in cahoots with the entirely politicized Treasury – will keep shoveling money onto the economic embers, and continue to do so until economic activity again flares up. That will, of course, require increasing the quantity of money that actually makes it into the economy – but that should be child’s play for Team Obama – with direct hiring and spending, continuing to buy mortgages and other loans to suppress interest rates, forgiving the bad debts of banks, or changing accounting rules so that banks can postpone reckoning day. That’s just for starters, all of it packaged nicely in the name of the public good.
Once the money starts to flow, there will be a pick-up in economic activity, which will beget yet more money moving around. At first, this money will be a palliative for the economic worries, but then comes the inflation – a small trade-off, the politicians will decide, if it buys them enough of a recovery to make it through the November elections and get the President the second term you know he so strongly desires.
Higher Interest Rates
If the U.S.’s many creditors come to agree with our point of view – that the dollar is being led to the altar as a sacrificial lamb to political expediency – then they’ll further reduce their purchases of our Treasuries and start trading their dollars for stronger currencies and tangible assets, including precious metals. At that point, interest rates will have to begin rising to attract new buyers.
Of course, the higher those rates ratchet, the more it will cost the U.S. government to carry its massive debt. While rising rates will continue to drive demand to the short end, suppressing those rates, in time the sheer quantity of paper that will have to be rolled over, and the rising tide of inflation, assures that short-term rates will have to rise too. At that point, the train begins to leave the track.
As the train wreck approaches, the government is going to have to find creative new ways to fund its social contract with impatient voters. Perhaps, for instance, pegging everyday fines and assessments to the amount of income a person makes. Executed brashly, such policies might even allow the government to charge a person of means hundreds of thousands of dollars – that’s correct – hundreds of thousands of dollars for a speeding violation. Indeed, that is precisely what is occuring today in Europe in such countries as Switzerland, Germany, France, Austria and the Nordic countries. In Germany the maximum such fine is $16 million – yes, $16 million – and “only” $1 million in Switzerland! To date the highest fine has been a $290,000 (euro203,180.83) speeding ticket slapped on a millionaire Ferrari driver in Switzerland and a euro170,000 (then about $190,000) ticket in 2004 to a driver in Finland. I know what you’re thinking: C’mon, let’s be realistic – that could never happen here – but think again.
Changes to IRA/401(k) Contributions/Withdrawals
Maybe the government will force you to convert some or all of your IRA or 401(k) into Treasuries, perhaps packaged up in an annuity. You’d be given the choice of making the switch or making a withdrawal and paying all outstanding taxes at that point. indeed, a recent article from BusinessWeek reveals that the Treasury is now looking very hard at the trillions in retirement accounts and trying to figure out new ways to “help” the owners of those accounts.
Changes in U.S. Dollar
Something will have to give. We think that something will ultimately be the U.S. dollar, as it’s politically more acceptable to have a failing dollar than a smoking hole where the economy used to be. Before this thing is over, I would not be surprised to see a new currency regime adopted that introduces exchange controls and a different category of dollar to be issued for the purpose of paying back foreign creditors. Such a dual-track currency system is nothing new having been used by desperate regimes numerous times throughout history.
The economy is now so manipulated by politicians, big bankers, and special-interest groups that making sense of the markets has become an almost impossible feat. Which is to say, it must push even harder on the levers of its printing presses, further setting the stage for the massive period of inflation we continue to see as inevitable… and for a stunning rise in interest rates.
*http://www.financialsense.com/editorials/casey/2010/0113.html (David Galland is the Managing Director of Casey Research, LLC., publishers of Doug Casey’s International Speculator which provides unbiased research and recommendations on the highest quality junior exploration companies.)
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint in whole or in part is gladly granted, provided full credit is given.
– Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
– Submit a comment. Share your views on the subject with all our readers.