Guest Post By Graham Summers
The biggest question for investors today is that whether or not rates will rise in 2015.
The Fed may raise rates a token amount this year, but the move will be largely symbolic. With over $100 trillion in bonds and over $555 TRILLION in interest rate derivatives trading based on interest rates, the Fed will not be normalizing rates at any point in the future.
Indeed, former Fed Chairman Ben Bernanke admitted this in private during a closed-door luncheon with several hedge funds last year. Bernanke’s exact words were that rates would not normalize anytime during his “lifetime.”
So the Fed may raise rates from 0.25% to say 0.3% or possibly even 0.5%. But we won’t be entering a hawkish period for the Fed by any means.
The reason is very simple… any normalization of rates would implode the bond market.
The fact is that much of the globe, particularly the developed west, is up to its eyeballs in debt. Mind, you, this is based solely on official public debt numbers. If you include unfunded liabilities, then the US, most of Europe, Japan, and even China are sporting Debt to GDP ratios well over 300%.
In the US, a 1% increase in interest rates means over $100 billion more in interest rate payments. The US is already running a deficit (meaning that it spends more than it takes in via taxes) and has been for most of the last 20 years.
Of course, the deficit could become larger to service the increase in interest payments, but with the US already having to resort to issuing NEW debt to cover OLD debt that is coming due, this is a slippery slope. The US issued over $1 trillion in new debt in an 8-week period for precisely this purpose.
The reality is as follows:
1) Bonds are the biggest bubble in history, dwarfing even the real estate bubble of the mid-2000s.