The Impossible Interest Rate Increases

Economics, Premium POM

Japan QE Tightening & the Trump Xi Jinping Meeting

The idea of the Federal Reserve increasing interest rates was considered by some to be impossible.  It was speculated that if interest rates were to climb it would tank the whole system and cause a stock market crash.  Though such statements and conclusions make for frightening headlines and increased website traffic the reality of the situation has been far less dramatic.

The semi-logic of such expectations does follow a sort of fundamental pattern.  Interest rate increases cause the costs of debt management to escalate.  The system has a lot of debt and has been in a growth contraction for some time.  In such an environment it is understandable to consider rate increases as a bad idea.

What if the environment changed?  How would this cause debt management to become more sustainable and allow for incremental interest rate increases over a period of time?

This is what we are dealing with now as the world continues to change and past assumptions are discarded for new realities.  It was widely considered that the Fed couldn’t end QE and it did.  It was assumed that the Fed would never begin the process of increasing interest rates and it did.  It was said that Trump would never get elected and he did.

Now we are entering into a time period where even Japan is openly talking about ending and tightening Quantitative Easing.  It is being considered that the Federal Reserve may even be increasing the frequency and amount of rate increases as job performance increases and the economy in America begins to improve.

The so-called Trump effect has been a boom for the stock market as well.  New record highs are being recorded on a constant basis and the percentage of Americans that now see the future as more hopeful is spiking.  It all looks good.

But there is a downside so to speak.  Rate increases by the Fed will put more pressure on the emerging economies such as China.  The upcoming meeting between Trump and President Xi Jinping at Mar-a-Lago will likely produce another fundamental shift in how the international monetary system functions and is structured.

This will no doubt include adjustments to the USD unipolar exchange rate regiment which most nations have been operating under for decades now.  The re-balancing which will be taking place will take into consideration the large amounts of sovereign debts which have accumulated and are threatened by interest rate increases.

This has been the position I have promoted on this site for over three years.  Speculation and predictions on economic and financial catastrophe have always been built on a static system which doesn’t experience change and evolution.  But this is never the case.  Things will always eventually change, sometime for the good and sometimes for the worst, and sometimes simultaneously depending on region and socioeconomic elevation.

Trump is the catalyst for the changes we are discussing.  The rest of the world is beginning to adjust to the new realities which are unfolding.  The American liberal left-right establishment is dying on the vine as the new administration continues its forward motion and implementation of its agenda.

With interest rate increases the cost of money increases which forces assets to become more productive.  This will calculate into real and substantial economic growth and sustainability as infrastructure projects and the subsequent commodities boom unfold into the years ahead.

All of this will contribute to improved debt-to-GDP ratios which make debt management more realistic.  Sure, in some cases nations, banks, and corporations may find themselves in bad situations and have to default.  But some of this will be offset by the improvements in other sectors and regions.

It’s interesting that those who have called for the collapse of the economy if interest rate increases happened are now focused on some other event which is just around the corner.  Don’t continue to be fooled by these scripts and diversions.  Things will continue to chug along and pick up speed as the financial and monetary adjustments continue.

Any future drops in the stock market caused by a contraction of the money supply will not necessarily be a bad thing from a macro perspective.  There is unproductive capital in the system which either needs to become productive or get flushed out.

There are historical changes afoot.  Stay informed and don’t panic.  All is becoming right with the world.  – JC

 

JC Collins can be contacted at jcollins@philosophyofmetrics.com

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