The Federal Reserve’s Cruel April Fool’s Joke
Kevin McElroy | Resource Prospector | April 1, 2011 2:03pm EDT It sounds like a cruel April Fool’s joke. But Minneapolis Federal Reserve President Narayana Kocherlakota casually mentioned yesterday that the Fed may raise the Federal Funds rate by 75 basis points sometime later this year.
It sounds like a tiny number, and in anything but Federal debt levels, it’s a rounding error.
To put this miniscule number in perspective, consider that Congress is currently debating a $33 billion budget cut.
But the current Federal deficit is currently over $14 trillion.
$33 billion amounts to less than 0.25% of $14 trillion.
In other words, the Federal Reserve is talking about raising interest rates (and therefore Treasury yields) to a level that will increase our debt by MORE than 3 times what Congress is quibbling about.
This disparity between the laughably small budget cut Congress is willing to consider and the reality of what the Federal Reserve will simply decide to do underscores the problem.
Because we’re beyond the point of fiscal fixes. Or at least, we’re beyond the point of making small incremental changes to the budget to fix our debt problems. We’ve already spent way more money than we have. Jiggering with the budget at this point is like rearranging the deck chairs on the Titanic while it’s at the bottom of the ocean.
It’s now the interest on that deficit spending that we have to contend with. And the Federal Reserve, for better or worse, has more control over the interest on our debt than any other single entity.
The Fed keeps interest rates absurdly low. It’s buying more Treasuries than anyone in an effort to keep those rates low. The Fed now holds the dollar’s fate in its hands like a frightened bird with a broken wing. And almost anything they do will likely kill it.
Another cruel joke: the champion of bonds, Bill Gross, no longer owns a single dime of Treasury debt.
Just last week, Gross dropped a bombshell. He said, „Unless entitlements are substantially reformed, I am confident that this country will default on its debt.”
As investors, we don’t get many big, obvious warning signs. When we do, we must act on them quickly. In this case, taking no action is akin to taking the wrong action.
There’s no more time to consider the likelihood of Federal default. It’s in the works. Everything that you would expect to happen with a currency crisis is happening today or has already occurred.
Prices are rising. The world’s largest bond investor is selling bonds. Real money like gold and silver are making new nominal highs nearly every week.
How many more warning signs does the public need before they start realizing the obvious? How much hotter does the water have to get before the frog boils to death?
On this day of joking, I could not be more serious about my recommendation to make sure you have enough gold and silver in your possession to cover at least 6 months worth of everyday living expenses.
That’s the only way to really, for sure, know that you have enough money to live on for 6 months if the dollar gets taken for a ride.