I like to think that as Janet Yellen goes about her day she often hums the Police’s “Wrapped Around Your Finger,” in particular the opening line, “You consider me the young apprentice, caught between the Scylla and Charybdis.”
Such an apt description of where the Fed Chair today finds herself and her compatriots on the Federal Reserve’s Open Market Committee … caught between two Homeric sea monsters, between two evils with no easy escape.
These evils are not the Fed’s dual— and often opposing — mandates of full employment and price stability. Rather, it’s the evils of damned if you raise interest rates … and damned if you don’t. For no matter the path the Fed choses, the arbiters of American interest-rate policy face the potential for fueling a crisis somewhere.
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Though I sound like an echo chamber, the only assets that will win are gold and silver, because in this crisis, the dollar will ultimately be hurt the worst.
The reason is, as U.S. rates begin to rise, our dollar gets stronger relative to local currencies around the world. That begets two potential problems the Fed must navigate cautiously.
Let’s start with Scylla, the six-headed beast played today by various Asian economies.
Asian nations and corporations have used the last several years of excessively low, sub-1% interest rates in America to accumulate somewhere between $2.5 trillion and more than $5 trillion in U.S. dollar-denominated debt. That’s a 10 to 20-fold increase from about 2005.
Nations and companies assumed all this debt on the implicit assumption that our Fed would keep interest rates low for years and years to come. (Spoiler alert: they’re not wrong.)
The potential bugbear, of course, is that those Asian countries and companies largely earn their revenues in the various Asian currencies, meaning they have to spend more of their local revenues to buy the dollars needed to repay dollar debt. That reduces corporate earnings in Asia, which undermines local stock markets … or, in some cases, creates a vortex of financial problems that could easily culminate in a currency crisis that would have global impacts, even here at home.
And then there’s Charybdis…
Debt’s Growing Threat to America
In our story, the sea monster styled as a massive whirlpool that swallowed ships whole is played by the U.S. economy.
Like a meth addict, America at this point cannot go through life without low interest rates. We have far too many financial problems in this country that higher interest rates would exacerbate, potentially to the point of either a failing economy or a dollar collapse.
First, the average interest rate on the $18.1 trillion in U.S. debt we must pay back is less than 2%. As our debt continually rolls over, government will have to issue replacement debt at higher and higher rates, which implies increasingly higher interest payments that government cannot afford without ultimately raising taxes, cutting services, or issuing even more debt simply to repay the growing interest burden — unleashing a debilitating debt spiral that will kill the dollar.
And we have U.S. $17 trillion in consumer debt in America, nearly as large the federal debt. As interest rates rise, credit-card debt, auto loans and leases, and adjustable-rate mortgages would grow increasingly expensive. That potentially cripples an economy reliant on a consumer class so poor that more than half the country has less than one month’s worth of income to cover an unexpected expense. That’s the definition of Poverty Nation.
And if that weren’t enough, the increasing value of the dollar that rising rates cause would hit America’s exporters hard — companies such as Boeing, Caterpillar, Microsoft, Apple, Anheuser-Busch, IBM, Merck, Proctor & Gamble and so many others. Their sales would slow or decline (several already are), reducing income and, at some point, ultimately leading to job eliminations, which would increase unemployment and slow GDP growth, among various negative impacts.
Trapped With Low Rates
The Fed certainly knows all of this … which is why Yellen told the Senate this week that the Fed is in no rush to push rates higher.
For that reason, the Fed must — and likely will — keep rates largely unchanged for a very long period, out toward, or even past, the end of the decade. I still believe that when the Fed raises rates the first time, it could surprise the world with a barely perceptible and highly symbolic increase of just 0.1% that would signal to the world to get its various houses in order.
Ultimately, we — meaning the world — face the great likelihood of a massive financial reset necessary to clear the toxic accumulation of debt around the globe. Currencies will get hurt, including our U.S. dollar, which could be the biggest loser.
Gold will play a part in the process, just as it has in past currency crises with the greenback. Silver will be an even bigger winner for technical reasons, and in my March Sovereign Investor newsletter I explain how to generate a gain from silver that’s likely to exceed 100%.
The Fed is simply buying time. It has to. It’s caught between the Scylla and Charybdis, and the only way to navigate the dangers is to keep a very low profile through continued low interest rates for years to come.
Until next time, stay Sovereign…
Jeff D. Opdyke
Editor, Profit Seeker