Skip to comments.Harvardís Feldstein: Rising Rates Will Cause Financial Market Meltdown
Posted on 04/02/2013 12:59:27 PM PDT by robowombat
Rising interest rates may cause a financial market breakdown, warns Martin Feldstein, a Harvard economics professor and former chairman of Ronald Reagans Council of Economic Advisors.
Even if the major advanced economies current monetary strategies do not lead to rising inflation, we may look back on these years as a time when official policy led to individual losses and overall financial instability, Feldstein writes in an article for Project Syndicate.
Super-low Treasury rates show mispricing of financial assets, he says. Because inflation is about 2 percent, the 10-year Treasury has a negative real interest rate. Historically, the real interest rate has been over 2 percent, but fiscal deficits and government debt was smaller in the past. Government debt has ballooned and continues to grow. Editor's Note: The Final Turning Predicted for America. See Proof.
Under those circumstances, Treasury rates should be much higher, but remain low because of the Federal Reserve is buying $85 billion of securities through its quantitative easing program.
Since that exceeds the size of the government deficit, Feldstein writes, it implies that private markets do not need to buy any of the newly issued government debt.
The Congressional Budget Office (CBO) predicts 10-year Treasury rates will rise above 5 percent by 2019 and stay above that level for the next five years, he notes. But the CBO assumes inflation of 2.2 percent.
(Excerpt) Read more at moneynews.com ...
And brought to you mostly by people educated at “schools” like Harvard.....
Feldstein has a good point. Keeping real interest rates negative is a form of financial repression. It works for a while, but eventually rates wind up higher than they would have been.
In other words, it is normal for real interest rates (the rate paid less the inflation rate) to oscillate between positive and near zero or somewhat negative, as governments stimulate and brake the economy. But, if the government tries to keep them negative (stealing from savers) for an inordinate amount of time, they eventually spring back to a new high to compensate for the inflation those low rates eventually induce.
Too late. The elites have painted themselves into a corner with ZIRP + debt.
Once interest rates rise the cost just to pay the interest on debt they created will consume the majority of the federal budget.
Only two ways out, minus the hope of some miraculous new product/economic explosion, repudiate the debt or France-like 75% tax rates/confiscations of 401ks etc.
Well, yes. After a period during which the Fed has kept interest rates artificially low -- spurring all sorts of investments that make no economic good sense -- raising those rates always results in a crash.
Bernanke knows that, too. He just thinks he's brilliant enough to make it a "soft landing".
Ben is buying like a mad man. Just the slight indication of Ben pulling back will cause interest rates to rise. Ben says publicly he knows how to unwind QE in orderly fashion but I don’t see it.
Reagans genie in the bottle was the ability to have his FED chairman LOWER the interest rate to stimulate the economy....now what do we do?
It worked for Baraq as long as he needed it to - they were able to generate enough Baraqqi/Bernanke/Geithner minibucks to fund an election-winning amount of entitlements.
By 2016 I think it will look a LOT different.
Feldstein knows this. He's too polite to say it out loud. He's just hinting around the edges.