NEW YORK (TheStreet) -- The Federal Reserve has printed trillions of dollars to monetize U.S. government debt. Any significant rise in interest rates will probably decimate U.S. government finances and the fragile housing market. It will probably also cause a financial catastrophe in the bond market, too, because of interest rate derivatives.
This is a solid reason why the Fed will not raise interest rates for the foreseeable future.
The power to create money out of thin air is great. Should we give it to politicians and secretive central bankers? Will this power be abused? Will those in charge yield to the temptation for "legalized counterfeiting?" Apparently the answer is "yes."
All that the Federal Reserve has done was to inflate equity markets. It never solved any of the original financial problems that led to creating the credit bubble of 2007. There was as well no resolution by our elected political officials to resolve these serious financial problems so that they would never occur again. The process called quantitative easing created a shift of a tremendous amount of wealth from the middle class and the poor to the rich.
The prices of stocks, which are typically held by the wealthy, created a clear redistribution of wealth that future generations will pay for. The Fed appears to have believed that boosting stock values would help to create new jobs and increase capital spending by businesses.
The problem with this philosophy is that wealth never filtered down from the billionaires into real economic growth within our economy. Instead of experiencing expansion, we have been experiencing sluggish growth that is likely to turn into a deflationary depression by the end of this year.
The top 1% of Americans holds more than 35% of the nation's wealth.
There are several reasons why the Fed will not raise rates anytime in the near future.
There are interest rate cuts and devaluations going on all around the world. Japan and the eurozone are both implementing quantitative easing. China is scrambling to hold its financial system together and stave off a hard landing. Emerging-market economies are being hammered by falling commodity prices, while oil producers are being similarly hit by oil price falls. There is no inflation in developed countries, and the world is entering a deflationary slump. Why would the Fed ever even think about raising interest rates?
The unwinding of bond purchases under quantitative easing programs and the normalization of bond prices would be extremely negative for the bond markets, so the tin can will be kicked down the road for quite some time still.
The People's Bank of China has significant room to lower required reserve ratios on banks to encourage lending. Even after a series of cuts, the reserve requirement ratio remains at 18.5% for major banks, one of the world's highest.
Reducing the ratio by 10 percentage points would free up 13 trillion yuan ($2.1 trillion) of additional capacity for banks to lend. On the fiscal policy side, China's $3.69 trillion of foreign-exchange reserves and relatively low national government debt levels mean it has the ammunition for fiscal stimulus.
China is planning at least 1 trillion yuan ($161 billion) in long-term bonds to fund construction projects as the economy struggles. Most of the interest payments on the bonds will be subsidized by the central government. More projects of this type likely will be initiated in 2015. This is a major factor why the Federal Reserve will continue pumping liquidity into the financial system.
Recent minutes from the Federal Reserve's policy-setting Federal Open Market Committee suggest that instead of a rate hike, the U.S. economy is more likely to see QE4 first!
In short, there is no reason to believe that core inflation will rise to the Fed's 2% target anytime soon. Raising interest rates at the moment would jeopardize the U.S.'s fragile recovery.
CPI Continues to Decline
The FOMC members gave the following reasons for caution:
- Wages aren't rising much.
- Prices aren't rising much either.
- The dollar is strengthening.
- Commodity prices are falling.
- Economic growth is still pretty weak.
- The labor market isn't as strong as the unemployment figures suggest.
We continue to see the U.S. and global economies struggle. The writing is on the wall that a collapse in equities is drawing near, but we have yet to see the broad stock markets break down.
When they do, there will be a lot of money made by taking advantage of falling prices. That will be the focus at www.TheGoldAndOilGuy.com
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.