First off, the market is not driving rates, because the Fed sets the rates which the big banks get to borrow at. This is an effective subsidy of banking activity, which makes them more profitable than they would be otherwise. Think of it this way. Big banks pay low to no interest to borrow from the Fed, then they buy up newly issued Treasuries are far below true market rates, because they can still make a 2-3% spread on their money, because Fed borrowing rates are set so low. That spread lines their pockets, but you and I are paying for that spread in many different ways, not the least of which because savers are getting 0% on their savings deposits. When the Fed does that, they are essentially recapitalizing the big banks at the expense of you and me.
Second, QE is not over. Stealth QE is still ongoing. As the Fed's $4.5 trillion balance sheet line items reach maturity, the Fed is reinvesting the proceeds, not allowing them to run off and shrink the balance sheet. This year alone the Fed will have $219B, almost $20B per month, in new cash from maturing bonds, which they will reinvest in more Treasuries and corporate bonds. This is about 50% of what QE3 was. So this stealth QE is really QE4, unacknowledged by the mainstream, but very real nonetheless. This stealth QE drives up bond prices, keeping yields very low, which also acts as a way to recapitalize the big banks at our expense.
The bottom line is that we do NOT have a free market setting bond rates, and therefore, our currency is a manipulated one, not one that floats on the free market. We are a centrally planned economy more attuned to the wet dreams of Karl Marx, than that of Adam Smith. Why am I against low rates? Because they distort markets, pull forward demand, result in low growth and lingering malaise economies, allow for businesses that would not be otherwise profitable to continue on as zombie companies, allow for irresponsible executives at big banks to continue on rather than be held accountable, incentivize misallocation of capital from wealth producing businesses to those that use financial engineering to siphon off wealth from citizens, it allows bad debt to never get cleared as new debt papers over bad debt like lipstick on a pig, and ultimately it destroys the capital creation process as savers are punished in favor of debtors, destroying capitalism as surely as Karl Marx predicted debauching the currency would do.
All of the brightest minds in economics, including Keynes, predicted that debauching the currency through low rates and money printing would ultimately destroy wealth, Keynes said it would do so in a stealthy and insidious manner in which only one man in a million would be able to diagnose it. Consider this your warning from the one man in a million able to do so.
You want rates to go up? End the Fed. Let Treasuries compete for free market dollars without Fed intervention. Let our currency float, with no Fed intervention. Let the Fed's balance sheet run off and shrink and return those maturing dollars to the Treasury. Force banks to borrow money on the open markets, rather than getting preferential treatment from the Fed at the expense of savers. You do these things and you'll see rates go up as debt is repriced based on risk and reward, and supply and demand. You'll also see that bad debt will get cleared and many irresponsible and bad actors will lose a ton of money in the process. Then once the bad debt is written off, the economy will be reset for growth and capital formation will once again get kickstarted, which will engender the virtuous growth cycle at higher rates than today's lingering malaise, paltry growth. |
