He says a rise in interest rates will be a game over. Why is that? Because the government won't be able to borrow more?
"The journalist is one who separates the wheat from the chaff, and then prints the chaff." - Adlai Stevenson
“I tell you that virtue does not come from money: but from virtue comes money and all other good things to man, both to the individual and to the state.” - Socrates
"Game over" is an exageration. As long as Europe is a mess and Asia is having troubles, the dollar and US Treasuries will continue to be attractive. The Fed quit being a net purchaser of US Treasury notes last June (they have been buying long term ones but not with new money but money from maturing short term ones- the Treasury is still replacing the mature short term Treasuries but there is plenty of demand for them) and rates stayed low and demand stayed high. Will the European crisis end and demand switch from US Treauries to Euro securities? I don't think that will happen for quite some time- certainly not next year- by 2013 as the interview suggests.
What else could lead to higher interest rates besides things in Europe? Price inflation. Inflation is one component of interest rates- as the rate of inflation increases, interest rates will increase. But the economy is still weak and it is hard to get price increases to stick so I also expect price inflation to stay low (food prices will rise in the next year due to the heatwave and drought in the US this summer reducing supplies but food is only about 10% of what people spend money on so it counts as ten percent of total inflation- eleven percent actually). Energy costs are a big component of prices but demand is still low for that globally and prices for oil have been keeping pretty steady. An attack on Iran (which I don't expect) could lead to a spike. I can't say about Israel, but don't see the US attacking them. So I don't see much price inflation pushing interest rates higher in the near future either.
Perhaps the irony is that what could cause all of this to change would be the economy (both here and in Europe) greatly improving. Then demand for energy will rise (along with prices). Investors will move money from US Treasuries into securities (stocks) lowering prices and raising interest rates there. Demand for goods and services could rise (along with their prices) and all that money the Fed has issued but has not been circulating causing price inflation will finally get released. Ironic being that a better economy is the most likely cause of the "end game" suggested by Schiff.
And if interest rates do rise, what will that mean? It won't be the "end of everything". It will mean that the government costs of borrowing will be higher and the money used to pay the interest on the debt (currrently just over $200 billion a year) will rise. But they will still be able to borrow. Higher interest rates will mean higher costs of borrowing for business as well and savers will get higher returns on their savings. But unless they soar high and fast, it won't collapse the economy or destroy the government or even our monetary system.
Game over? Not really. Just my opinion.
Now if you are currently a bond investor, you will get hurt if interest rates rise. On bonds, prices and interest rates move inversely so if you are holding them you will lose money if interest rates go up. The government is not a bond holder (actually they are though- government agencies with Social Security leading the way actually own about 48% of the total US debt) but a seller. As long as somebody is willing to buy their product, they will survive.
Last edited by Zippyjuan; 10-02-2012 at 02:01 PM.
Freedom is a state of mind. Nobody can take that from you unless you let them.
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Its Gameover for the current system.
The US is still incredibly muscular economically. It is however completely politically impotent.
When push comes to shove the US can do what it wants, repudiate what it wants and keep on trucking.
Stop the Looting and Start Prosecuting! Gold plated Tungsten IS Money!
We Must Dissent A colher não existe.
A government is just a body of people, notably, usually, ungoverned.
"You mean this entire war started because The Empire dressed as the enemy? That's exactly what happened in the last major war! Our government is so stupid!"
Government bubble, precisely