The Federal Reserve recognizes that market forces have finally begun to overpower the financial repression that has forced interest rates lower. To keep these powerful market forces at bay, it has reacted with gradual interest rate increases and a lot of jawboning, hoping that federal revenue grows rapidly enough to keep the Solvency Ratio from reaching the Tipping Point. But the Federal Reserve is “behind the curve”.
I remember this phrase very well from the 1970s. Interest rates kept rising, but the Federal Reserve never caught up with the worsening inflation until Paul Volcker became Federal Reserve chairman. He raised interest rates high enough so that the real interest rate reached a record level to re-establish demand for the dollar, which slowed the rate at which its purchasing power was being eroded. That’s not going to happen this time around.
When Mr Volcker raised interest rates to those extremely high levels back in the late 1970s and early 1980s, the US was the world’s largest creditor nation. Now it is the world’s largest debtor nation, so the current Federal Reserve chairman, Jerome Powell, does not have the same options that were available to Mr Volcker. The federal government today is over-leveraged with a huge debt load. The Tipping Point would be reached in any Volcker-like attempt to foster demand for the dollar by raising interest rates to even normal levels, let alone record real interest rates. So what is the federal government going to do?
It is unlikely that the federal government will give up willingly its power to create currency and return to a Constitutional dollar, which is defined as 13.714 grains of fine gold. It will not cut back on government spending nor learn from the lessons of history. As a direct result of the federal government’s boundless propensity to spend the currency the banks create for it out of thin air, the dollar is on the same path taken many times by many countries that incurred economic collapse as a result of the currency’s collapse.
Forcing interest rates to artificially low levels and underreporting the true rate of inflation for decades together have kept the federal government’s Solvency Ratio under control. But abuse of financial principles and irresponsible self-indulgent behaviour does not last forever. There always are consequences.
The dollar will hyperinflate. Like every other fiat currency before it, the dollar will end in the fiat currency graveyard.
- Source, James Turk via FGMR