Martin D. Weiss: Bernanke’s day of reckoning has arrived.
Now is when he must decide precisely how to start cutting back the Fed’s massive, high-wire bond-buying escapade.
Now is when we’ll see how treacherous it can be to unwind a speculative bubble.
And now is the time you need to be prepared for the far-reaching impacts — not only on bonds of every stripe and color, but also on your stocks, ETFs, and mutual funds … your residential and commercial real estate … your business, your job, your retirement … and virtually every financial plan you’ve made or thought of making.
This is why Money and Markets interest-rate specialist Mike Larson has been standing on the rooftops to broadcast his warnings of sharply higher rates ahead.
And it’s also why I want to share with you the thoughts of another interest-rate prognosticator — my father, J. Irving Weiss.
My father began studying interest rates in the late 1930s, including work with the world’s most prominent interest-rate historian, Sidney Homer.
Dad’s unique viewpoint: Rising interest rates are not caused just by rising inflation. An even bigger factor is the relative size of the nation’s DEBT MONSTER.
As long as the debt monster continues to grow at a rapid pace, he argued, any attempt by the government to hold interest rates down is bound to backfire. Ultimately, the Fed has no choice but to remove its lid on interest rates and let them explode higher.
Based on this theory, Dad not only predicted the greatest interest-rate surge of modern history (in the late 1970s), but he also pinpointed the ultimate top in interest rates years ahead of time: 13% for long-term U.S. Treasury bonds, 17% for 3-month Treasury bills.
As you’ll see from his writings of the 1990s, which I’ve excerpted below, his insights are still directly pertinent to what’s happening today.
Why the Fed Can Never Unwind a Bond Bubble Gradually
by J. Irving Weiss (1908 – 1997)
As I write these words sitting on my easy chair, my grandson is writing his own words with my discarded papers.
Little does he realize that this story will affect him even more than it affects me.
Unfortunately for both of our generations — and especially for his — the U.S. Federal Reserve is no longer in the business of controlling inflation and moderating economic excesses.
It’s in the business of creating them.
You see, for the Fed to create a speculative bubble is relatively easy — especially in the bond market. All it has to do is ease money aggressively and pump liquidity into the economy consistently. Then, speculators rush out of safety and into risk, fueling the bubble.
Unwinding the bubble, however, is another matter entirely. Even the Fed’s most gentle and subtle pinprick can unleash panic selling in the bond markets that’s beyond anyone’s ability to control.
Case in point: The speculative bubble in bonds that the Fed created in the 1970s.
The bubble started under President Richard Nixon in 1969 when the Fed began pumping money into the U.S. banking system in huge amounts.
The Fed under Nixon thought this was the only way to revive a moribund economy. But the Fed’s critics — especially economists from the Chicago‑Saint Louis monetary school — thought the Fed was crazy.
At a meeting held in West Germany in June 1971, they asked:
Why has the Fed suddenly doubled the rate of growth in the money supply?(...)Click here to continue reading the original ETFDailyNews.com article: Why Interest Rates Will Explode AgainYou are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)
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