How to create a financial tsunami (Part 3)

You may wonder where is part 2. Well, I guess it will take me a while to finish. However, things are progressing and the next financial tsunami is being build. This time by Janet Yellen and her friends at Wall Street.

"While Wall Street frets over the ability of bond markets to absorb an approaching interest rate rise, the U.S. Federal Reserve has a message for the industry: deal with it."

As the chart above illustrates, interest rates set by the US FED followed a downward trend for  30 years and approached zero in 2009. Almost every hike was followed by a recession and a drastic drop of interest rates. It is important to note, that a hike in interest rates drives the value of existing bonds down and a drop of interest rates drives the value up.
So what will holders of large amounts of low yielding bonds do, when the FED anounces to drive interest rates up? And what does that mean for the liquidity of the financial system and the real economy? The level of US central bank money in the system has reached 4000 billions US$ at this point in time, about five times the level before the outbreak of the GFC.

But the fundamental problem of a tremendous current account deficit is still there and the cumulated piles of US$ nominated paper in the hands of hyperproductive foreign economies like China, Japan and the oil exporting countries did not disappear.

Sapere Aude!

Georg Trappe

P.S.: The first law of liquidity: When it is most needed, it will be least available.
To understand why, I recommend to view the following in the given sequence.
It will be worth the time spent.

1 Kommentar:

  1. Tja, dann warten wir mal ab, ob die FED nach dem heutigen FMOC-Meeting die Lunte ans Pulverfass legt. Deckung ist angesagt, und Gruß!