Does the Fed Need to Raise Interest Rates to Combat De-Dollarization Initiatives?

Does the Fed Need to Raise Interest Rates

Are rate increases necessary to combat de-dollarization initiatives?

The Fed and De-Dollarization.

A drop in foreigners holding U.S Treasuries may indicate declining demand.

The Fed’s top allegiances are to its shareholder banks and the U.S. Government. If higher rates are needed to help the U.S. Government raise revenue, they will raise rates, even if it harms the economy.

This week’s podcast discusses what’s behind the Fed chatter about raising interest rates.

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Podcast Summary:

The Economy is Fine, It’s Just the Weather

Introduction: 0:00-16:58 Discussion of the Fed’s recent comments on the state of the economy. Federal Reserve Vice Chairman Stanley Fischer claims weather is now a seasonal “pattern’ that holds back first quarter every year. U.S. home builders also believe the economy is getting better now that the weather is warmer, despite leading indicators that show nothing of the sort. Discussion of the state of the real estate market.

The Fed Presidents Talking at Cross Purposes on Purpose

16:58-21:37 Discussion of the recent Fed President statements regarding the direction of interest rates. Fed Vice Chairman Stanley Fisher noted that people need to get ready for a rate hike. The Fed has been saying they are going to raise rates because there is a “recovery” and the economy is improving, but its not.

What some of the Fed Presidents have been saying about interest rates:

St. Louis Fed President, James Bullard: We may raise rates and then lower them.

Atlanta Fed President, James Lockhart: Mr. Lockhard heads the Atlanta Federal Reserve banks that is tracking U.S. GDP at near zero for the first quarter has changed his stance to perhaps the Fed should wait before raising rates.

He recently noted that the Fed can not ignore slowing in the Chinese economy. (while seemingly ignoring weakness in the U.S. economy)

New York Fed President Wiliam Dudley: It’s unclear if bad jobs report means economy slowing.

Minneapolis Fed President, Narayana Kocherlakota: Mr.Kocherlakota thinks that rates should not rise until well into 2016.

All the Fed Presidents have been clinging to the notion that the job market and economy are improving or will improve (as the weather gets warmer). Last year there was GDP growth in the second and third quarters due to inventory build up and Obamacare spending. That won’t happen in 2015 as inventory to sales ratios are extraordinarily high and won’t be increased. Obamacare spending increases also won’t be repeated and they are actually a drag on consumer spending for other items as Obamacare spending is money that won’t be sent on other consumer items.

inventory to sales chart

The inventory to sales ratio has exploded higher in recent months on an increased in inventory and tepid sales.

Japanese Chinese, Russians, French, Swiss, English and Belgians Dump U.S. Treasuries in February

Does the Fed Need to Raise Interest Rates to Stimulate Demand for U.S Treasuries?

The dollar is strong, the economy is weak Europe, China and Japan are lowering rates and a rate increase may crash the economy and stock market – so why would the Fed raise rates?

21:37-31:00 Discussion of the reasons some countries are reducing their holdings of U.S. Treasury securities. Japan and China are the two largest holders of U.S Treasuries and sold $30 billion combined in February. Perhaps the Fed needs to raise rates to stimulate foreign demand for U.S. Treasuries especially with de-dollarization initiatives taking hold and the price of oil dropping creating less need for dollars.

Perhaps the Fed needs to raise rates because foreigners are dumping U.S. Treasuries and they have less need for dollars as oil price drops, as entities default on U.S. dollar debt and fewer dollars are used in international transactions.

The Bank of Japan has been buying just about all the newly issued Japanese government bonds and is probably tapped out and unable to continue to buy U.S. Treasuries.

Foreign holdings of U.S. Treasuries

Foreign holdings of U.S. Treasuries dropped in February. Japan sold $14 billion in U.S. Treasuries claiming the number one spot from China who sold $15 billion..

A New Nation of Consumers? – China

The percentage of China’s GDP is growing toward 50% consumption (the U.S. GDP is about 70%). This means greater Chinese domestic consumption of Chinese produced goods and perhaps fewer exports. Fewer exports to the U.S. would mean China would be accumulating fewer dollars.

Why Lowering Rates and then Raising them Again Helps the Fed

31:00-32:55 discussion of how lowering rates and then raising rates can help the U.S. sell more bonds.

The Fed’s Push Towards a Stock Market/Cashless Economy.

32:55 Discussion of over priced IPO and Janet Yellen’s “cash is not a convenient store of value” statement. The Fed wants to control what people spend and where they spend it. They also believe that people are saving too much.

Reuters and its Constant Spin of Economic Data

A Reuters report admitting there was weak data is discussed- a diversion from the normal propaganda that the economy is “solid’, (or will soon be solid) irrespective of the weak data.

Discussion of the enormity of the U.S deficit and the futility of trying to cut it. Deficits have created the need for greater deficits and there is no political will to cut them.

Rand Paul and the 2016 election is discussed. Ben Bernanke’s new book title is discussed. Hillary Clinton’s candidacy is discussed this “poor woman”.

Discussion of the increase in government entitlements. The rich depend on monetary policy to get rich and a good portion of the population rely on fiscal policy for their sustenance.

Discussion of Fed intervention in the economy and their incredulous point of view that they are surprised at the outcome of their actions.

Does the Fed Need to Raise Interest Rates to Combat De-Dollarization Initiatives?

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Further Reading:

Top Foreign Holders of U.S. Treasuries

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