Hat Trick Letter (Archive Edition) – Part 3: The Unintended Consequences

Originally published: 2 December 2011
Original author: Dr. Jim Willie ("The Golden Jackass")

Navigation: Part 1 | Part 2 | Part 3 | Part 4

Editor's Note

This Archive Edition preserves the original article while improving readability through editorial headings, paragraph spacing and navigation. The author's views and arguments have been preserved.

Unintended Consequences

Focus on suppressed long-term interest rates and their consequences. They are broad and horrendous.

The US captains of the derelict vessel travelling in icy waters filled with icebergs boast that the US economy benefits from ultra-low interest rates. They believe Americans are better off than Europeans who are experiencing rising borrowing costs during a debt crisis.

The author argues that suppressing the 10-year bond yield has severe consequences, some of which may be unintended.

"Can there be any more drastic attempt at a free lunch than suppressing the market interest rate for 10-years in order to build a more perfect union?"

Seven Consequences of Suppressed Interest Rates

  1. Savers receive virtually no interest return while inflation continues to erode purchasing power.
  2. Banks are encouraged to retain housing inventory, delaying recovery in the property market.
  3. Large banks continue Treasury bond carry trades rather than supporting productive business investment.
  4. Investment banks continue speculative activities rather than financing machinery, production and employment.
  5. The Federal Reserve expands its balance sheet to absorb toxic assets, weakening its own long-term position.
  6. The US Government delays meaningful deficit reduction, increasing the eventual risks of inflation, default and systemic failure.
  7. Artificially low interest rates distort the valuation of virtually every financial market.

Continue Reading: Hat Trick Letter (Archive Edition) – Part 4: The Grand Divergence →

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