Yet more yakking from the Mainstream Pundit Class this morning that Yellen is about to "raise" interest rates.  To be clear, the Fed has no absolute (fiat) control over any interest rate.  Not even the Fed Funds rate, which is the one it's assumed to control directly.  And that's the overnight inter-bank transfer rate.  About as short term as one can get.  It's "changed" by the Fed "suggestion" of some new higher/lower rate.  Given the structure, banks comply.

Now, if the long term rate on corporate and Treasuries is determined by the internal rate of return on physical capital in the private sector, and it is albeit at some arm's length, then should the Fed/Yellen decide to push up Fed funds, one gets into a rate inversion.  One caused by fiat, as it happens, not economic reality.  The theory (almost entirely right wing, Greenspanian) is that raising Fed funds will filter out to Treasuries and corporate bonds.  But how?  The fact is, long term rates are in the crapper just because capitalists have run out of ideas.  They're sitting on TRILLIONS of idle $$$, which they can't find useful ways to invest in their businesses.  All these TRILLIONS have been chasing Treasuries for years, pushing down yields.  The CxO class would rather get 10% (they hope, but so much moolah chasing Treasuries gets them 1/10th that) from Uncle Sugar fur shur, than build out new plant and equipment.  Raising Fed funds rate isn't going to cause Gyro Gearloose light bulbs to start flashing over the heads of said CxO class members.  They'll still be just as clueless as they are today.  They still won't have any more idea how to generate 10% internal rate of return than they do today.  All we'll get is an acceleration in wealth transfer from the many to the few.

So they demand that Uncle Sugar pay them 10% or so on Treasuries so that the CxO and hedge fund classes don't have to work for a living.  Why should Uncle Sugar, i.e. the little people who pay taxes, agree to such a transfer of wealth from the 99% to the 1%?  Where's the free market in all that?

Being a financial engineer in the next few years is an occupation which will keep the gastroenterolgists very, very busy.  "Ulcers hab been berry, berry goo to me!!"

Views: 62

Comment by Zanelle on August 29, 2016 at 10:30am

Wealth transfer.  Uncle Sugar.  Did you see the Sixty Minutes expose last nite about how easy it is to transfer dirty money into America.  They nailed about fourteen lawyers who were happy to discuss how it is done....only one said it wasnt for him and passed.  The others were all fawning over the millions they were being asked to launder and pass along.  Greed and corruption will always be with us I fear.  

Comment by Robert Young on August 29, 2016 at 11:20am

yeah, although it was a re-run.  kind of amazing that there's more left for the 99% than in a west African dictatorship.

Comment by Con Chapman on September 2, 2016 at 4:34am

The Federal Reserve controls the discount rate, the rate at which it makes loans to member banks.  The rates are set by each regional reserve bank, subject to review by the Board of Governors.  https://www.federalreserve.gov/monetarypolicy/discountrate.htm

Comment by Robert Young on September 2, 2016 at 7:23am

" Sometimes, because of an unusually high demand for loans or a sudden demand for withdrawals, the amount of money the bank has as a reserve falls below the required percentage. When that happens, the bank first tries to borrow from other banks, then it tries to borrow Eurodollars, then it tries to borrow using repurchase agreements (which are loans secured by government debt obligations like T-Bills)  and finally it goes to the lender of last resort -- the fed. The rate the fed charges them is the discount rate." "

here: http://tinyurl.com/hmsnjeg

IOW, the discount rate only matters in times of crisis.  sort of like when the Fed did QE.  it doesn't matter in the normal course of commerce.

Comment by Con Chapman on September 2, 2016 at 7:33am

Your post said the Fed has no absolute control over any interest rate--just correcting a factual misstatement.  Generally speaking the discount rate may not be important to a well-capitalized money center bank, although I've been practicing in this area for 37 years, and just about every commercial loan agreement in American contains a provision permitting the lender to pledge the borrower's note to the Fed. (They can pledge commercial notes without that language, but larger banks make it clear that they can do so.)  The majority of banks in America by number--small to medium commercial banks--don't go to the Eurodollar market before they go to the Fed window.

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