Memo to Yellen on rates: swallow your pride and leave them alone


At the risk of sounding melodramatic, the noose is tightening around Wee Janet Yellen’s neck. The amount of Bric (epecially South American) debt now denominated in $US is astronomical. I watched an interview yesterday with the anchorman asking ‘if US rates rise by a quarter-point, is that really the end of the world?’ – marvelling as I did so at the financial illiteracy of the question. Worse still, the suit from some Wall Street firm or other (as you can tell, I was really paying attention) replied,
“Not in the greater scheme of things, no”. Unreal.

Keeping it simple, let’s say that as a poor risk, a Bric nation in trouble is currently paying 1.5% on fiscal debt servicing. Put that up to 1.75%, and the Bric suddenly needs to find 17% more repayment monies every month. It won’t be able to, will it? Gulp.

Nobody knows for sure what the chain reaction to that will be, because nobody can be certain what other varieties of excrement might be hurtling through the air at the time – from China, Ukraine, Japan, ClubMed, the Saudis….or a hundred other self-created trouble spots around the Globe.
But the somewhat left-field nature of Draghi’s speech last week (I liked it, but nobody else did) is a classic example of what I mean.

Let’s suppose, for example, that a large US mineco investment has been made in the mining potential of Venezuela; I mean, it has been known to happen. Or that a huge lump of dodgy lending in Venezuela is sitting as an asset in a major Spanish bank. Or of a large Portuguese bank in Brazil. Imagine a large Aussie miner – looking to diversify away from China – in the same position. Double-gulp.

But Ms Yellen isn’t going ‘gulp’: the general tone coming out of the US Fed at the minute is the warbling of a Rebel Yellen: the word is she’s out to normalise and, as one journalist put it yesterday, ‘defend the reputation of the Federal Reserve’. Most of the betting money at present is on a quarter point rise in December. I think this is no time for a pissing contest.

Yesterday, Fed notables unveiled those Dodd-Frank law amendments in full. If you really want to scare yourself to death, take a peak at how woefully lightweight they are….and in particular look closely at what will effectively disallow unlimited liquidity support during a future dry-up. That to me is a panic in the making, but then what do I know?

In the absence of anything substantive from Dodd-Frank, Janet Yellen’s job ought to be taking firm action in supporting legislators to ignore the banking lobby and make things really safe. But with a bought Congress doing what the Dimons and Blankfeins want, that isn’t in any script we’re likely to read this side of 2025.

What the Fed Chair is trying to do, in the absence of such real reform, is please all the people all the time – her colleagues, the markets, the Brics, and major US manufacturers. And so the ship will plough on through the waves….until the day it doesn’t. She is tinkering with a phial of nitroglycerine in the munitions hold.

If that too sounds a bit amdram, think on this: despite the lack of solid investments offering a return, junk bonds haven’t been in the current depth of doldrums since the near-miss of 2008. Risk-aversion is there for all to see. That suggests there is the very high likelihood that  Brics struggling in the context of even a quarter point rise will accelerate the rush of investors to safe ports like the US…applying further pressure on rate reductions and an even stronger Buck.

Just under a week ago, Yellen declared that the “economic conditions are ripe [for us] to start raising rates”. I wonder what data she read in order to reach that conclusion, but mainly I worry that it might have been the last US jobs report….which doesn’t reflect anything much beyond wish fulfilment.

Little by little, the magnetic pendulum of reality is dragging the Fed towards the panic-pit. I’d be willing to bet that if she puts rates up this month – and I think she will – she’ll be a lady ripe for turning by March at the latest. But by then, it’ll be too late.

I, of course, would like universal rates to be abandoned in favour of ‘off Broadway’ lending to sound ideas with good collateral. But then that’s just me.

On verra.

Yesterday at The Slog: Is this ‘leak’ telling us the truth about Turkey and the UK in NATO?

20 thoughts on “Memo to Yellen on rates: swallow your pride and leave them alone

  1. The thing is that the Fed nor any central bank will ever be able to raise rates. So they and we are caught between the devil and the deep blue sea. It’a a perfect dilemma. Rates are rising all over the place, EM and junk for instance and so too is issuance there so this chapter of the credit bubble is on it’s last legs.


  2. I wouldn’t worry. This will-they-won’t-they over interest rates is all a charade to try to hide the true state of the American economy form the public – and possibly even themselves.


  3. The rates will rise as an hors d’oeuvres to further escalating war and denouement. Frankly, the world and his wife need emergency care best provided under cover of a titanic military and economic fin de siecle.


  4. Please call me a simpleton, Isn’t all looking like 1929 again?

    … & if so, we know who got themselves out of that one to best advantage… Wonder if it will work for them
    again… Hmmm.


  5. “and the Bric suddenly needs to find 17% more repayment monies”. Perhaps it would have been better to have said “and the BRIC gradually needs to find more payment monies as the current debt is rolled over at the higher rates”. Your overall message is correct, but the speed at which it will take place needs to be nuanced.


  6. The truth of the matter is Yellen can’t raise rates because if she did it would put the whole of the US economy in deep doodoo She has been threatening to raise rates for over 18 months now and every three months has always found an excuse not, be it internal markets, jobs numbers, external markets, the price of gold, the price of this and that… If she raised rates there would have to be a mother of a bailout put in place because all of a sudden companies will have to pay interest on their loans and will default, along with government debt, along with personal debt and the whole thing will start all over again. Imagine higher interest rates on mortgages….


  7. I will add only this.

    I was talking to a colleague a few days ago, she is in her mid twenties and had just bought a house with her fiance. They have it on a 38 year mortgage… and even to get that had to put down 15k deposit on 160k loan.

    The punchline is, these people were at school doing their GCSEs in 2008/9 their entire adult experience has been in a ZIRP environment. What will happen when rates ‘normalise’?

    Frances Coppola is of the opinion that the ‘old’ banking model is now dead and consigned to history, and that we are in the new normal but surely such an arrangement as we have now is not sustainable.


  8. I agree with Jaime in Quebec that the effect on the borrowers will be both variable and gradual, depending both on the amount due for refinancing each year and the new interest rate change they have to pay (this could indeed still be a reduction even after the increase). Britain’s average maturity, for example, is 14 years so only 7 % on average fall due each year. The BRICS’ average maturity is less, I think. More facts and fewer opinions, please!

    The question seems a reasonable one for a layperson to ask and the answer, unreal as it may seem to you, a reasonable reflection of the reality that many prosperous people inhabit.


  9. Keep an eye on the price of oil, which is collapsing, together with commodity prices. This allows a window of opportunity to return to normal monetary conditions and deflate the asset price bubble in property prices. Any sane central banker older than me (64!) would inch up base rate by a quarter of one percent, with the intent of getting to 1 percent in 12 months, punishing speculative borrowers( various governments and the property spivs), and returning the market economy to normal, pre, for example, the abolition of boom and bust by the new Pimco demi god.This smells like 1982, the beginning of a long overdue equity bull market. For those who have lost their shirt, over 10 years, in ‘safe’ M&S, Tesco, Sainsburys et al., I give you RDS and Antofagasta , whose present valuations assume constant rainfall over Cumbria.


  10. You cannot just raise rates “just like that ” poof and its done by pushing a button.
    The biggest problem is not emerging market or other debt , it is the fact the stupid morons at the Fed will have to by latest calculations have to WITHDRAW liquidity from the market in a range of between $350 Bn and $800 Bn
    Now consider just ho exactly the Fed could possibly do that to get rates up and what that would do to the economy
    Everything else including loan repayments come second.

    The stupid bint might announce it, But there is not a snowball in hells chance she can follow through and withdraw that much liqidity


  11. Yellen is missing an important point.

    When your economy and your livelihood go to hell because some nation changes their interest rate that is actually the global economy.

    US will be disliked just a little bit more and this new bank gains even more support.


  12. If I had a question for Janet Yellen (other than all the other obvious ones) I would be asking why she promotes a steady inflation rate of 2%. Who benefits by that, unless it is to conceal the theft of wealth from the people to the financiers.
    An inflation rate of 0% or better still in negative numbers, can also mean that production is getting more efficient and profit margins are being maintained.


  13. Isn’t it worse than an unlikely rate rise ? Emerging markets income is often commodity based and the debts are in appreciating dollars.


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