Weekend Economists Light the Candles December 19-21, 2014

[Demeter]

9. The Fed NEEDS Inflation Otherwise the Bond Bubble Will Burst

http://www.zerohedge.com/news/2014-12-19/fed-needs-inflation-otherwise-bond-bubble-will-burst

As we keep emphasizing, the Fed’s real concern is the bond bubble… NOT stocks. We get more evidence of this from Janet Yellen’s press conference after the Fed’s Wednesday FOMC meeting. During the conference, Yellen repeatedly stated that lower oil prices were “positive” for the US economy. This is simply astounding because the Fed has repeatedly told us time and again that it was IN-flation NOT DE-flation that was great for the economy. And yet, on Wednesday, the head of the Fed admitted, in public, that deflation can in fact be positive.

How can deflation be both positive for the economy at the same time that the economy needs MORE inflation? The answer is easy… Yellen doesn’t care about the economy. She cares about the US’s massive debt load AKA the BOND BUBBLE.

Yellen knows deflation is actually very good for consumers. Who doesn’t want cheaper housing or cheaper goods and services? In fact, deflation is actually the general order of things for the world: human innovation and creativity naturally works to increase productivity, which makes goods and services cheaper. However, DEBT DEFLATION is a nightmare for the Fed because it would almost immediately bankrupt both the US and the Too Big To Fail Wall Street Banks. With the US sporting a Debt to GDP ratio of over 100%... and the Wall Street banks sitting on over $191 TRILLION worth of derivatives trades based on interest rates (bonds), the very last thing the Fed wants is even a WHIFF of debt deflation to hit the bond markets.

This is why the Fed is so obsessed with creating inflation: because it renders these gargantuan debt loads more serviceable. In simplest terms, the Fed must “inflate or die.” It will willingly sacrifice the economy, and Americans’ quality of life in order to stop the bond bubble from popping. This is also why the Fed happily talks about stocks all the time; it’s a great distraction from the real story: the fact that the bond bubble is the single largest bubble in history and that when it bursts entire countries will go bust.

This is why the Fed NEEDS interest rates to be as low as possible… any slight jump in rates means that the US will rapidly spiral towards bankruptcy. Indeed, every 1% increase in interest rates means between $150-$175 billion more in interest payments on US debt per year. If you’ve ever wondered how the Fed can claim inflation is a good thing… now you know. Inflation is bad for all of us… but it allows the US Government to spend money it doesn’t have without going bankrupt… YET. However, this won’t last. All bubbles end. And when the global bond bubble bursts (currently standing at $100 trillion and counting) the entire system will implode.