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Does The Fed Have What It Takes To keep Interest Rates Down?


This Question Was From A Rebel Capitalist Pro Member on 7/21/20:

Hi Lyn and George, does the Fed truly have the tools to keep interest rates suppressed for 5 or 10 years or more? How do you see their efforts affecting mortgage rates over the next decade?

Rate Suppression comes with a compromise

So, in theory, the Fed can lock yields on whatever they want, but the release valve is currency strength.

The Fed can keep rates low, provided they're willing to print money and buy treasuries.

The Fed can peg interest rates at whatever they want. But if they get into a crazy situation, then it can turn into project Zimbabwe!

Inflation will run hot

They can devalue the currency immensely.

However, if you look back in previous times, they did this in the '40s, and then to some extent, in the '70s.

Usually it doesn't take 5 to 10 years to play out, as long as they lock yields for a couple of years and let inflation run hot.

Inflating Away Debt

And then they raise those rates more slowly and fail to keep up with inflation, which can inflate away a lot of the debt as a percentage of GDP.

So, what makes this situation more unique is that this is… If we look back in history, at the end of long term debt cycles, we didn't really have private debt and government debt at record high levels at the same time, usually it was one or the other.

So in the 1930s, they tackled the private debt problem. And in 1940s, for World War II, they tackled the government debt problem with currency devaluation, and then another currency devaluation in the '70s.

So it was done in series rather than all at once.

We're potentially approaching a bigger situation this time because we have government and private debt both very high at the same time.

They can definitely lock yields for a time.

But then the question becomes, does currency devaluation get out of control or is it more gradual?

And for that, we're going to have to wait and see. That's why my reports are every two weeks because that's the kind of thing that as more information comes, we can navigate, looking ahead a couple years and then also shorter term.

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