Ever since the Bank of Japan shocked global markets by introducing a negative-interest-rate policy last week, the U.S. Federal Reserve has been forced to broach the subject of whether it too will go negative rather than continue the rate-hiking trajectory it started in December.
During a speech Monday at the Council on Foreign Relations, Fed Vice Chairman Stanley Fischer stated that negative rates are working more than I can say I expected in 2012, alluding to other nations that have imposed them, and he emphasized that the central bank would remain data-dependent in its rate-setting decisions.
Stress tests to gauge negative rates: Moreover, the Fed announced that in its annual stress test on banks, it would examine the effect of negative rates as a factor. As interest rates turn negative around the world, the Federal Reserve is asking banks to consider the possibility of the same happening in the U.S., Bloomberg reported. The Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period.
The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities, the Fed said last week.
U.S. reaches grim milestone: One reason for negative rates here in the U.S. is that growth appears to be slowing. Fourth-quarter GDP came in at a measly 0.7%, while the Atlanta Fed is estimating first-quarter GDP at a mere 1.2%. Deutsche Bank has announced that it thinks the probability of a recession in the next 12 months is 46%, considerably higher than the Feds model it examined.
But theres another reason why the Fed might be pushing for negative rates. Look no further than a grim milestone that the U.S. reached last week, on Jan. 29: The federal government breached the $19 trillion national debt mark for the first time in American history, hitting $19.012 trillion.
It took a little more than 13 months for the debt to climb by $1 trillion, The Washington Examiner observed. The national debt hit $18 trillion on Dec. 15, 2014.
By suspending the debt ceiling last November, Congress has issued itself an unlimited credit card. That suspension will continue until 2017, when a new president will be in office. But the damage has already been done: The debt has an increased by more than $8 trillion since Barack Obama assumed the top job in January 2009, when the total debt was just $10.6 trillion.
Debt-to-GDP running high: The Congressional Budget Office is expecting the national debt to reach $22.6 trillion by 2020 and $29.3 trillion by 2026.
This means that if the nominal U.S. GDP as of Dec. 31 which was $18.12 trillion grows at the 1.2% rate expected by the Atlanta Fed, total debt to GDP is now on pace to hit 105% at the next GDP tabulation, and rising fast from there, Zero Hedge noted.
To provide context to these eye-popping numbers, the U.S. didnt hit the $1 trillion debt mark until Oct. 22, 1981, while $10 trillion was reached on Sept. 30, 2008.
What do we have to show for this?: Less than eight years after hitting $10 trillion, the U.S. government reports that it hit the $19 trillion mark, wrote Simon Black of the Sovereign Man site. But what do they have to show for it? Its not like anyone defeated the Nazis or Soviet Union over the last 8 years.
By 2008 the banks had been bailed out, and the world had supposedly been saved. Where did all the money go? What real, tangible results do they possible have to justify the last $9 trillion in debt?
Gold, debt likely to resume tandem: The sad, or infuriating, answer is that we have very little to show for all this debt. And when debts cant be repaid, they wont be. Bankrupt governments historically either impose austerity on their citizens by cutting benefits or else inflate away the value of the currency to offset the debt.
Gold remains time-tested protection from this insane government spending. Between 2009 and 2013 spot gold was closely correlated to growth in the Feds balance sheet, according to a post at the Valuewalk. Between 2000 and 2013 spot gold was closely correlated to growth in U.S. Federal debt levels and limits. We have always regarded the gaping divergence since 2013 between these two series and spot gold prices as a great mystery. Nonetheless, we expect these traditional correlations to revert toward longstanding means. Because we expect the Feds balance sheet and the U.S. federal debt limit to prove sticky downward in future periods, prospects for reversion strongly favor higher gold prices.
One cant change economic laws. Debt is not money; gold is money. Running up the national credit card can only end badly. Imposing negative interest rates is not a solution to the governments insatiable spending habit, nor is inflation, while austerity has the potential to incite significant social unrest in a nation where so many of its citizens are dependent on checks from Uncle Sam. Investors need protect themselves with gold now while there is still a lull between the yellow metal and its positive correlation to the escalating U.S. debt.