Unless the Fed does something stupid...

In my previous post I pointed out that the national debt has risen 13-fold in the past 30 years and interest rates have gone from 20 percent to zero. Yet despite this unequivocal proof that there is no connection between the so-called "debt" and rates, all of mainstream economics and the media continue to warn that spiralling debt will cause rates to spike.

They are flat out wrong...

Unless...

...the Fed does something dumb, like raise rates on the belief that rising debt will create a need to "attract capital."

I wouldn't put it past them. (Doing something dumb, that is.)

If you listen to Bernanke's recent remarks about the need to reduce the deficit and "fiscal sustainability," it appears that he, too, doesn't understand that it is the Fed--and the Fed alone--that determines rates. (You'd think he'd understand this by now after the historic exercise in rate reduction that has occurred by his own hand! Amazing!!!)

So when the idiots at Moody's S&P and Fitch downgrade America's credit rating (and believe me, they will!) the Fed's reaction to this could easily be to raise rates on the belief that they need to do that to attract capital.

This would set in motion a rate increase cycle of who-knows-how-high proportions. Not a pretty sight.

In contrast, a Fed that understood its role as rate setter, would counter the rating Agencies' credit downgrade, by pushing rates down to zero and keeping them there until everyone very clearly understood that the rate was going nowhere north of that level.

No...better yet...if the Fed were really smart (like, if it were run by me!) I'd wait until all the lemming fools shorted Treasuries on a credit downgrade, then I'd bury them all once and for all by pushing rates down to zero. Get rid of all the cockroaches at once!!