The Interest Rate Hike and Bearings

Posted by Jeff 20/12/2015 0 Comment(s) The Bearing Market,

What impact will Janet Yellen's decision to raise the interest rates have on the bearing industry? Probably not much and probably not for long because the rate hike won't stick.  The U.S. government can't afford to pay much more than 0% on its massive load of debt.

 

Interest rates are supposed to be based on risk. The higher the risk, the higher the interst rate is supposed to be. So, one of two conclusions can be reached by rates near zero percent: 1) the economy is in great shape and there is no risk or 2) interest rates are completely manipulated and no longer bear any resemblance to the real world. One look at the U.S. government debt clock reveals that, with debts approaching 19 trillion, the risk of lending money to the united states is not zero.

 

The world's largest debtor is the U.S. Government and U.S. Treasury bonds (the vehicle through which the U.S. Government borrows money) are not selling as easily as they once did. In order to keep the U.S. government supplied with money while keeping interest rates low, the U.S. has resorted to QE, which as I understand it, is a term that largely means it is loaning money to itself.

 

However, in order to have any kind of a return to a normal economy--or any credibility with the nations of the world holding trillions of our debt--we have Janet Yellen decided to raise interest rates.  Doing so encourages the fiction that our economy is strong and that we are still capable of paying interest on our debts--a necessary condition for people to loan us money in the future.

 

However, the Fed cannot continue to raise interest rates forever. The U.S. debt is so huge, that each one point rise in interest rates adds another $170 billion in interest on the national debt, which is something the U.S. simply cannot afford.  The only reason the dollar still has the strength it does, is because the rest of the world is equally broke.

 

The Chinese are drowning in debt, as are the Japanese, the Europeans and every other country in the world. In order to keep their currencies competitive in this world, they have eased as the Fed has eased and and the world is awash in bad debts. In the long term, there are only two options: default or hyper-inflate. 

 

Either one of those things holds huge and scary implications for the world's economy and the Fed's recent decision to hike interest rates brings us one step closer to one or the other. But no matter what comes--default or hyper-inflation--the world, and bearings, will continue to spin.  Interesting times.

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