The price of gold has fallen four straight weeks, primarily driven down by anticipation of Federal Reserve monetary tightening. The kickoff of the Fed’s balance sheet normalization program and the expectation of rising interest rates have helped spark a dollar rally. But few people seem to be paying any attention to the pitfalls of quantitative tightening. In fact, the Fed’s policy to push interest rates higher could turn out to be a havoc-wrecking juggernaut.
We’ve already discussed the impact rising interest rates will have with the government more than $20 trillion in debt. Any substantial interest rate increase would crush the US budget under interest payments. Analysts have calculated that if the interest rate on Treasury debt stood at 6.2% – its level in 2000 – the annual interest payment on the current debt would nearly triple to $1.3 trillion annually.
But the Fed has an even more basic problem. It has inflated a stock market bubble. This attempt to shrink the balance sheet may well pop it. Peter Schiff pointed this out during his podcast earlier this month.
I don’t know why the markets are excited about the prospect of a plan to shrink the Fed’s balance sheet, because if the Fed actually shrunk the balance sheet, the markets wouldn’t like it because it would put dramatic upward pressure on interest rates which are not good for stocks.’
This post was published at Schiffgold on OCTOBER 6, 2017.