Iceland's national debt is over 320 billion krona, which is roughly about $4 billion US dollars. That's huge, considering that's about a quarter of their GDP. The US public debt is now over $9.2 trillion, and will probably increase at a rate of $800 billion per year. The US national debt is about 36% of GDP.
In contrast to Iceland's actions, the U.S. central bank ignores the specter of inflation by continuing to push interest rates even lower. The Fed is bowing to political pressure to keep recession at bay by pumping more dollars into an economy where consumers are exhausted from their giddy spending spree.
The bills are coming due, but there is no more new money to pay for them. Household prices, such as food and fuel are on the rise. Those credit card offers come every week as well. If you haven't been affected yet, you will.
Although the average consumer price index reported for last year was about 4%, the current producer price index on crude goods, such as food and energy, is over 20% from this time last year. So far, prices to consumers have only been felt in the areas of transportation (9%) and energy (about 19%), with most other areas hovering around 4%.
Instead of protecting the value of the dollar by increasing key interest rates, the Fed lowered them by three-quarters of a point last week (3/18/08), making the Fed Funds rate 2.25% and the discount rate 2.5%. From the wonderful chart maintained at The Privateer, the Fed had cut the Fed Funds rate six times since last August, from a high of 5.25%, and the discount rate eight times from 5.75%. The stock market usually responds immediately, because it knows that more money will come into the system. But the effect on consumers is usually six months or a year behind. Combine artificially low interest rates with the stimulus checks being issued in May, we're looking for a new round of inflation this summer.
The economy will have to absorb $168 billion dollars of new money, courtesy of the U.S. Treasury, with no increases in productivity. I'll cash my check like everyone else. I have credit cards and medical bills that I need to pay off. I've had to heat my house this winter and put gas in the tank to get to work. I expect the Fed to keep cutting interest rates because the stock market has already priced in the knowledge of the upcoming stimulus package. The market will react downward afterwards to the fact that consumers are so worried about their existing debt, that they won't want to acquire more stuff. Stock prices will fall after a bump in some new spending. The credit card companies will see a sharp decline in their assets, as consumers try to pay off this debt. On the up side, they will see fewer write-offs, because default rates will slow. Inflation will continue upward because there is more money in the economy, with higher prices for fuel and food.
For those of us who watch interest rates for fun, we have this smug satisfaction in knowing that the Fed will have to reverse this trend of artificially suppressing interest rates in about a year. When it does, it will overreact to double-digit inflation with double-digit rates. I'm sure that Paul Volker's playbook is gathering dust on the shelf right behind Ben Bernanke. If he can't find it there, he can just look north.
©2008 Bob Nightingale, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Wednesday, March 26, 2008
Last modified: Wednesday, March 26, 2008
The views expressed in this article are those of Bob Nightingale only and do not represent the views of Nolan Chart, LLC or its affiliates. Bob Nightingale is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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Reader Comments:
Posted By: N/A
Date: 2008-10-09 22:23:12
A public debt of 25% of GDP is not huge, it's fairly low compared to other countries.How can you say the US has a public debt of 'about 36%' when you link to an article saying that the US public debt is 60%...See:https://www.cia.gov/library/publications/the-world-factbook/geos/us.html#Econhttp://en.wikipedia.org/wiki/United_States_public_debt
Posted By: Jake, the champion of the constitution
Date: 2009-01-24 01:12:39
Bob - all things considered, fantastic call here. 1 Euro = 163 ISK... for the moment
Posted By: Alex
Date: 2009-06-11 13:36:30
I think you need to buy a new crystal bal. It is now June 2009 and the current interest rate is 0-0.25%. Showing once again that econimic preditions are only worth anything for those who get paid to make the forecasts.
>>In contrast to the US Federal Reserve, the central bank of the northern >>Atlantic island nation of Iceland raises its rates to 15% on inflation fears. >>My crystal ball says the US will do the same in about a year.