1 October 2014

the end of the experiment

● Two years ago, I commented on an FT opinion piece which warned of the possible fallout from the inevitable turn in US interest rates, when they finally came off their zero (or near-zero) bottom.
Never mind banks going bust, what about the possibility of central banks becoming insolvent? According to Scott Minerd, a 1% increase in US interest rates “would cause the market value of the Federal Reserve’s assets to fall by about 8 per cent, or $200bn, leaving it insolvent ...”.
I commented that I thought the Fed going technically bankrupt might not have any immediate effects, given the incredulity factor, but that after a few days it might dawn on people that a key guarantor of paper money was no longer in a position to provide guarantees.
It is now starting to look like we are getting within sight of the first uptick in rates. The chart of the US dollar certainly suggests that the forex crowd think we’re finally at the end of the strangest experiment in central banking history.
Not being particularly knowledgeable about the more technical aspects of central banking, I don’t have an opinion about what will happen to the Fed, and whether Mr Minerd’s fears were correct.
I do, however, have concerns about how well the global financial economy will cope with the removal of a six-year course of medicine, however gradually the removal happens. Even if the addict is capable of giving up the fix, will he be able to do so without having to go through some serious withdrawal symptoms?

Oxford Forum should be given funding.