Rate Hike History 3-22 through 3-23
Over the past 12 months the Federal Reserve has raised its Federal Fund rates from .25% to 4.75-5%. This is just the beginning of much higher rates. This article will explain why.
Reason #1: Competition from B.R.I.C.S.
At the end of 2022, 7.2 trillion dollars of US Debt was held by Foreign Countries. China is liquidating them, Russia has liquidated all its holdings. And both countries have introduced their BRICS alliances as a rival of the G7 in the West. It appears that they are in agreement to dump the dollar and convert to the Chinese Yuon. Which is currently trading at 15 cents to the dollar.
“The BRICS countries, namely Brazil, Russia, India, China, and South Africa, are considered the five foremost emerging economies in the world. Although the acronym BRIC was created as an informal term for these emerging economies, BRICS countries have held annual summits since 2009, with comparable areas of interest and ambitions to the more-established Group of Seven (G7) – of which Russia was also a member from 1997, until it was expelled following the annexation of Crimea in 2014. According to the World Bank, G7 and the original BRIC countries make up 11 of the 12 largest economies in the world (with the other being South Korea).
Reason #2: Higher Risk of Default
Interest rates on us treasuries are sold at auction. In order to sell them they have to be competetive with other foreign debt. This means, the higher the ratio of National Debt, the Higher the risk of default (non-payment) or hyper-inflation (debt devaluation).
The graph below shows at the end of 1922, the United States total govt. debt was 120% of the value of our Gross Domestic Product. By june, Congress will take it even higher by raising the debt ceiling. Raising rates can offset risk and attract investors.
However, it will also accelerate hyper-inflation and gut the assets of every commercial bank in the world that has treasuries on the books.