More important than any “credit crunch” that may occur as a result of banks tightening credit (you can be sure the banks are tightening regardless of what the Fed may do regarding rates), is the self-imposed fiscal credit crunch that will occur as interest expense on the public debt begins to crowd out discretionary spending and entitlement spending.
It is going to get increasingly difficult for the Federal government to run debt-driven “stimulus” programs as the public debt outstanding ($31.5 trillion at latest count), grows by leaps and bounds. Even if the Fed were to lower interest rates, the mountain of debt is so staggering that owed interest expense is suffocating, even at low interest rates.
We are likely looking at $1 trillion in interest expense this year and another $1.5-2.0 trillion to cover this year’s fiscal deficit. That’s $3 trillion vaporized into thin air. Another way to think about it is that the $3 trillion is 15% of Real GDP – i.e. 15% of the U.S. economy that is utterly wasted. That’s $3 trillion of money that the Fed will print – i.e. $3 trillion of U.S. Dollar devaluation. That’s how the Fed is destroying your cash at the bank – even as it sits in the bank physically secure.
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