Tags: Fed | debt | rates | taper

Todd Wood: Interest Rates Are Low ... Until They're Not

By Todd Wood   |   Thursday, 26 Sep 2013 10:51 AM

So the market was shocked when the Federal Reserve decided recently to maintain its quantitative easing (QE), which is currently the lifeblood of the U.S. economy. The 10-year note passed back under 3 percent.

Many see the Fed's decision on starting to taper as the driving force for interest rates going forward. Certainly the Fed will play a major role on where rates are going; however, the threat of an external event that sends rates higher is very real.

We are approaching $20 trillion in debt and are on our way to $30 trillion. The Fed's balance sheet has grown to almost $4 trillion via various rounds of QE. We haven't even seen the negative fiscal effects of Obamacare yet. The dollar is losing its reserve currency status.

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Who knows what will cause rates to jump? It could be a statement or action from one of our foreign creditors, an international incident or a worsening of the debt crisis in Europe.

My point is we won't see it coming.

I think the real reason the Fed didn't start to taper is they can't afford to. They know that each percent rise in the yield curve equates to $160 billion in debt service costs. This will starve the rest of the federal budget. We don't have the money!

They have been hoping for a robust economy to help pay down the debt, but alas, this is nowhere in sight. The Fed can't grow its balance sheet forever to control the bond market.

The bond market is in a position similar to the Nasdaq at the turn of the century. Everyone knows it's way overvalued but continues to play along. Interest rates only go from 20 percent to zero once in a lifetime.

As Sam Elliot so famously said in the movie We Were Soldiers, "Gentlemen, prepare to defend yourselves!"

Todd Wood is a graduate of the U.S. Air Force Academy. He has been an aeronautical engineer and a special operations helicopter pilot for the USAF flying counterterrorism missions globally. After a long career on Wall Street, he left a seat on an emerging market debt capital markets desk to write. His first thriller novel, Currency, was published in late 2011 and deals with the national security consequences of our sovereign debt. His follow-on novels deal with issues that are material to our nation's future.

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