While fiat currency is bad enough, it is through the use of fractional reserve based debt which (changes the size of the money supply) that we end up with a pump and dump economy. First comes the feast and then follows the famine with the educated elite always getting the feast and the common man stuck with the ensuing famine. In other words, income and wealth inequality.
When the pump is on, all the new creation of temporary money (AKA debt) buys assets while they are cheap. Over time, the abundance of new money chases prices upwards. This is why people on the left and right coasts and in many parts in between live in houses which they owe 400,500,600 thousand dollars or more on. We are not talking mansions here folks, we are talking about 2000-2500 sq ft houses (if they are lucky) which are either in some kind of well established neighborhood or other trendy location.
Why do people do this? Why do they borrow that much money for a consumption item like shelter? Simply because they can. Leave a bag of candy in front of a child and tell him its OK to eat all he wants but to be careful not to eat too much or he will get sick. The next thing you know the kid will have a stomach ache and need to be put to bed. Yes, it's that simple. We were never properly trained about how fiat currency works and so people now think their house is worth $600k simply because they paid that much for it. They could not be more wrong and they will finally understand that in the coming years as rising interest rates collapse the price of homes.
"But I have a fixed rate! I got a great deal on the mortgage and so I will be fine if rates go up big time like you predict they will".
I hear this all the time. And these people would be right if nothing else changed. But folks, do you know what the unemployment rate in Spain is right now? I entered this string in Google: "current unemployment rate in Spain" and got this result.
Then I did the same for Greece:
Those are Great Depression numbers. What happens when the pump and dump economy of the US tanks? If you get laid off and cannot find another job, can you still afford the PITI on your 400-600k house? And even if you are lucky enough to stay employed, what happens when your neighbors default? Some will do it because they lost their job and can't make payment. Others will do it because it's just good business. They will say "7 years of bad credit is not worth making the payment on a 600k loan when the same house now sells for 200k".
Yes, that's right. Houses can go down in price just like the stock market. Both are just assets. Both are mostly owned though the use of debt. When the interest rate on the debt climbs, the amount of money that someone will be able to offer you for your asset goes down. Not because they want it to but rather because they have no choice. Rising interest rates are akin to removing the candy from in front of the baby. The resulting price collapse is what most economists call deflation.
But not to worry, the fed has mentioned that they will hold interest rates low for a considerable time blah blah mealy mouthed blah blah, right? Mark my words, the fed will soon be in a hurry to raise the fed funds rate NOT because they want to and certainly not because they promised they would (quite the opposite in fact). No, they will do it because they in fact don't control them. The bond market, which is much much bigger than the fed controls the bond rates which are SUPPOSED to be linked to the fed funds rate and the bond market is already pushing them higher.
When you see Yellen sweating at the microphone it will not be because she is trying to figure out when to raise rates. No, she has looked at the charts and she has chart analysts and they are telling her the rates are going up right now. So Yellen's sweaty face will be due to not knowing how to break it to us, what lie and fed speak she can use to mesmerize the herd like Greenspan and Bernanke did before her. Unfortunately, Yellen probably doesn't know she was picked as the disposable fed, the scapegoat fed.
In any case, the ten year treasury yield is tracked by the $TNX.X ticker in TDAmeritrade and so you see it below. Wave black 1 was a good sized wave that began its climb in July 2012. 10 year rates were 1.4% back then. During wave 1 up the rates peaked at 3% and have since pulled back to wave 2 at 2.618%. As you can see from below, wave 1 of 3 has just completed and 2 of 3 is done or nearly done. 3 of 3 is going to send panic into the markets because it will move more rapidly than the fed expects and thus the fed will have to change guidance unexpectedly. The market doesn't like surprise and it won't have confidence to leverage itself to the hilt when it can't trust the fed to do what it says it will do.
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