This is going to happen…

Unless they just wanna completely reset the economy

For the last 12 months, the federal reserve has created more havoc then in many of the recession‘s we’ve experienced in the last 25 years. They’ve done this by raising the federal funds rate which has caused bond yields to go skyward and the values of those bonds to go south.

These actions have created insolvency amongst the banking system, combined with the, pandemic, the commercial real estate market, and those companies that are having to mark to market their loans.

According to Bill Gross, the bond king during PIMCO’s heyday, there is $85 trillion in credit. To pay that interest on that credit there needs to be $4 trillion in credit created each year to maintain the present GDP rate. The only way this can happen is if interest rates go lower. At the present if Fed Funds rate and interest rates were to stay where they are or continue to go higher as the Fed has indicated, maintaining this level of GDP is not possible.

Commercial loans are attached to what is referred to as Prime plus or minus a certain percentage amount. Prime is at 8%.

If you have a loan that is benchmarked against prime, you are paying 8% in interest each year. Prior to the federal reserves raising interest rates, Prime was much lower. Mortgage loans are typically prime plus or minus a percentage amount. To maintain our present GDP rate, rates have to come down. At theses levels that is not sustainable.

So What Has to Happen?

For the United States to maintain its present GDP projections, Federal Reserve has to lower rates, which intern will cause treasury yields to go lower.