From Dr. Keith Weiner – CEO of Monetary Metals and President of the U.S. Gold Standard Institute
On one side, they force rates higher. This will wipe out the marginal debtor. After rates have been falling so for so long, the margin may be a wide swathe of the economy. Each downtick is a greater incentive to borrow. And also a business case for borrowing to finance projects of ever-diminishing return on capital.
On the other side, those who understand credit—surely some are among the Fed elite—are eying the tightening conditions nervously. The Fed itself, via the excellent FRED site published by the St. Louis Fed, tracks the spread between junk bonds and Treasurys. Not only is the 10-year Treasury yield up to nearly 2%, but the spread is up from 3.0% to 3.74%.
By some estimates, the percentage of “zombie” debt out there is over 20%. Zombies are companies who make less in profit than their interest expense. They couldn’t afford to pay the interest (without borrowing more) even before this latest Fed wild hair. The higher the rate, the more previously-non-zombies become zombified.
In other words, zugzwang. In chess, this is when any move makes your position worse. This describes the Fed’s situation perfectly.
Read it all HERE