Federal Firestarters

Relax said the night man
We are programmed to receive
You can check out any time you like
But you can never leave
--Eagles

John Succo explains why the Fed can't raise rates.

Modern money printing is primarily credit money--i.e., creation of debt. ZIRP has facilitated $trillions in speculative, debt-based projects. If the Fed raised rates, cost of creating and maintaining debt-based projects goes up, causing many to unwind projects (a.k.a. deleveraging), which drives prices lower. As prices go lower, more and more project holders face margin calls. Which drives more selling.

Stated differently, the Fed's inflation of credit money is followed by a deflation of credit money when risk appetite diminishes.

It happened in 08. It will happen on a larger scale this time because debt and leverage are much higher.

The Fed would prefer not to be the one to put this vicious cycle in motion by raising rates. But make no mistake, regardless of where the spark comes from, the Fed has lined the tinderbox.

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