Now that Federal Reserve Presidents Fisher, Kocherlakota and Plosser are non-voting members, Chairman Bernanke can go full bore into his deflationary Japanese ZIRP policy.
The U.S. government shows no signs of wanting to deal with the budget deficit and Ben Bernanke shows no signs of wanting to raise interest rates at any point during his tenure.
The effects of these policies will make it almost impossible to raise interest rates any time after 2014. The more debt that gets piled onto the balance sheets the greater the chance of a Japanese style deflationary outcome.
Imagine a world in 2015 where interest rates need to rise just 1% and the effect it would have on not only the fixed income market but the budget deficit as well. Each trillion dollars in debt would add $10 billion to the budget deficit. With our gross public debt likely to exceed over $20 trillion by the start of 2015 it is becoming increasingly unlikely that we will be unable to raise interest rates as the addition to the debt burden through the interest expense will blow a hole in the budget.
What Bernanke has yet to realize is that his ZIRP policy has become essentially meaningless in an environment where Congress continues spending and regulating like drunken sailors. In this context, the policies being enacted can be looked at as pushing on a string.
Meanwhile in Europe the ECB is pushing back against the suggestion from the IMF that they should participate in the debt swap along with private investors.
What the ECB has failed to realize is that by asking the public sector to take a significant haircut while the ECB, IMF and pension funds remain whole they have created a bifurcated sovereign debt market. The terms on a prospectus have become meaningless as the only important term is who holds the debt in the end.
The dangerous policies of moral hazard being practiced by central banks in Europe and the U.S. lead to an environment where interest rates are going to zero, economic growth is stalling, and the U.S. is barreling straight toward a Japanese style outcome. Investors need to have an allocation to gold (GLD, DGP) within their portfolios through ETFs or physical holdings if they expect to survive this upcoming crisis unscathed.
Disclosure: I am long DGP.