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Two simple economic factors to watch

Jul 08, 2013

As we watch for signs of the times, there are two economic factors to monitor. These two things will have a very large impact on America's economy.

The first is the Eurozone's slow implosion, due to the austerity measures that are taking place there. As a whole, the Eurozone now has 12.2% unemployment. The figures are far worse for the southern nations of Europe. Spain hit 26.9%. Portugal has 17% unemployment.

With shrinking revenue, even with the austerity measures, the debt ratio to GDP (Gross Domestic Product) continues to go higher. Greece's ratio was 113% before its recent crisis. Now it is 157%, even after all the bailouts and write-offs. But they are not alone. Spain moved from 40% to 84%. Italy went from 106% to 127%. France went from 68% to 90%. Even Germany went from 67% to 82%.

At this rate, it will not take long for the Eurozone to drown in debt. When that happens, or as people see it approaching, they will start sending their money to America as a safe haven. This will be great for the US economy, at least temporarily.

However, that brings us to the second economic factor that we need to watch. It is the achilles' heel of the US banking system. I refer to the hundreds of trillions of dollars worth of derivatives that the big US banks have bet on low interest rates in their Casino Banking Practice.

 I have said in past years that when the rates begin to go back up, those big banks will go bankrupt. So far they have made multiple billions of dollars fleecing those who tried to bet against them. Why? Because the rates stayed low.

Until this past May.

Since the first part of May, interest rates have begun going higher, even though the Fed has not budged from its zero interest rate policy (ZIRP). Though markets can always be manipulated, they are like an elephant on a chain. At some point the elephant can break loose and go berserk. So also it is with interest rates.

Since the first of May, the 10-year Treasury Note has gone up 1.1% from 1.614% to 2.719%.

The 30-year note has gone up from 2.81% to 3.7%.

The 5-year note has gone up from .641% to 1.86%.

Now these tiny figures may not impress the average person, who thinks such small rises would make little difference on his home mortgage. But realize that the big banks have leveraged their bets so much that they only have a few billion dollars to back tens of trillions of dollars' worth of their bets. A 1% rise in interest rates can mean losses of many billions of dollars.

And it has.

The "Chart of the Day" from the Fed shows that their profits have dropped from $15 billion to $6 billion just since April. These profits are called "unrealized gains." One article calls it a "bloodbath," and says:

After crashing from $15 billion to just $6 billion, the reported balance of net unrealized gains is barely positive for just the first time since April 2011. And to think this number had topped out at over $43 billion in December 2012. But the worst is that monthly drop in "gains" of $24 billion is the biggest by a wide margin since the Lehman collapse.


Just wait until the banks have to report this in their quarterly reports. When investors begin to understand what is happening, many of them will start heading for the exits. If the interest rates continue to rise, each uptick will cost them millions more. When the investors figure this out, it will be too late. It will be shearing time, and many are going to be fleeced with a power lawn mower.

So these boring interest rate figures are important to watch, especially here in America. The Eurozone only has to watch how fast the train is traveling toward the fiscal cliff, but America's date with destiny could come very quickly, if those interest rates continue to rise.

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Category: Financial

Dr. Stephen Jones

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