If you’re a holder of STEEM, what I’m about to tell you should give you great hope for the future.

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After some hawkish statements from Fed Vice Chairman Stanley Fischer on Sunday, the US dollar surged, gold hit a two-week low and silver fell to its lowest point in seven weeks. 

Fischer claimed the Fed is close to hitting its targets for full employment and 2 percent inflation. So could a rate hike be just around the corner? 

We’re now nearly eight years into the Fed’s little monetary experiment of near zero interest rates. Since artificially low interest rates [suck long term](https://steemit.com/economics/@jasonstaggers/6-reasons-artificially-low-interest-rates-suck-long-term) and make the US look weak, the Fed is under pressure to keep lifting rates. 

There’s just one problem... 
### The United States would be totally and completely screwed if interest rates started rising.

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It turns out that former Fed Chairman Ben Bernanke agrees. According to guests at a $250,000 per plate private dinner meeting held for wealthy hedge fund investors, Bernanke [said](http://www.reuters.com/article/us-usa-fed-bernanke-insight-idUSBREA4F0OG20140516) behind closed doors that he doesn’t expect to see the federal funds rate at its long-term average of 4 percent at any point during his lifetime. He was 61 at the time.

Here are three reasons why the Fed will NEVER voluntarily normalize interest rates:

# 1. Higher interest rates would bankrupt the U.S. government.

The U.S. national debt is already nearly $20 trillion and growing. 

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As I’m sure you’re aware, the U.S. government pays interest on this debt. For fiscal year 2105, their [total interest expense](https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm) was just over $400 billion. They’re on track to exceed $460 billion for 2016.

In 2015, the U.S Government took in $3.25 trillion in tax receipts. 

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Government spending over the same period, including interest, totaled $3.7 trillion. 

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In order to meet those obligations, the US borrowed about $450 billion to cover the shortfall. That was just enough to make the interest payments, with a little left over for Obama’s vacation budget.

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If you had to borrow just to service your debts, how long do you think you would have left? It’s no wonder that some are saying that Uncle Sam is already bankrupt.

That doesn’t even take into account the hundreds of trillions of dollars worth of unfunded liabilities like social security and medicare. 

Not only is this path unsustainable, it also reveals just how far on the knife’s edge America really is. If they have to borrow just to make interest payments on exponentially increasing debt today while interest rates are almost zero, what will happen if and when interest rates eventually do increase?

For the U.S. government, a minimal one percent rise in interest rates would equate to about $200 billion more in interest payments per year after current debts roll over. If interest rates were to normalise to around four percent, their interest expense alone would exceed $1 trillion per year.

The U.S. Government simply cannot afford for interest rates to rise.

# 2. Higher interest rates would implode the bond market. 

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On the question of whether the Fed will raise interest rates, most economists look to signs of strength or weakness in the labor market and the inflation rate. They’re looking in the wrong place. The focus and attention should be on the bond market.

Bonds represent debt. Because interest rates have been at historically low levels for the past ten years, nations and companies have been borrowing more and more by issuing debt in the form of bonds. The yield paid to investors of those bonds is a reflection primarily of the prevailing interest rate.

Bond values have an inverse relationship to yields, or interest rates. As interest rates increase, bond values decline. If bond values decline, the investors who own the bonds begin losing their principal.

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It can be helpful to understand how yield affects value by looking at commercial real estate. Let’s say you want to pay $1,000,000 in cash for a commercial property that will pay you $60,000 per year in rent. That’s a 6 percent yield. 

After you buy the asset, interest rates begin to go up. Within a few years, investors no longer need to take on the risk of owning a commercial property to get a 6 percent return. Now investors demand an 8 percent yield in the same area to compensate them for the greater risk. 

Your property still brings in only $60,000 in income per year, but based on an 8 percent yield, investors are now only willing to pay $750,000. In this case, a 2 percent change in interest rates has resulted in a 25 percent loss in the value of your asset.

Higher interest rates would have the same effect on the bond market. Ignoring the time to maturity, an investor who purchases bonds based on a one percent yield could lose half of their investment if interest rates doubled to 2 percent. 

Think back to how much wealth has evaporated when real estate or share market bubbles have burst in the past. Due to the amount of worldwide wealth currently held in bonds, especially by banks, any dramatic movement north in interest rates would have epic ramifications on the world economy.

When you dive a little deeper and understand the $600 trillion derivatives market, then you really start to see how highly leveraged the world is. If the bond market tanks, these derivative plays will all start to unwind, unleashing carnage on the world’s financial markets. 

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Warren Buffet recently said that he believes the bond market is grossly overvalued. Bond expert Bill Gross recently made similar comments. Billionaires all over the world are trading out of the US dollar and into gold. They may not say it, but they all expect complete and utter economic chaos.

You can bet the impact of higher interest rates on the bond market will be weighing heavily on the minds of the Fed board members in the coming months.

# 3. Higher interest rates would crash the US equities market.

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Stocks have been on an upward trajectory since 2009, about the time the Fed funds rate bottomed out. 

Low interest rates mean that investors don’t make money when they park cash in the bank. In search of higher returns, investors look to riskier assets, like real estate and the share market. This investor speculation in part explains why stocks in the U.S. have been on the rise, but that’s not the whole story.

For at least the last six years, the primary driver of equity values has been corporate buybacks. Just like individual investors, corporations need something to do with their cash. With uncertainties in the economy, rather than spend that money on internal investments that might not pan out, instead, companies have been returning that cash to shareholders by buying their own stock.

When companies buy back their shares, the prices of those stocks go up. This explains why corporate executives sitting on stock options are big winners of this strategy. In fact, ever since these corporate buybacks began, insider sales have reached record highs.

In the previous months, we’ve already seen sell offs in the share market as investors grow increasingly anxious over Europe, China and a possible Fed rate rise. A lot of Americans’ wealth remains tied up in shares, and while Yellen has already commented that the market is overvalued, she will do all she can to avoid a dramatic collapse. 

Anything more than a symbolic rise in interest rates would have dramatic and undesirable affects. Don’t be surprised if we see the Fed kick the can farther down the road with plenty of rhetoric, but little action. 

And if there is a move in the funds rate, my money’s on a cut back to 0 percent. After that, buckle up for QE4.

### And THAT is why I keep POWERING UP!

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@jasonstaggers