Another View of Interest Rates

There is a fear of increasing interest rates. We all know that the FED has pressured them down by its printing of money. Let us first look at M2 and the Monetary Base.

Clearly we have a growing M2 and an exploding Monetary Base. Trillions are pressed into the banks and the MB now is approaching $3 Trillion.

Now consider a simple retiree. Say they had $1 million in the bank and wanted to live off the interest. Independent of any real inflation, they would have to inflate their earnings at a rate which we will show so as to keep the same annualized payout. Thus if they had $1 million and the annual rate was 5% they got $50,000 pa. But if they want $50,000 pa and the interest is 3%, they must have well over $1.5 million. The rate at which the base must increase is an imputed inflation. We show this below assuming a 10 year Treasury.

 The above shows the 10 year rate as well as the calculated inflation due to the decreasing rate. This imputed inflation is in addition to the actual cost inflation. Thus we see  that for someone on a fixed payout from a seemingly risk free investment they will see an added inflation rate of from 5-10% pa due to the FEDs manipulation of the MB.

Now if the Treasury defaults, and if the money was in cash, then they can buy in at a higher rate and reduce the FEDs inflation. Thus it is to the advantage of those with cash assets to see a default!