Can the Fed afford to raise interest rates?

Oct 5, 2015

- By Bill Bonner

Bill Bonner
Syracuse, Sicily

Dear Diary,

"When in doubt; go to Italy," is the saying.

We are always in doubt. What better place to go?

The last few days have been spent exploring Sicily. But Sicily is not exactly Italy. It sits in the middle of the Mediterranean, where every sleepy sailor or ambitious empire builder was bound to wash up. The Phoenicians, Greeks, Carthaginians, Romans, Byzantines, Arabs, Normans, Spanish, and French - all tried their hands at ruling Sicily. The Italians are only the most recent of the invaders.

We rented a little Fiat 500 to explore the island. It lacks power, but it is perfect for zipping around in tight places.

Yesterday, we visited Greek and Roman ruins. The 'Valley of the Temples' at Agrigento is a marvel - with one of the best-preserved Greek temples in the world. About 2 hours away is a Roman villa with some of the best frescos ever discovered. Apparently, they were buried in a mudslide and thus preserved for 1,000 years.

The Sicily that we've seen so far is remarkably open. Rocky mountains, open fields, vast pastures - there is little shade. It must be excruciatingly hot in summer. If we were running things, we'd plant more trees.

Still, it is nice to be able to see so much countryside as we are driving around. One thing we've notice is that there are thousands of abandoned houses - large, stone farmhouses - all over the island. The small towns, too, are being depopulated. In the large towns - Syracuse and Palermo, for example - you see many recent immigrants from Africa and India. But the small towns and rural areas seem to be losing people, leaving houses empty.

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More about Sicily in a moment... including very cheap houses...

Back in the markets, the Dow rose on Friday. Glencore recovered most of its week's losses. The fright of a few weeks ago seems to have diminished. It is 'back to normal,' almost. Stocks and bonds still trade at silly prices. Shills from Wall Street still 'talk their book' on TV. And the Fed is still promising a rate hike - perhaps before the end of the year.

This rate hike talk is either believed or not. To the extent it is believed, it is disastrous in the short run. To the extent it is not believed it is disastrous in the long run.

A rate hike (or the anticipation of higher interest rates in the US) drives investors to dollars. This raises the price of dollars. Anyone who owes dollars and can't print them at will - emerging markets in particular - is in a rough spot. And when you put debtors between Scylla and Charybdis, that is, between a rock and a hard place, many of them are bound to run aground.

The dollar is the funding currency for the world economy. When the price of dollars goes up, it is another way of saying dollars are scarce. And when dollars are scarce, world trade tends to go down. In other words it creates a situation opposite to the EZ money the Fed has been aiming for.

We see the effects of this already. Sales of the 'yellow machines' - backhoes, loaders, bulldozers, etc - have been falling for 3 years. Containerized freight coming from China is down 30% since 2013. The world economy is slowing down and possibly in recession already.

On the other hand, if you don't believe the Fed will raise rates - which we don't - it sets up a further thought. The Fed did not raise rates at its last FMOC meeting for a reason. It must see the problem developing in the world economy, as we do. And it must realize that its policy goal must be to lower the price of the dollar, not raise it.

The Fed will come forward, not to praise the dollar with higher interest rates, but to bury it with Negative Interest Rate Policy, a ban on cash, or 'whatever it takes.' It is all probably coming... along with bigger and even more reckless bubbles.

But let's forget the Fed for a moment.

We landed in Palermo on Friday. The city has a bad reputation.

"People don't like Palermo, because it was controlled by the mafia," explained a taxi driver. "They made crooked deals and built all these ugly apartment buildings you see on the outskirts of town. Many times, they had to tear down ancient buildings that had been there for hundreds of years."

It was true that there are ugly apartment buildings in the hills surrounding Palermo. But it looked to us like almost any other town. The apartment buildings that the mafia built were no uglier than those built by the democratically-elected government of Baltimore.

"How was it to live in a town run by the mafia," we wondered?

"It wasn't so bad. They killed people who threatened them - but besides that the mafia ran a fairly decent government. There wasn't much crime. If someone stole something from you, you could usually go to the mafia and they'd get it back for you."

More to come...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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