This past week saw JPMorgan Chase & Company CEO Jamie Dimon give an alarming interview on future interest rates. He believes that four percent rates are in the cards based on potential inflation stemming from U.S. economic growth. What he does not go into is the negative impacts this will create for consumers, businesses, and a national government that are at record debt levels. These groups will struggle to service all time high debt loads when interest rates rise to this historically normal level.
It is a warning call for why you need to have a gold IRA. When the government can no longer service its debt because of higher interest rates, there will be widespread financial crisis and panic. Gold offers insurance and protection during market turbulence. With a five thousand year historically proven track record, the yellow metal is the best hedge for your retirement portfolio out there. Now while there is still time to figure it out, you need to learn what gold goes in an IRA.
JPMorgan Chief Warns of Four Percent Rates
JPMorgan’s Jamie Dimon has been out warning investors to prepare for benchmark yields in the U.S. to reach four percent. While he does not admit to this causing government finances a serious problem, he does acknowledge it will impact them. Dimon recently told Bloomberg Television in an interview while in Beijing:
“It might force the 10 year up” if the Fed raises its short term interest rates faster and higher than markets anticipate. “You can easily deal with four percent bonds and I think people should be prepared for that.” This amounts to normalization.
Yet even while sidestepping the issue of government bond interest rate consequences, Jamie Dimon acknowledged that we are in potentially dangerous uncharted territory with all of it:
A greater amount of American government fiscal borrowing combined with bond purchase cutbacks by central banks around the globe, “may cause more volatility, higher rates in a way we don’t fully understand” because this quantitative easing exit is unknown territory. “We’ve never had QE, we’ve never had reversal.”
He is still avoiding the dramatic consequences that these higher rates will cause consumers, corporations, and especially the debt-saddled federal government.
Central Bankers Facing Growing Crisis of Confidence
Central banks have been avoiding raising interest rates for fear of what this would do to a global economy that needed nearly a full decade to recover from the Global Financial Crisis. The consequences of their lethargic inaction have been to create a crisis of confidence in their abilities to manage the international financial system. Consider what the Financial Times said in a recent article about the IMF spring meetings:
“As they gather in Washington for the annual meetings of the International Monetary Fund, there is a crisis of confidence in central banking. Their economic models are failing and there are doubts whether they understand the effects of interest rates and other monetary policies on the economy… In short, the new masters of the universe might not understand what makes a modern economy tick and their well-intentioned actions will prove harmful.”
We’ll consider some of the indebted groups who will be dramatically affected by their policies of raising interest rates to historically normal levels of four percent.
Consumer Debt is Rising Dangerously
Even as consumers have saved a little more since the terrifying Global Financial Crisis, they have also managed to raise their level of consumption. Yet 90 percent of Americans have not seen any real increases in their income over the past ten years. The answer is that they have fallen back on consumer credit cards to fuel their purchases. This chart shows that the share of consumer credit as a percentage of GDP has actually risen relentlessly over the past decade:
A great amount of this debt has stemmed from substantially higher car loans and student loans in the post crisis era. Over the short term, these purchases increase GDP. There will be a time in the future when the massively higher consumer debt causes problems.
This may be a root cause of the next recession, or it could simply make the next economic downturn that much worse. This unyielding advance of consumer credit is a serious sign of how the lowest earning 90 percent of Americans are borrowing against tomorrow to consume now in hopes that there will be a greater future income available to help them service their debts.
Corporate America’s Debt Is Also At Record Highs
It is not only the cash-strapped consumers who are overspending their means at a real cost to the future of the economy. The overwhelming majority of them are only managing to get by and are still borrowing. Yet the consumers are not alone in this disturbing trend at a time when interest rates have been at historic lows. Corporate America is doing much the same thing.
The corporations have been massively leveraging their own balance sheets not to increase employee salaries or invest in new growth or expansion opportunities. Instead they have used these debt-based proceeds to buy back shares of their own stock (to increase the share prices) and to raise executive salaries and compensation. This chart below tells the story:
Neither of the two trends can continue. It is only a matter of time until this breaks down. Then the debts the companies have acquired with frivolous spending will have their consequences as rising interest rates create a serious drag on free flow cash in the future.
Government Debt Is Dangerously At All Time Highs
Perhaps the most seriously and dangerously impacted group from historically normal but still higher four percent interest rates will be the United States Federal government though. At over $21 trillion and counting, it is simply getting harder and harder to find enough buyers for all of the Treasuries that the U.S. Federal government is now forced to float to keep up with debt issuance.
China and Japan who have long been the largest and second largest buyers have been reducing their purchases of these U.S. Treasuries steadily for months now. Worse still is the fact that according to the CBO, by 2020 the country will be permanently adding another trillion dollars in deficit per year to the already all-time high national debt load. This will average annually 4.9 percent of the entire American economy.
With interest rates rising, the debt service on this historically unprecedented debt load will rise catastrophically as well. How will the government manage its finances as an increasingly large percentage of tax receipts go to just cover interest on the debt? It has been a huge government experiment, and the answer is that no one knows how it will end.
Gold Will Protect Your Retirement Portfolio From Rising Rates and Financial Insolvency
What we can say with absolute certainty is that governments from Roman times have been at this junction before. In every case where national finances failed and economic crisis ensued, gold has been the rock that sheltered the assets of individuals. The coming consequences of decades of debt buildup are inevitably coming. This a a great reason why you should invest in gold. It is still not too late for you to learn how to invest in gold for the sake of your retirement portfolio and future.