John Ransom
The Federal Reserve Bank, with a capitalization of $62 billion, has recently lost $192 billion, as interest rates have risen, according to ETF Guide and Scott Minerd, the Global Chief Investment Officer at Guggenheim Partners. This, despite attempts by the central bank of the United States to keep interest rates much, much lower

"Our estimate shows that the spike in bond yields since the first quarter of this year,” writes Minerd, “has caused a mark-to-market loss of $192 billion on the Fed’s holding assets, equivalent to approximately all of the unrealized gains that the Fed had accumulated since it began to implement quantitative easing in late 2008.”

As bonds interest rates rise, the value of all of the bonds that the Federal Reserve has been purchasing and holding as a result of their quantitative easing program, has gone down, just like every other bond value. 

Added to this is the bond crisis going on amongst state and municipal governments, the most obvious of which is the Detroit bankruptcy, and the fiscal outlook for government is not good.

So, I’m not saying that the next crash will happen in October.

But it could.

There is a more significant risk of several market-rattling confluences in October that could lead to a Chernobyl-sized market meltdown rather than just the Three Mile Island-sized market meltdown we had 2008.

Both from a monetary and fiscal policy point of view, United States cannot weather another financial storm of the magnitude of 2008’s financial storm or maybe even smaller.

Fiscally and monetarily, the United States is in a much weaker position today that it has been at any time since World War II, as a result of fiscal profligacy and monetary easing. Thus, even a smaller liquidity crisis than the one we faced in 2008 could precipitate a deflationary spiral in assets that, once started, would be difficult to stop.

Several developments over the last several years, which have accelerated recently, have severely weakened our position financially.

Interest rates have continued to rise, despite the Feds easy money policies and zero-interest-rate policy. While the Fed ideally would like to keep interest rates from rising, the rate on the ten-year Treasury bond has risen from a low of 1.51% to a 52-week high of 2.74% printed recently. 

John Ransom

John Ransom’s writings on politics and finance have appeared in the Los Angeles Business Journal, the Colorado Statesman, Pajamas Media and Registered Rep Magazine amongst others. Until 9/11, Ransom worked primarily in finance as an investment executive for NYSE member firm Raymond James and Associates, JW Charles and as a new business development executive at Mutual Service Corporation. He lives in San Diego. You can follow him on twitter @bamransom.

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