Jim Willie: If the Fed ends Zero Interest rates it will destroy the big banks

2014 has been the year of the Federal Reserve acting like the European Central Bank head Mario Draghi in that they have talked alot about ending QE and their Zero Interest Rate policies (ZIRP), but heading into the end of the year the Fed has done neither.  And the primary reason for this according to statistician and founder the Hat Trick Newsletter Dr. Jim Willie, is that the big banks have become so reliant upon ZIRP that to remove it would mean the utter destruction of these primary institutions.

In an hour long interview on Oct. 12 with Elijah Johnson of Finance and Liberty, Dr. Willie laid out the two consequences that would take place should the Fed end ZIRP, and why these alone would be enough to destroy the JP Morgans and Goldman Sachs of the U.S. financial system.

Jim Willie:  The big banks are dependent on this Zero Percent Interest Elijah, they cannot get away from it.  They’ve got lots and lots of carry trade, which they borrow the zero percent on the short end and they invest in the bonds on the long end and 2 and 3 and whatever percent, and they put on leverage with the futures contracts.

They can’t get out of them.  If the Fed raises interest rates it’s going to destroy the big banks in two ways.

First it’s going to force them to unwind their carry trade with tremendous losses that gather at an accelerating speed called convexity.  They’re sales start actually feeding on themselves, and before you know it the Fed will lose control.

But the second way it would destroy the system is that if you raise interest rates you take away the interest rate derivative feeder system.  And it’s input is the free money.  You cant take away the free money from the interest rate swap derivative or you remove demand for the long-term bond.

So they’re stuck until they break the whole fricken system. – Jim Willie

All one has to do is look over the past few months at the bond,forex, and stock markets since the Fed tapered most of its ‘surface’ QE money printing.  And not only is the destruction of these assets beginning to accelerate at a faster and faster pace, but the consequential strength of the dollar has caused massive recessions in Europe and Japan as deflation falls upon theseeconomies after being held up with 3+ years of excess moneyprinting and liquidity.

Many people ask over and over for analysts to predict the when for the collapse of the entire monetary system to take place, but that is not a question that is answerable with the Fed able toprint money at will, and keep interest rates artificially low for the foreseeable future.  But like Dr. Willie, and another well known analyst by the name of Jim Rickards, the inevitability of collapseis a given mathematical certainty, and now is not the time to hope for some false miracle to stave it off, but instead to look for non-paper assets that will sustain you through a collapse that will result in a complete changing of the monetary guard.

Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday evenings giving an weekly economic report on the Angel Clark radio show.