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How the Federal Reserve's "Nuclear Option" Is Threatening Our Economic Freedom

As if GDP growth crawling at 0.7% in the fourth quarter of 2015 and the stock market tanking in 2016 aren't enough to scare everyone, something even more frightening is coming.

What's happening is that the soldiers of fortune at the U.S. Federal Reserve have devised an insidious plan to solidify their control over free markets and America.

This prescription envisions banks lending cheaply and consumers spending robustly, spurring economic growth and propping up beleaguered markets.

But, as I'm going to show you today, the reality is quite different.

This isn't just an insane policy, it's a MAD (mutually assured destruction) policy, the equivalent of a "nuclear option" in economics and finance.

The FedHere's what the Fed wants you to believe, what's really going to happen, and how, if the Fed wins the battle it's about to wage, Americans will lose their war for economic freedom.

After causing the credit crisis by manipulating interest rates too low for too long, the Fed had to rescue big banks by implementing ZIRP, their zero-interest-rate policy, and then quantitative easing (QE).

The one-two punch allowed insolvent big banks to borrow at no cost (ZIRP) and to buy trillions of dollars of U.S. Treasuries, which they'd re-sell to the Fed for fat profits under the $4 trillion buyback scheme (QE).

Too bad ZIRP and QE never trickled down to the economy at large, evidenced by GDP growth averaging less than 2% over the past eight years. Instead, the bulk of the Fed's "stimulative" efforts pumped up various asset classes, especially stocks.

Now, with economic growth faltering, recessionary fears mounting, and increasingly volatile stocks slipping, the Fed is floating the idea of a negative-interest-rate policy, or NIRP.

What NIRP Means for the Banks

But instead of spurring (actually trying to force) lending by banks and spending by consumers, NIRP will have the opposite effect on banks and consumers, and magnify the dangers facing savers and investors.

NIRP not only lowers the cost of borrowing, taking it into negative territory – which theoretically means borrowers get paid to borrow – it flattens the yield curve.

Just because banks incur a small cost to sit on idle cash doesn't mean they're going to lend more money. NIRP will result in banks lending less.

As rates get compressed along the yield curve, flattening it, banks will be faced with lending for longer periods at lower interest rates, not higher rates. That reduces their net interest margins and profits.

Besides, if you're a banker and rates have been manipulated to artificially low levels, are you going to lend a lot of money out at low fixed rates and face losing money on all those loans when rates eventually rise?

No way.

Banks are going to suffer. We know that because it's already happening in Europe, where the European Central Bank (ECB) instituted NIRP last year. Bank stocks across Europe have been pounded down on average 30%, with some down more than 60%, in just the past few months. Obviously NIRP isn't working for the banks over there.

And it isn't working for the economy either. Eurozone growth last quarter was 0.3%.

What NIRP Means for Consumers, Savers, and Investors

Consumers aren't going to run out and spend just because they might be charged to keep money in a bank.

Resorting to NIRP sends a direct message to consumers that the Fed's worried about deflation; it's a clear "no growth" message. So why would still leveraged and indebted consumers run out and spend if they believe that prices will be cheaper down the road?

They won't. That consumers will defer spending in anticipation of falling prices is what the Fed fears most about deflation. That's why the Fed's message that it sees deflation won't stimulate spending, this time it will curb it.

As far as savers and investors, it's going to get really ugly under the shadow of NIRP.

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Ralph Moody | February 23, 2016

    Please offer a plan to place into action on what index put option should be used to profit for the upcoming event
    Thank You

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