In considering which part of the trans-Atlantic system’s Everything Bubble is most likely to blow out first, one is reminded of the old Jewish joke about the grumpy waitress who returns to the table of four regulars to whom she has just served their dinners, and asks with great disinterest: “So, is ANYthing all right?”
No, it is not. Third World debt may well be the first to blow. The Fed announced today that it is increasing interest rates by 0.75%, and will do the same again in July (see separate report). Steven Englander, global head of G-10 FX research at Standard Chartered Bank, one of the oldest of the City of London arms of the British Empire, told Bloomberg on Monday, June 13, that the Fed may soon go for what he called a “Volcker moment” – meaning a shock interest rate increase over a short period of time like what then-Fed Chairman Paul Volcker did in 1979: he jacked up short-term interest rates to nearly 20% and sent unemployment soaring to nearly 11% in 1981. Englander noted that Volcker’s action did have an impact on “stagflation,” “but it also caused the London Inter-Bank Offer Rate (LIBOR) to skyrocket, destroying the economies of many Third World nations.”
This “damn the torpedoes” approach is similar to what former New York Fed head William Dudley called for a couple of weeks ago: an immediate jump to 5-6% interest rates. And former Vice Chairman of the Fed Alan Blinder told Bloomberg on June 12 that “The chairman of the Fed doesn’t want to let the ‘r’ word slip out of his mouth in a positive way, that we need a recession. But there are a lot of euphemisms and he’ll use them.”
