If we could freeze all other conditions and avoid the effects of public confidence, likely change in debt, debt rating, etc… If  we ignore these things, then the direct result of raising the interest rate for a given national currency is to attract outside money. That is, we would see an increase in foreign conversion into dollars and a movement of US assets from stocks and bonds into currency or currency equivalents. This is a simple result of the higher payout that one would expect after a raise in interest rates.

In theory, the sift of international assets and investment into dollars does four things:

• It strengthens the value of the dollar, thereby increasing the take-home potential of US workers and the number of things US residence buy from overseas (because a slightly higher fraction of organizations seek dollars)
• It increases income for anyone tied to published interest rates, such as many senior citizens.
• It increases interest payments from anyone tied to published interest rates. For anyone deeply in debt on instruments such as credit cards or home equity, this can have a devastating impact—causing minimum payments to rise by many times the interest rate hike.
• It increases US national debt, because so much of the economy is built on forward loans in the form of Treasury notes. With an interest rate increase, the US must pay more on both new debt and the financing of massive outstanding debts.

This is all theoretical, of course. In practice, one of the first effects is for individuals and institutions to wonder: “How can the US possibly pay out on debt at an increased rate?”.  [possible answer]*

One very obvious effect is that many individuals will further lose confidence in the American economy or the will of American’s to honor the national debt. Because of this, the effect of raising the interest rate (for the first time in 9 years) is not easy to predict. Despite massive uptake on US debt, the Chinese and energy producing nations have limits to what they can believe. A subtle switch in their investment activity (or the determination to move away from a dollar-based reserve) will have massive repercussions, especially for the US.

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* Some pundits argue that US debt and payments can continue to grow, because the ability to accommodate these things are protected by these things:

• a recovering economy
• increased activity from the new investors
• need for producer nations to seize on a massive consumer market
• need for producer nations to invest their gains

But, a growing number of economists, investors, analysts, credit bureaus, and citizens don’t buy this argument! They point out that it kicks-the-can down the road and foists untenable debt on future generations. They would prefer that the US reign in spending and pay down debt.

In this regard, being the world’s reserve currency has helped hook the US on debt, and it has ballooned out of control. Transitioning to a firmly capped currency that is not controlled by legislation or a reserve board would help the country avoid massive debts (those that exceed the willingness of bond holders to finance) and to do what it must do.

In my take, the real question is not “What if the Fed has raised interest rates?” The real question is:

Does the U.S. have the courage to link its currency to something durable
— and beyond control of transient political winds and a debt pyramid?”

Sure, we must still honor the excess of the past 40 years. But with gold, or Bitcoin, at least we will have solid underpinnings and incentives to spend within our means.

Philip Raymond is a member the New Money Systems Board
at Lifeboat. He is Co-chair of Cryptocurrency Standards
Association and editor at A Wild Duck.