Interest rates will skyrocket as soon as 2016

First, read this:  http://www.zerohedge.com/contributed/2013-01-26/fed-defer
Now read the underlying article:  http://www.federalreserve.gov/pubs/feds/2013/201301/201301pap.pdf

It's not an easy read.  Part of it is a discussion of "deferred assets".  The word "deferred asset" is misleading.  It really refers to a loss, in the situation where the value of the liabilities exceed assets.  In other words, insolvency or bankruptcy.  But instead of the Federal Reserve declaring bankruptcy, which would really freak everyone out, they make up a fictional asset to hide the loss.  They could call it anything they want since they are making it up, like "unicorn poop", but "deferred asset" sounds more technical.  To be more accurate, it should be something like "unrecognized losses".

Anyhow, by using deferred assets, it is IMPOSSIBLE for the Federal Reserve to ever become bankrupt.  So we can quit worrying about that.  But the result is that the interest that the Federal Reserve has been paying to the Treasury will drop from about $90 billion/year to zero.  Instead of making payments it will reduce the deferred asset by the same amount.  This will cause the interest paid by the Treasury to increase by about $90 billion/year, adding to the deficit.

Furthermore, the interest rates on short-term notes will increase from near 0% at the end of 2014 to at least 4% by the end of 2017.  This will cause net interest paid by the government to suddenly surge to more than $700 billion per year by 2018.  ($18 trillion public debt x 4%).  And we can't maintain the fiction that the Fed owned bonds aren't real because the interest is remitted back to the Treasury, because the Fed will need that interest to cover its deferred assets.

Conclusion:  It looks like the free lunch and kicking the can down the road will end about 2017, coincidentally about the time when the current partier-in-chief will be leaving office.

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It seems like the market is addicted to the easy money, and as soon as it stops, probably the end of 2013, interest rates will begin to rise.  In reaction, the Fed will need to intervene again. Any hopes of a medium-term exit are unlikely.  So, in other words, the "beginning of the end" could start as early as 2014. 

So I see two options - a) the short-term interest expense bomb which will go off as this article states, about 2016, causing a recession and immense pain or b) the long-term hyperinflation bomb, which will go off about 2036.  I'd rather have option A.  Let's pull the bandaid off quickly. 

My opinion is that the Fed should immediately stop all asset purchases, and slowly start to sell off its portfolio, and raise interest rates to 5% over the course of the next 2 years.