Tuesday, July 07, 2009

It's the Spending, (and Bonding), Stupid!! (Part 2)

Think all those T-Bonds are sorta meaningless?

Think again. Powerline quotes the London Telegraph:

Applying [Laubach's] assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc. The impact would be devastating by making it punitively expensive to finance national borrowings....

The US deficit has blown out from 3pc to 13.5pc in the past year but long-term rates are largely unchanged. Assuming Mr Laubach's "typical estimate", long-term rates have to climb 2.5 percentage points. ...

Economists are predicting a wide range of ratios but Mr Congdon said it was "not unreasonable" to assume debt doubling to 140pc. At that level, Mr Laubach's calculations would see long-term rates rise by 3.5 percentage points. The study is damning because Mr Laubach was the Fed's economist at the time, going on to become its senior economist between 2005 and 2008, when he stepped down.

When long-term Treasury rates are 7%, then home mortgage money will be about 9-10%. You'd best secure your mortgage right now.


J. Strupp said...

No thanks. Not buying it.

Rates will rise when the economy is headed towards actual recovery and inflation becomes a real risk. This is fantasyland at present and deflation remains the current threat. As you've stated on your blog in recent weeks, rates have risen off of their lows the last couple months. Yet they have risen only due to recent "green shoots" data and the fact that we have apparently survived financial armegeddon that became a real possibility last September. The market knows the only way inflation is a real risk is when the economy is on the mend and we are on our way towards eliminating excess capacity and high unemployement.

This is, of course, not even close to becoming reality in the near term. There is no way rates climb as high as you predict (therefor hiking mortgage rates as high as you predict) unless THE RECOVERY IS REAL. For example, notice how mortgage rates jumped a couple weeks ago, plateaued when it became obvious that these higher rates would cause further stress in the housing market (therefor killing any chance of economic recovery) and then backed off? Well treasury yields are doing the same thing (right on cue) now that it appears that the "green shoots" theory is a bunch of nonsense and we are a long way from recovery.

I'll repeat: we do not have to fear long bond rates in the near term regardless of our current short term deficit spending on economic stimulus. Inflation is not a risk and U.S. treasuries remain a safe haven asset in times of tremendous uncertainty. When recovery is real and the massive slack in the economy begins to fade, then we need to act quickly to assure that your scenario doesn't play out. At present, this is not a serious issue to address.

Dad29 said...

Not MY prediction. Laubach (ex-FRB chief economist) prediction.

And yah, for the time being, inflation is not present.

So what?

A Depression will keep rates low, but I don't think that's what's desirable.

And "acting quickly" when recovery comes--how, exactly?

By raising taxes to buy back the bonds from the Fed, that's how!

Another sure-fire way to kill off the recovery, Struppster.

Face it. Your "solution" sucks, AND it will not work.

J. Strupp said...

"A Depression will keep rates low, but I don't think that's what's desirable."

Either do I. But slicing and dicing spending at the local, state and federal level during a recession of this nature (I'm still using the "R" word at present but I'll keep you posted) is F'ing insane. Raising taxes isn't the best thing in the world but it's a hell of a lot less destructive than throwing people out on the streets to defend your principles.

Not to worry Dadster, you are going to get your wish. Obama's stimulus isn't big enough to get the job done and the vultures are already circling. My guess is that you'll get your "fiscally responsible" crew into office just in time to witness our own 1937-38.

Deekaman said...

Obama's stimulus will never be big enough. Put money back into the hands of consumers and you will see an economy take off.