Death Trap: Fed Stuck At Zero And US Borrowing Costs Starting To Rise

[girl gone mad]

Death Trap: Fed Stuck At Zero And US Borrowing Costs Starting To Rise
http://www.businessinsider.com/henry-blodget-its-getting-more-expensive-for-the-us-to-borrow-all-those-billions-2009-12">The Business Insider

The United States needs to borrow ~$1.5 trillion a year these days to fund its deficit. And the concern among most deficit hawks is that the cost of that borrowing will rise as the economy comes back to life and inflation fears mount.

So far, rates have remained stubbornly low. The Treasury is now trying to move its borrowing "out the curve," however--borrowing money for longer periods to lessen the risk of a short rate increase--and yesterday's Treasury auction didn't go well: Specifically, lenders demanded higher than expected interest rates for their money.

The Fed, meanwhile, is stuck keeping short rates at near zero to quietly recapitalize the banks. This combination has made the yield curve steeper than at any time in the past 29 years.

Bloomberg: Treasuries declined , with the yield gap between Treasury 2-year notes and 30-year bonds reaching the widest since at least 1980 amid lower-than-forecast demand for the $74 billion in notes and bonds auctioned in the week.

Treasury 10-year notes fell for a second consecutive week as reports showed consumer confidence and retail sales rose more than forecast...

“We had sloppy 10- and 30-year auctions at time when there are less people in the market,” said Larry Milstein, managing director in New York of government and agency debt trading at RW Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The short end is locked in by the Fed and the long end is starting to see pressure from supply. Also, consumers are seeing some positive signs.”

The spread between 2- and 30-year Treasuries reached 374 basis points on Dec. 10, the most in 29 years, as the U.S. sold $13 billion of the so-called long bonds in the last of the week’s auctions.

[lib2DaBone]

1. We need to get rid of the FED... U.S. take control of their own money..

[provis99]

2. strangely enough, plenty of right-wingers hate the Fed, too.

Liberals hate the Fed; conservatives hate the Fed. Yet it still runs things. Why?

[Skink]

3. Becuase metal doesn't seem to work.

Monetary value and labor work. The world would do well observing an actual minimum wage.

[IrateCitizen]

7. There is not one instance of a paper currency throughout history...

... that did not eventually crash. Not one, excepting modern times, of course. And given the short-term run of that as compared to other paper currencies, that's hardly a given.

You are also off base in presenting it as an either/or -- paper money or metal. In the absence of a market economy that has taken over anything and everything (as ours has), people meet a lot of their needs OUTSIDE of a market economy. They will again.

[snot]

4. I have a feeling this is impt.; but pls, cd someone explain all in dummie terms?

[OutNow]

5. Here Comes Inflation

All the money pumped into the system will lead to inflation. I expected it to happen this year, but it looks like it won't hit until the second half of 2010.

It you're old enough, just remember the Ford / Carter years.

Prices go up fast, your salary not so fast.

Home loans - 15 to 20% interest

Credit Card interest - up up and away

Investments - bonds, value goes down, CDs - interest rate goes up - stocks - ?? probably down

[IrateCitizen]

6. Not necessarily...

There's a big debate raging right now between many economists whether the real danger is inflation or deflation. Sure, there's the danger of inflation resulting from all of the funny money that the Fed has been printing around the clock since last year. But there's also the deflationary danger when the $500 trillion - $1 quadrillion of global derivatives eventually unwind and erase a good portion of this illusory "wealth" that has been created through financial chicanery (as a former engineer, I absolutely refuse to call what they jokers do "engineering" because it creates nothing of lasting value).

Either way, a lot of us are screwed in this process.

[northernlights]

8. as long as the banks continue to hoard the money

and use it to pursue their own interests, as opposed to using it the way it was intended -- to be loaned out to small businesses, for mortgages and to students -- then there deflation will continue.

Is there any indication the banks intend to start loaning the money we loaned them? Because it seems they really just intend to continue hoarding and/or speculating with it...

[pokercat999]

9. Not yet. We could have deflation for several years if not a

couple of decades. Expecting the recovery anytime soon (if recovery means jobs and a healthy economy) is for fools. We still have millions of alt-arm and option arm mortgages about to reset (default) in 2010, 11 and 12. The commercial real estate market is about to or in the process of collapsing and more jobs are going to Mexico and overseas.

How exactly are we going to recover?

Rather than a recovery a stock market crash seems to be the more likely outcome in the near future.

[chill_wind]

10. K & R n/t

[roamer65]

14. The 1970's inflation was a result of Nixon's massive money supply growth...

to fund the final years of the Vietnam War. His money supply growth was record for its time...until recently we broke that record. His massive money supply growth started around 1971, when he closed the gold window. So in comparison, we are around 1972 of the 1971-1981 stretch. The big inflation is coming.

The Fed won't remove the liquidity. It will let it flow into the economy and try to fudge the inflation numbers at the "back end".

[Statistical]

15. CD rates down?

On what planet?

In high inflation environment all interest rates rise including CD (and T-bonds, savings bonds, money market funds, etc).

[OutNow]

16. I wrote - CD interest rates go up

and the value of bonds go down

and yes you are right, similar liquid assets also see interest rates go up i.e. money market funds

there is always the question - is high inflation good for you or bad for you?

The answer is - it depends. If you get most/all your income from a job and have lots of debt and/or an ARM mortgage inflation can really destroy you. If you are wealthy and have cash that you can invest in TIPS, etc. you can ride out the inflation wave.

[A HERETIC I AM]

11. There's a lot of information in the linked article as well as the Bloomberg article..

linked at the bottom.

This one;
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7yHrrr_Vklo&pos=4

What exactly is it you are looking for an explanation of? Is there certain parts you don't understand or all of it?

I'd be happy to explain as best I can, but short of picking the entire article apart (which would take me about 2 hours to put a post together that properly explains everything) , if you can narrow it down, it would make it a bit easier.

[westerebus]

12. Simple version.

We spend large amounts of money on things. Roads and cyber security. Wars and unemployment payments. We are financing the majority of this with borrowing.

Our tax base does not cover all our expenses.

We spend more then we take in. So we borrow to cover our short fall. We can raise taxes and lower spending to get our economic house in order. Or we can keep borrowing.

As for right now, the interest we pay to borrow that money is pretty low.

At some point, interest rates will increase.

As interest rates increase, the cost to borrow money increases. It gets more expensive to keep doing what you've been doing.

It will come down to needs versus wants. We need jobs. We need universal health care. We need fair trade. We need quality education. We need clean water and clean air. We need to have a regulated banking and investment system and a sound currency.

We may want to kill some dirt farmer on the other side of the planet in the name of national security. We may want to keep the system of corruption in place that caused the financial melt down in place because that's how our politicians get funding.

We may decide to decide the current system needs to change.

The longer we put off paying for what we need and spending on what we want, the more it's going to cost every body on the planet.

[roamer65]

13. Here's is the medicine that needs to be taken to solve the problem.

$1T in tax increases on levied everyone making over $60K a year. They should increase in a graduated manner as income rises, eventually topping out at around 70%.

We need to reduce the budget deficit to no greater than 3% of GDP , just as the Growth and Stability Pact of the EU mandates for EU member nations. Otherwise, we risk either more severe austerity measures or a hyperinflationary depression within a few years.