A must read: “Why Interest Rates Will Almost Certainly Rise in 2010″
By Daniel at 25 December, 2009, 1:28 pm
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Interest rates, artifically suppressed by the Federal Reserve and China, are about to start rising, and will continue rising for a generation.
On Christmas Eve 2009, I wish I could parrot the “happy-happy” Party Line that interest rates and mortgage rates will stay low for essentially ever, but that would require lying. The truth is the drivers of super-low interest rates are diminishing, and the forces of higher rates can no longer be restrained.
There have two primary drivers of super-low interest rates: The Federal Reserve and the Chinese buying Treasury bonds.
The Fed has created massive artificial demand for more U.S. debt in two ways; by direct purchase of bonds being auctioned (During the first 2 months of the new fiscal year, the Federal Reserve grew its balance sheet by about $65 billion, in effect purchasing about 22% of the federal government’s new debt) and by secretly buying Treasury bonds from “primary dealers” (banks) a few days after the auction.
This way, it appears for propaganda purposes that some private parties are actually buying T-bills to hold, when in fact they are only temporary proxies for cloaked Fed purchases.
The entire “package” of Fed buying of Treasury debt to keep interest rates low runs in the hundreds of billions–The Fed’s balance sheet ballooned to $2.24 trillion in assets as of last week, up 142 percent from the beginning of 2008. The Fed purchased outright $300 billion of longer-term Treasury securities, $1.2 trillion toxic-garbage mortgage backed securities no sane investor would touch, and hundreds of billions more in Treasury debt via proxy buyers.
And now as the Fed ends some of its lavish support of the Treasury debt, Congress and the Obama Administration are stepping up their borrowing to unprecedented levels:
http://seekingalpha.com/article/179827-why-interest-rates-will-almost-certainly-rise-in-2010
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