patrick.net

Also, if they do push long term rates lower, that would seem to kill a lot of lending, because lenders are going to judge that the risk of default is higher than the interest rate they can charge.

If you can get only 1% on your money, but the odds of not getting any of it back is 2%, it's dumb to lend at all.

Your quote there was written by a LA Times journalist, and it makes zero sense. Flooding the financial system with dollars does not push long term interest rates lower. Often it would do the opposite. It is true that in recent times the fed has bought long term mortgages and bonds to keep downward pressure on long term rates. This is somewhat unprecedented in at least the past 4 or 5 decades, and is related to our real estate situation.

I don't usually read this stuff anymore, but was curious where that guy got that. Here is the FOMC statement from Tuesday.

http://www.ritholtz.com/blog/2010/09/fomc-statement-4/

They talk about the lack of inflation which implies their willingness to keep short term rates low. The bond market and mortgage markets are going to make their interpretation and price long term securities accordingly and do their own thing (unless the fed is buying again).

The ws journal is a far better source for that kind of thing. And some others here.

http://online.wsj.com/article/BT-CO-20100921-709328.html
Still looking for the jounal's post FOMC statement analysis (not a subscriber now)

http://moneywatch.bnet.com/economic-news/blog/macro-view/fomc-statement-inflation-is-the-key/2554/

http://blogs.forbes.com/greatspeculations/2010/09/21/wall-streets-silly-attempt-to-spin-the-fomc-statement-as-positive/?boxes=marketschannelnews

Which effect wins out?

There is a major paradox with interest rates, especially relative to leveraged assets such as real estate.
Increasing inflation ---->increasing interest rates------>decreasing real estate prices

What ? (the big rise in RE prices is delayed. Attention cash shoppers....)

History surely won't repeat itself exactly, but still it is hard to predict how this is going to unfold. Maybe we can hear from some of those who think they know.

marcus says

Increasing inflation —->increasing interest rates——>decreasing real estate prices

I think a lot of the inflation of the 1960s and 1970s was due to plain economic growth -- real gains in productivity -- increasing the borrowing power of the population, and the more we borrowed the more inflation we saw.

Demographically, the baby boom started turning 20 in 1966 (its peak year, born in 1955, was only 11). Then by 1976 the peak baby boom was 21 -- and it's no accident that both Bill Gates and Steve Jobs, both born in 1955, founded their world-changing companies in the mid-1970s!

The "All-Devouring Rent" Theory predicts that land values and rents will rise to take any consumer surplus gained through productivity, and I think that's a good explanation of the 1970s, as rising productivity, baby boom household formation, and new economic development served to push production and consumption in a cycle of inflation and debt expansion.

Ceteris paribus, rising interest rates push down land values. But if people can see a healthy batch of inflation coming, they will discount any interest rate you can throw at them to get in on the inflation train. Volcker finally had to be brought in by Carter to combat this inflationary spiral.

All that's fine and good, but this:

http://research.stlouisfed.org/fred2/series/CMDEBT

is the reality of our current situation. Until the PtB can turn that machine back on, we are in Japan Mode, or, if we're particularly unlucky, Weimar Republic 1930-32 mode.

Patrick I live in SF n pay 1000 a month for rent. I want to move to Portland and buy a home for 150k and mortgage would be 700. Is it a good time to buy in POrtland or wait 2 years? thanks Patrick!!!

Did anyone catch the Maestro (aka Greenspan) on the PBS Newshour this past Friday? He scared the $%^&! out of my wife. He was basically like WE MUST LET THE BUSH TAX CUTS EXPIRE! He seemed truly frightened that US government borrowing (to service the debt) was out of control and interest rates could explode once our creditors start getting squirrelly. He blamed both the Democrats (spend and finance) and Republicans (tax cuts through borrowing). Or perhaps he's just trying to shore up his 'legacy' and hoping he can got out in front of this one. At any rate, given all the political rhetoric as they sunset, quite interesting to see one of their original supporters say the times they are a changin'.

marcus says

The ws journal is a far better source for that kind of thing.

Be careful Marcus .... the WSJ is "right wing." You might read something in there that will cause you to think.

>>But on the other hand, creating more dollars must lower the value of existing bonds, pushing their actual yields higher, not lower.

I don't think there is any paradox here. The Fed bids up the prices of long-term bonds, old ones and newly created ones, from their current value to a higher value.

This decreases the yield for all of them, old and new.

As an aside, this is how the Fed-Treasury-Banks merry-go-round works, it is quite a racket:

First the Fed buys treasury bonds directly from the US Treasury (debt monetization). Then the Fed uses the very same Treasury Bonds as payment for the junky private long-term bonds (MBS and corporate debt, etc) that they purchase from certain preferred and privileged private parties, such as banks and primary dealers. This way the Fed won't have to give actual cash to the banks. It looks less sinister and inflationary when using bonds than giving out cash.

But if the bank needs something even more liquid than a long-term T-bond, the Fed will exchange it for something shorter or even cash, as needed.

Like I said, quite the racket, and you and I would never be able to participate at the terms that banks are getting.

justme says

I don’t think there is any paradox here. The Fed bids up the prices of long-term bonds, old ones and newly created ones, from their current value to a higher value.

This decreases the yield for all of them, old and new.

But other participants in the market for bonds could decide the Fed is printing too many dollars to buy those bonds, and just refuse to buy bonds, causing bond prices to fall.

It's definitely a racket. I'm just trying to figure out how much corruption the bond market can take before the other players give up and stop playing.

RayAmerica says

Be careful Marcus …. the WSJ is “right wing.” You might read something in there that will cause you to think.

Only their editorial page. Unlike Fox news they are (or at least used to be) a legit newspaper. With a politically conservative editorial page, and politics free news and business journalism.

Another thing for you to consider. It's not that business is always, pro republican. It's the degree to which republican policy is pro business. I have no problems with business or the business world. It's just that our politics is sometimes too skewed toward their benefit.

Hi Patrick,

I see what you mean. It is the question of whether the so-called "bond vigilantes" will come out in force, or not. Paul Krugman has a lot to say about this topic :-)

This is, essentially, what is keeping Greenspan up at night. The market buys your debt... until it doesn't.

It's more about "we're all in this together" mentality. It doesn't matter where you live, or what you do, we're all in this same financial market together. We've all got money, and it's all tradable to USD.

So it's all one big currency affair.

The fed, the government and other governments are doing what they're doing because they have to right now. Which means other investments aren't necessarily better. If you have to put your money somewhere, these bonds are still the best bet. Professional investors don't invest in get rich quick schemes, which means investing in something right now which is stable, not likely to tip over, and if it does tip over, you're not the only person in the same boat. Bonds are that boat. We're all in it, if the bonds tip, we're all going in. If you invest in some "cowboy hat making business", if it goes belly up, you're pretty sure they aren't taking anyone else with them.

I guess our advantage is that other parts of the world are even more corrupt than we are, and even more willing to debase their currency. So foreigners still buy our bonds, because they know too well what their own government is like.

Hmmm, what are Chinese government bonds paying? Looks like they track own own yields. Not that you could necessarily buy a Chinese gov't bond.

justme says

I don’t think there is any paradox here. The Fed bids up the prices of long-term bonds, old ones and newly created ones, from their current value to a higher value.

Any student of the debt markets knows there is a paradox, or whatever you want to call it. The feds adding long term securities to their balance sheet is highly unorthodox, and everyone knows they are doing it only because these are such unusual times. The credit markets still aren't even functioning normally.

And it is true that the fed can't corner the market for long term securities or anything close to that without completely invalidating it. And the long term debt market is somewhat independent of the short term market which the fed can completely control. (although again, Patrick has a point that they can't make banks want to lend money short term at such low rates - at least not to any but the very lowest risk borrowers)

I guess our advantage is that other parts of the world are even more corrupt than we are, and even more willing to debase their currency.
Like Brazil (or perhaps not):
An "international currency war" is underway, Brazil's finance minister, Guido Mantega, has warned. His comments follow a series of interventions by governments to weaken their currencies and boost export competitiveness. Japan, South Korea, and Taiwan are among those that have recently tried to cut the value of their currencies. In a speech in Sao Paulo, Mr Mantega said the competitive devaluations were effectively a new trade war.
"We're in the midst of an international currency war," he told a meeting of industrial leaders. "This threatens us because it takes away our competitiveness.
"The advanced countries are seeking to devalue their currencies." Mr Mantega has been trying to talk down the value of Brazilian real. The currency is at a 10-month high against the dollar, and has been described by analysts at Goldman Sachs as the world's most overvalued major currency.

Basically everyone is doing their own thing right now, trying to keep afloat during a world recession and world recovery. Whoever can keep things moving along until a full recovery shows up, will survive.

But, who's boat do you want to be in? If the the whole thing goes belly up, who will be the best off? If the US goes belly up, the waves will crash everyones boat. So if you're in someone elses boat when the US goes belly up, you're coming down hard too. However, other peoples boats will only tip over smaller countries, they won't take down the US. Sit in the largest boat and wait this whole thing out, take 1% or 0% but keep it safe.

So how far can they go? That's the interesting question.

How close can Helicopter Ben get to unlimited printing before the other participants in the bond market decide that dollars are a losing bet, and start to sell US Treasury bonds?

So how far can they go?

We can't know the answer to that. What we can know is that by the time everyone is sure that we have significant inflation ahead of us, we won't be asking that question anymore. By then, bonds will be in a very clear down trend.

And the paradox is that by then, with mortgage rates going up (monthly cost for all but cash buyers going up just on the change in mortgage rates alone), real estate may be steady to actually declining in price, in spite of the inflationary expectations.

At least that's how it worked last time. I'm sure that most people recall that inflation hit real estate (and the stock market) last, as inflationary expectations and long term interest rates finally came down.

But as I said before, we all know it's not going to be the exact same movie this time.

Well considering they're offering them at the lowest rates ever, in the largest quantities ever and they're being gobbled up.... awhile...

I've read that property prices stayed nominally flat in Argentina even as the currency devalued, because there were opposing forces at work which were approximately equal: a great fall in purchasing power and large unemployment, opposed by people desperate for somewhere to store their wealth who were buying property.

But also, a reader of this blog told me that there are no mortgages in Argentina so interest rates are irrelevant. Property deals are accomplished with suitcases of cash in the bank lobby. You pay cash - not even a check, real cash - or you don't buy at all. Probably a good thing too, given this crazy interest rate swing:

http://www.latin-focus.com/latinfocus/countries/argentina/arginter.htm

More history of Argentine property:

http://www.globalpropertyguide.com/Latin-America/Argentina/Price-History

https://archive.ph/6Qq4U

Rising Interest Rates Will Crush the Federal Budget
The interest costs of Treasury debt are about to soar while revenue from capital-gains taxes will plunge.
By Red Jahncke
June 29, 2022 6:21 pm ET

https://notthebee.com/article/here-are-the-online-savings-accounts-paying-the-most-interest-right-now

If you're not earning at least 4% on your savings, you're losing out on free money. Here are 13 online savings accounts paying between 4.25% and 5.07%.

💰 Upgrade - 5.07%
💰 Bask Bank - 5.00%
💰 Laurel Road - 5.00%
💰 EverBank - 5.00%
💰 BMO Alto - 4.85%
💰 CIT Bank - 4.65%
💰 SoFi - 4.50%
💰 Lending Club - 4.50%
💰 Synchrony Bank - 4.50%
💰 Barclays - 4.35%
💰 Discover - 4.30%
💰 Capital One - 4.30%
💰 Citi - 4.25%

.

Interesting article about how 10 year bonds dropped 46% since mid 2020.

This makes sense as the general rule is for every 1% increase in the Fed Funds rate there is generally a 1% increase for each year of a bond's duration.

So when the Fed Funds rate increased about 5.0% since 2020, that would result in about a 50% drop for a 10 year bond.

https://markets.businessinsider.com/news/bonds/treasury-bond-yields-market-selloff-market-crashes-dot-com-bubble-2023-10

Another asset being housing, the rule generally is a 1% increase in the 30 year mortgage rate equates to a 10% drop in housing prices.

.

Since last year, I've been buying T-bills, mostly from TreasuryDirect: https://www.treasurydirect.gov/

Current 3-month and 6-month T-bills rates are close to 5.5% https://www.wsj.com/market-data/bonds

Also, I live in CA, so I don't have to pay state tax on the interest earned in T-bills. Interest income in CDs and savings/money market accounts is taxable by state.

If and when the yield curve starts to flatten (vs inverted as we have currently), I may start dabbling into T-notes and T-bonds. My gut feeling is that the short term rate will remain well above 5% till sometime in 2024.

Patrick says

Rising Interest Rates Will Crush the Federal Budget

marcus says

The feds adding long term securities to their balance sheet is highly unorthodox, and everyone knows they are doing it only because these are such unusual times. The credit markets still aren't even functioning normally.

Where has Marcus been ? He stated the above back in 2010 and it is prophetic. Fed has lost money and I wonder how much they will continue to lose money as they continue Quantitative Tightening. They are selling Treasuries at depressed prices due to the increase in interest rates.

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Patrick says

Rising Interest Rates Will Crush the Federal Budget

No they won't. The Fed will just print more money. It will crush the economy.

richwicks says

Patrick says

Rising Interest Rates Will Crush the Federal Budget

No they won't. The Fed will just print more money. It will crush the economy.

You are both right.

What Patrick said will happen first. Then when Congress' ass is up against the wall, what richwicks said is likely to happen in some form.

Whether that is LBJ/Nixon/Ford/Carter limited currency debasement or full on Weimar Germany hyperinflation is yet to be determined.

ad says

marcus says

The feds adding long term securities to their balance sheet is highly unorthodox, and everyone knows they are doing it only because these are such unusual times. The credit markets still aren't even functioning normally.

Where has Marcus been ? He stated the above back in 2010 and it is prophetic. Fed has lost money and I wonder how much they will continue to lose money as they continue Quantitative Tightening. They are selling Treasuries at depressed prices due to the increase in interest rates.

.

The Fed is not selling the longer term Bonds they hold. They are holding 'em to maturity and letting them roll off their balance sheet that way, but yeah if they marked to market, they lost about $1 trillion.

Misc says

They are holding 'em to maturity and letting them roll off their balance sheet that way,

True that the Fed is still losing money and they'd lose a lot more money (almost Silicon Valley Bank style) if they did sell off their long duration bonds.

.

Misc says

The Fed is not selling the longer term Bonds they hold. They are holding 'em to maturity and letting them roll off their balance sheet that way, but yeah if they marked to market, they lost about $1 trillion.

The Federal Reserve can make up as much funny money as they want. They'll never go bankrupt.

richwicks says

The Federal Reserve can make up as much funny money as they want. They'll never go bankrupt.

What is interesting is that QE and ZIRP back in 2008 to 2016 did not cause annual inflation over 3% based on government reported statistics.

Thanks Obama ?
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ad says

What is interesting is that QE and ZIRP back in 2008 to 2016 did not cause annual inflation over 3% based on government reported statistics.

Inflation is a political event.

If I give you a trillion dollars, and you just bury it, no inflation. Inflation is caused when there's either a panic, or stupid people are given money.

richwicks says

If I give you a trillion dollars, and you just bury it, no inflation. I

There was a huge hole to fill in 2008 to 2012 and they did not overfill it resulting in hyperinflation.

This time I think because Birdbrain Biden came in January 2021 and having to pay back his voters (Green Party types, AntiFa, etc), he spent a lot more than what was needed and the hole was overfilled.

And the Fed should have started to raise rates by mid 2021 a few times instead of essentially waiting to March 2022.

But you are right as this time (2020 to 2022) they did a lot more of a helicopter drop of money to the masses with extended unemployment, stimulus checks and free rent (essentially) as well as PPP loans.

Down here in Florida panhandle the short term vacation rentals went normally for $200 a night to $350 a night with people using all that extra COVID money.

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Obama also did not fight back against the Republican rhetoric. The Republicans went all "fiscal responsibility" and Obama caved. He had the smallest increase (as a percent) in the overall Federal debt than any other president in recent memory. This lack of fiscal stimulus from the Federal government left the Fed as the only game in town and they only lowered rates enough to bail out the banks not to get the economy moving again. This along with other policy errors caused the country to have the weakest bounce back from a recession ever.

Misc says

This along with other policy errors caused the country to have the weakest bounce back from a recession ever.

So you wanted more Keynesian economics and this is why Obama's two terms only average about 1.8% annual GDP growth ?

Debt to GDP ratio still increased from around 55% in January 2009 to 106% in January 2017 :-/

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