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Renting Money Rates

December 11, 2018

The previous blog generated more comments that I usually get but some said they don’t really understand the issues of interest rates and long term debt. Well, it is confusing and I even said that in the blog. Here are some more comments.

The previous blog tried to oversimplify this very complicated topic. I used the 10 year treasury rate as a measure of long term growth activity. I believe that while it is valid there are many other factors that affect interest rates and in some respects are devoid of capital spending purposes.

    • The federal debt is growing daily with signs of faster growth. The debt is funded by borrowing and that means the issuance of bonds. As the government’s debt needs grow this will increase the supply of Treasury bonds and this will tend to push up interest rates. The only thing that would keep rates from growing is a flight to safety such as what occurred in the recession of 2008/2009 and for a number of years thereafter.
    • There is a flat yield curve. This means that the short term rates are pretty much the same as the long term rates. Normally the longer term rates are higher to reflect the greater risk due to time until maturity. I went over the reasons for this in the previous blog and refer you to that.
    • Flat yield curves are not normal and it will have to change, either by the short term rates dropping or the long term rates increasing. With the Fed dug in at higher short term rates and the market dug in without demand for longer term funds there will be a standoff for a while. I believe it will change when the effect of the increased federal borrowing takes effect, and the long term rates increase.
    • Higher rates retard growth, so the near future portends lower growth and possibly a trending toward a recession. Inflation (as the Fed suggests) doesn’t appear on the horizon.
    • I posted blogs with more details on August 9 and 16. Here are links to them.

The above are some thoughts I have but I certainly have no idea what will happen. The intention is to share ideas with you. Enjoy!


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