RateWatch – Clouds Gather

Markets: We’re down 12bps (.12%) on the day on the FNMA 4.5% bond, which is the benchmark for interest rates at the moment.  That’s down about 100bps (1%) from its high of last Thursday.  It is, however, a good bit higher than it was earlier today, so we’re seeing a sort of rally into the FOMC minutes that will be released at 2pm EDT.  The Dow is threatening 10,000 again.  This is translating to rates at 5%, plus or minus a fraction.

Analysis: This is not going to be easy to say, and will likely not make me popular.  Nevertheless, it has to be said, I think.  We’re in trouble.  This economy is in serious trouble.  Lasting, probably permanent, possibly fatal trouble.

The trouble is not coming from the usual sources.  It has very little to do with unemployment, or with productivity, or with declining innovation among US firms.  It has to do with the complete abandonment of fiscally-sound policy by the federal government, which is leading to the destruction of the dollar.

A friend of mine asked me the other day why, if the government is printing trillions of dollars to finance the national debt and keep the payrolls fat, we’re not seeing inflation.  I told him that we were.  It’s not showing up in the Consumer Price Index yet (though it eventually will), but that’s because the CPI measures only price increases.  There is another way for inflation to express itself, and that is in the decline of the value of the currency against international standards, like the price of gold or oil, or the value of other currencies, all of which are spiking.  There is no consumer pressure on prices because a) nobody is borrowing money to spend, because they can’t get loans b) nobody has any liquid savings, so no spending can come from reserves and c) banks are holding on to cash instead of lending it, because right now, who is a good credit risk?  Anyone?  Much better to fatten the balance sheet to prevent your institution from being taken over by the FDIC.

We got in debt as a people, then our government got into debt over what it could handle, now we’re trying to get out of debt by borrowing or printing money.  A child could see that this won’t work.  What is required is discipline and sacrifice.  Unfortunately, discipline and sacrifice are hallmarks of a bygone age.  Unless we recapture it, we’re in for a hard time.  This is only the front porch of the house of horrors, if we don’t shape up.

Advice: Don’t borrow money for anything that does not appreciate in value (education and land, pretty much).  Shed your debt as quickly as you can, including your home loan.  Learn valuable, off-grid skills like how to grow carrots and raise chickens.  And pray very hard.

Cj

One Response to “RateWatch – Clouds Gather”

  • Tod Hansmann says:

    Do you make it sound dire because that’s how it is, or because you know people will only go half-way of whatever you mention?

    Personally, I see it as more dire. Not because of any numbers or indexes. It’s more dire because we aren’t prepared, and that makes the problem worse, even if it’s only half as bad as you present it.

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