| HappySqurriel said: Interest rates in the US are skyrocketing not because people are demaning more money but because people are demanding far less debt than is being produced ... Essentially, the Federal Reserve takes the Treasury's debt, generates an IOU with a certain value and a date where they're going pay this out and sells it for a price lower than it value at maturity and this determines the interest rate that they talk about in their rate setting meetings. For example, selling a $100 treasury with a collection date 1 year in the future for $97.5 you end up with an interest rate that is (slightly more than) 2.5%. Now, how this influences other interest rates is because this treasury debt is 100% safe and you will get that dollar value from the government at maturity so all other debt needs to have a premium in order to attract investors because of the risk they represent. For the past couple of weeks, there has been low demand for treasury bonds which has resulted in the government reducing the price they sell their bonds at and (therefore) increasing the interest rate of all debt.
The outcome from this will (likely) be that the treasury and federal reserve will push for more quantatitive easing (printing money) resulting in a devaluing of the dollar; and China could follow through on its threats and stop/slow down the purchase of US debt and/or (re)moving the peg with the US dollar, which would result in higher interest rates and higher inflation. |
Maybe demand for bonds is low because the stock market has been on a three month rally and the rate of return putting your money there is much higher than putting it in treasury bonds, which even during a recession don't give that great of a return. They are simply like a mattress where people stick there money to keep it safe. When the stock market does better, they take it out of the mattress because there isn't much incentive to leave it in the mattress.
Furthermore, the people "demanding less debt" usually aren't in the securities market in the first place.
It will be great if China removes the peg to the U.S. dollar currently on the yuan. That is one of the primary causes of the humongous trade deficit we have. It gives China an unfair advantage on the world market and has hurt our economy in several different ways, including speeding up outsourcing. And you are making a very simplistic argument that China unpegging its currency would hurt the U.S. dollar. It is just as likely that it would benefit the U.S. dollar as it would change a lot of dynamics in the U.S.-China trade situation.
There is a complex connection between the value of your currency, inflation, and interest rates. There aren't any set rules as to what will happen when one changes. It depends on a lot of factors what will actually end up happening. I don't think you are recognizing this fact.
Plus at the same time you are saying we will see both higher interest rates and higher inflation, when normally those two forces are diametrically opposed except in rare instances of stagflation (which we have only seen once this century).
We had two bags of grass, seventy-five pellets of mescaline, five sheets of high-powered blotter acid, a salt shaker half full of cocaine, a whole galaxy of multi-colored uppers, downers, screamers, laughers…Also a quart of tequila, a quart of rum, a case of beer, a pint of raw ether and two dozen amyls. The only thing that really worried me was the ether. There is nothing in the world more helpless and irresponsible and depraved than a man in the depths of an ether binge. –Raoul Duke
It is hard to shed anything but crocodile tears over White House speechwriter Patrick Buchanan's tragic analysis of the Nixon debacle. "It's like Sisyphus," he said. "We rolled the rock all the way up the mountain...and it rolled right back down on us...." Neither Sisyphus nor the commander of the Light Brigade nor Pat Buchanan had the time or any real inclination to question what they were doing...a martyr, to the bitter end, to a "flawed" cause and a narrow, atavistic concept of conservative politics that has done more damage to itself and the country in less than six years than its liberal enemies could have done in two or three decades. -Hunter S. Thompson
