This is long post — much longer than I plan to put here on a general basis. But this will give a good foundation for everything that’s yet to come, as it resides there in the archives.

It’s a post about where I think we are generally going to go with rates (and why) — largely because of the times we’re in. Most of the posts after this one should be more on a daily focus (Fed rates, Economic reports, etc.), but the bond market, from which mortgage rates derive, is a world market. And, as such, the global picture–or specifically the US’s position in it, is critical.

Last week, rates shot up significantly, in a speed of increase that’s not been seen in many, many months:  from around 3.65 to 3.85. Although there are always many factors that go in to this, the net was that the world markets were beginning to get a little unsettled with our spending.

Like any other household, a country must also be fiscally prudent — not spending more than it takes in. We are now so globally economically connected that we can no longer think our affairs happen in a vacuum. And if our “house” spends foolishly, without a reversal, it’s a matter of time before we’re in the poor house. And investors get leery.

So what’s the big deal? It’s manifold; and significant. (And probably far more reaching than you comprehend.) On the very least level, leery investors want more interest for their purchase of Treasury notes and bonds. (Higher Treasury bonds = higher mortgage and lending rates, as these are the direct vehicle from which a mortgage is derived.) So, to begin with, we’re looking at higher personal borrowing rates. Secondly, and still significant, the US now owes so much debt that a significant portion of what we produce (our GDP — gross domestic product), goes to simply pay interest coverage. If those rates go higher, we will struggle more and more to make our own payments. (And printing money is not an option, as this IS the Treasury bonds that are being sold.)

The one critical factor that no one talks about is that the US Dollar is currently the main currency of world transactions. There is a very hidden, but significant value in all of this: The fact that more dollars are in circulation means that we can “float” more debt, simply because it’s “out there.” –Float more, lower rates; float less means higher interest rates.

We do not live in an economic vacuum.

Well, there are already rumblings, particularly in oil producing nations, to consider transacting oil in some other currency. Euros perhaps. Currently, if we have high interest or inflation, the money that they are holding for our oil purchases, are getting less “bang for the buck.” Switching to a different currency might give them better yields. But, for us, doing so would be disastrous: All the money floating, comes home to roost. (And in the process, will need higher and higher rates to absorb it all.)

In fact, the idea to move away from USD was first promulgated by our enemies: Osama bin Laden, and others. Specifically as a means to take us down economically. Can you begin to see the importance?

But to return to the discussion, if we are foolish in our “economic house” it brings this on ourselves, as the world markets — as they always do (like it or not) — will simply adjust to the current state of affairs.

We simply MUST be fiscally prudent. ..And although this post is long already, here’s a nugget that I believe you’ll have not seen anywhere else: Bush the younger went into Iraq for WMD. And although I personally believe they were there, I think the REAL reason we went in was because Saddam was beginning to champion the idea of transacting oil in non-dollars. Yeah, we went in for WMD — but economic weapons of mass destruction.

Did that buy us some time? Yes, but some only. If we don’t get our spending affairs in order, we’re sunk.

One comment

  1. Don, this also is a good post. The dollar is the reserve currency of choice in the world, meaning that if countries want to keep their money safe, they usually invest in dollars as the safest choice. If that changes as a result of the oil-producing or any other reason, there will be a HUGE devaluing of the dollar in a very short period of time. Coupled with the large amount of dollars that are out there and record spending, you’ve got a house of cards that’s very, very shaky, and will lead to huge inflation (I think).

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