The news is taking an interesting development: As we’d mentioned over the past couple of days, there are divergent market-movers going on: Greece’s debt challenging (and the EU response), and improving economic news — both of which will move the market in a different direction. Well, as it turns out, the news is the same today; but more extreme in both cases.
Greece, on Friday, asked the EU to “release now” the assistance funds. This is really needed on their parts, as their payments due to creditors are coming before the expected assistance. And either they will be able to make them; or default. However, Germany (who will be the most significant financial assistor) is having some challenges: They do not want to issue the funds without a plan on Greece’s part to address their spending debt that goes beyond one year, as is the current situation. This is prudent; if you’re going to give some $40 billion dollars, you would like to know that the country that is going to get is, is planning on doing something other than use this as a band-aid.
And therein lies the whole problem: Nations (and households) around the world find it far easier to be on a spend-spree, then to work within a budget. (And I speak of our own.) But economics is not denied; and to paraphrase inspired Scripture; what is sown, you will reap. You can game the system for a short time, but eventually…
Greece’s bonds are now trading at 9.4% — up from the sevens recently. There is grave investor concern that they will default before they are assisted. And worse, this crisis is pointing to vulnerabilities in like countries, who are now themselves becoming weakened under the scrutiny: These include Portugal, Ireland, Spain, and Italy. No one loves a crisis. And this thing may yet spread uncontrollably.
On the other hand, an article in Bloomberg news this morning boasts, “Bond Traders Declare Inflation Dead After Yields Fall.” Are you kidding me? I think it’s time for me to write the post I had previously discussed, about inflation — what it is, and what causes it. Those people quoted rested their conclusions on: Inflation numbers are down, and demand for US Treasury debt is increasing. And believe me, this is not a simple situation: It is essential that the US (and other governments) work to stimulate the economic engine through which the goose continues to lay its golden eggs — or we’re in a real pickle. On the other hand, the printing of money is inflation — direct relationship.
The prime concern the Fed has at this point (very real; here and around the world) is deflation — that condition where prices fall. If such happens, the economy stagnates, as people hold off purchases expecting a lower price in the future. And we’re not far from that situation, due to our slow economy.
But, to the issues, interest rates are down because the Fed has kept them low to stimulate the economy. And, for the most egregious of their errors, Treasury debt is up simply because corporate debt is down — the net result being less debt in the marketplace (albeit much more by our nation.) And money has to flow somewhere. It’s not that they love US Treasuries; it’s that there’s no alternative.
And, if you’ll permit me a diatribe, it’s the Fed that we’re trusting all this stuff to? No one remembers that it was the FED who caused this whole global recession five years ago by 24-straight interest rate increases. Yeah, that cracked the market. Congratulations. On their behalf, there were compelling reasons for the Fed to raise interest rates (a reloading) post 9/11, when they’d dropped them to almost zero. But the Fed has historically always overshot the mark, in whatever they tried to control. And they sure did so here; and we are all surely paying the price for it. And this is the group that we’re supposed to rely on for our all-encompassed financial well-being? OK, enough of a diatribe.
OK, so… rates are pressured down because money (big money) is now flowing out of Greece and Europe into the US. And rates are pressured up, because inflation is dead. (Wow, that’s still tough for me to even have those words in my mouth.) Where this goes is any sheep’s guess.
The problems are significant. Those who are boasting of solutions don’t seem to begin to see the gravity of the situation. But for today, rates will likely have an upward pressure, although mostly stable.
