Rates are sharply lower this morning, generally on continued concern that Eurozone financial challenges might spread. Although the Greece agreement has stemmed the imminent threat, the reality of the delay-in-response did cause an affect to Portugal, Spain and other Euro nations; and left the market unsettled. As such, US Treasuries benefited from a significant flight-to-security.

Domestically, signs continue that the economy is recovering. And although this is good news, that doesn’t mean that our entire set of fundamentals is strong. We are still vulnerable in that some of our policies are highly inflationary, in terms of spending.

On that count, most every single household knows that “money goes out easy; but comes in hard.” This is how it is with most things of discipline — the tendency to require ongoing work. And it’s helpful to keep that in mind as we set national policy. Yes, it’s essential to make some of the moves that we’ve done for the sake of economic stability — but once we’ve decided to “pull that trigger” let’s not lose sight of the reality that there is a great tendency to squander cash in the process. A spending free-for-all is the temptation.

But inflation is directly related to the increased supply of money (read, spending and printing of cash.) So, the morphine is necessary; but let’s be careful of the addiction, and keep its use short-term. Next week, we’re selling another $80 billion of bonds. (And again, for perspective — which you’ve heard several times repeated here now — last year, we historically were selling about $9 billion per week.) Economically, this will work to cause higher prices on goods and services.

The Fed has manipulated the marketplace (through rate increases, etc.) to keep inflation in check. But, in my opinion, these market movers are artificial (albeit, perhaps permanently successful.) Nonetheless, doubling the money in circulation doubles the price of goods — economic reality. So, while the economic stimulus is necessary; let’s be circumspect as we do it.

For us as finance and lending people, the current range (with various market controls) is expected to rise to about 4.15% by the end of the year (up from today’s 3.6%). But keep an eye for the long term. For today, I would expect no upward pressure, as the Euro situation is still strongly affecting the market. Unless major news changes, I wouldn’t lock.

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