Last week, something happened in the bond market — rates rose sharply across the board for the first time in years. For example, 10-year Treasuries jumped from 1.99% to 2.31%. Talk about March Madness! I think we are seeing the beginning of a major sea change: rising rates as the economy recovers and the Fed’s extreme “easy-money” policies finally kick in.
For the past four years, ever since the financial crisis of 2008, Federal Reserve Chairman Ben Bernanke has been working closely with the Obama administration to stimulate the economy with fast money growth, zero interest rates and huge deficit spending. Now that the economy is showing some signs of recovery, the impact is being felt in the form of higher price inflation and higher interest rates.
Government officials can report data that misrepresent price inflation and unemployment statistics (see Shadow Government Statistics for the real inflation and unemployment figures — which are much higher than the government’s), but they can’t lie about interest rates. And interest rates are going up!
I’m recommending some great new ways in my Forecasts & Strategies investment newsletter to profit from higher interest rates, such as prime rate funds. Higher rates also will put pressure on any bonds and bond funds that you may have.
As interest rates rise, it raises the cost of borrowing for the federal government, which needs to finance a ballooning federal deficit. For years, the government has been able to get away with cheap financing of the debt. But with interest rates rising, watch out. The deficit could get a lot worse.
That’s why we desperately need someone in the White House who knows what he’s doing and can fix the problem, rather than let it continue to snowball.
Be sure to read my feature “You Blew It!” I’ll plan to have a new one for you every week. The purpose is to point out a bad decision, a foolish action or an ill-fated statement by a public official, business leader or investment guru. I have used the phrase within my family for years and they once printed t-shirts for a reunion with those exact words on each one. They learned to take my constructive criticism with a sense of humor and I hope you do, too. My intent is not to ridicule anyone but to point out a mistake that could be corrected, much as advice from a trainer or a coach can turn a faltering athlete into a world champion.
You Blew It! Cutting Back on Debt Hurts the Recovery?
The establishment media, long under the spell of Keynesian voodoo economics, is constantly warning the country that cutting consumer debt, reducing consumer spending and falling prices for homes will be a drag on the economy.
Recently, the Wall Street Journal published a cover story that reported “the housing bust has chilled consumer spending, the largest single driver of the U.S. economy,” and therefore the economy would fall into another recession or worse (“Home Forecast Calls for Pain,” September 21, 2011, Wall Street Journal, page 1).
Nothing could be further from the truth, and so far it hasn’t happened. Consumer spending is the effect, not the cause, of prosperity. This cardinal truth is known as Say’s law. What really drives the economy? It’s the supply side — savings, investment, productivity, technology and entrepreneurship. According to Nobel Prize economist Robert Solow, 75% of economic growth is due to technological advances, the kind that made Steve Jobs famous.
It’s good that consumers live within their means by saving and investing in the stock market and businesses. It’s all about balance — debt is fine as long as it can be financed properly and used constructively. But excessive debt is bad, whether it involves consumers, businesses or government.
Recently, George Mason University Professor Peter J. Boettke wrote, “Keynesian economics is simply bad economics.” For more evidence, go to the following column I wrote: Read more about it here.
Yours for peace, prosperity, and liberty, AEIOU,