Friday, March 23, 2012

What If Interest Rates Moved Higher?

Yesterday in Kondratiev Wave Cycle Coming To An End, I briefly discussed the catastrophic consequences that would occur should interest rates rise just a little off their all time record bubble lows seen today.  The following video from Professor Antony Davies provides an excellent visual demonstration of these consequences.

It is important to remember the interest charges he discusses are on top of the trillion plus annual deficit spending that is already baked into the cake.  The interest represents the cost to carry the previous debt incurred, just as if you had a credit card balance.  All future projections on the US deficit have these bubble low yields priced in forever.

This simple walk through shows why the Federal Reserve has boxed itself into a corner in terms of future quantitative easing programs.  If the market gets spooked on the inflationary consequences of owning US government debt denominated in US currency they will sell government bonds causing interest rates to rise (creating the scenario below).  The Fed's only response will be to print more currency and purchase more bonds to push yields lower, the equivalent of throwing gasoline on a fire.

Right now US treasury bonds are the risk free darling of the global financial community, just as Greek government bonds were 3 years ago and Italian bonds were 2 years ago.  Money has the ability to move at the speed of light in today's interconnected global world, seen in the ability of Greece's government bond yields to rocket launch higher almost over night.  For those living in Spain, Italy, the UK, Japan, the United States or invested in those countries that believe "it could never happen here," please read the recently posted Global Market Forecast, which provides the update on sovereign debt around the world including the United States.

1 comment:

  1. This has to be one of my favorite posts! And on top of thats its also very helpful topic for newbies. Thanks a lot for informative information!
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