Posted on 01/27/2013 9:59:23 AM PST by whitedog57
I was interviewed by Fox News correspondent James Rosen last week on the impact of rising interest rates on the consumers. Apparently, recent increases in Treasury yields is getting attention from the media.
In a flash, I thought back to 1994 when Clinton was President. The US had just come out of a recession and The Fed had been lowering the Fed Funds rate rapidly to spur economic growth. The Effective Fed Funds rate hit bottom in December 2003 as the Real GDP growth rate had hit 5.28% (annualized) in Q4 of 2003.
Fearing an overheating economy, The Fed put their foot on the brakes and started raising the Fed Funds rate. The 10 year Treasury rate spiked from 5.23% on September 1993 to 8.05% on November 11, 1994, a whopping increase of 2.82% or 282 basis points in little over a year.
Certainly, the Fed, lenders, consumers, Realtors and the world are watching to see if history repeats itself over the next year.
Fast forward to today. The ten year Treasury rate (CMT) sits at 1.88% (1/27/13), up from 1.58% on 11/16/13. This represents a 30 basis point increase since November in the 10 year Treasury yield.
But will this continue? It is a noticeably different economy today than back in 1994.
The first difference is the the M1 Money Multiplier. The M1 multiplier is the ratio of M1 Money Stock to the St. Louis Adjusted Monetary Base. The M1 Money Multiplier was 2.784 at the beginning of 2004, but sits at 0.898 (below 1!) as of January 9, 2013.
So, the M1 Money Multiplier crashed and burned after 2008. But what about M2 Money Velocity? (the ratio of nominal GDP to a measure of the money supply. It can be thought of as the rate of turnover in the money supply–that is, the number of times one dollar is used to purchase final goods and services included in GDP).
M2 Money Velocity was at 1.990 in Q1 2004. It now sits at 1.572, the lowest reading since before 1959. Increasing the money supply has done little to increase GDP.
And GDP growth per dollar of household debt is crashing as well.
So while interest rates are rising and may continue to rise, this is not the same economy and banking system that was present in 2004. Real GDP growth is about half of Clinton-era levels while M1 Money Multiplier and M2 Money Velocity are pale images of their former strengths.
Mortgage Rates
The 30 year conventional mortgage rate stood at 6.83% in October 1993 but rose to 9.20% by December of 1994, a whopping increase of 237 basis points in little over a year.
Is it possible for mortgage rates to spike another 237 basis points as they did in 2004? Anything is possible, but with The Fed’s hyper intrusion in the bond market, slow GDP growth and dead M1 Money Multiplier and M2 Money Velocity, it is doubtful. The Fed will not aggressively raise the Fed Funds rate in the face of a stagnant economy.
Unless, of course, inflation starts to really heat up (such as Shadow Government Statistics claims).
Does he have the decade or the President confused? One thing's for sure,current GDP growth is not half of 5. 28 %
11/16/13 aint here yet
you are more correct than you think, We have had NEGATIVE GDP GROWTH for over 30 years. You CANNOT find a SINGLE QUARTER in 30 years with POSITIVE GROWTH if you SUBTRACT GOVERNMENT DEFICIT SPENDING.
I think inflation is a foregone conclusion.
Baby Boomers are out and the work force will need workers. Housing will need to recover, and those $100K student loans will need to be paid. And the government debt needs to shrink as a percentage of GDP.
Answer inflation....lots of it.
Obama’s problem: inflation will hit his base hard. He needs the GOP to take the fall. Start now declaring them at fault for everything - it worked when he did it to Bush and Romney. He needs an adversary or he looks like crap. He has to make them look worse than he is.
When the Treasury Yield Curve finally returns to historical trend line, or surpasses it, the entirety of the new taxes/fees in the 2013 Appropriations bills will be eaten by Interest Expense. As a matter of fact, no matter how much more the bastards in DC raise taxes and fees, they will NEVER collect more than they’ll be paying out in interest expenses due to raised interest rates on Federal debt.
Leaving us even further in the hole, at which point even the lapdogs at S&P and Fitch will have to downgrade the US Fed government.
Egan-Jones had the temerity to tell the truth and Obama’s and the NYFed’s goons persecuted them in the kangaroo courts they run: http://www.bloomberg.com/news/2013-01-22/egan-jones-faces-18-month-ban-on-sovereign-asset-backed-ratings.html
We live in a failed state with a failed currency and a failed credit system. Bide your time wisely as we have four years of further flailing of a collapsing Executive branch and a cornered dieing animal in their parasitic banking system.
At Fed, Nascent Debate on When to Slow Asset Buying
By BINYAMIN APPELBAUM
WASHINGTON — The Federal Reserve has left little doubt about its plans for the next few months, and thus little mystery about the statement it will release Wednesday after the latest meeting of its policy-making committee. The economy remains weak. The Fed will keep buying bonds to hold down borrowing costs.
Inside the central bank, however, debate is once again shifting from whether the Fed should do more to stimulate the economy to when it should start doing less.
Proponents of strong action to reduce unemployment won a series of victories last year, culminating in December when the Fed announced that it would hold short-term interest rates near zero at least until the unemployment rate fell below 6.5 percent. The rate was 7.8 percent in December.
To accelerate that process, the Fed also said it would increase its holdings of Treasury securities and mortgage-backed securities by $85 billion each month until it sees clear signs of strength in the job market.
The Fed is expected to affirm both policies on Wednesday. The Fed’s chairman, Ben S. Bernanke, said this month that the persistence of high unemployment “motivates and justifies” the efforts.
The looming question is how much longer the asset purchases will continue.
The officials who led the push for stronger action have turned to defending the need to continue asset purchases for as long as possible, while those who opposed the policy are pressing for an early end date.
$85B a month, of which $38B to $45B is new , taking on $400B to $500B in new Federal Debt as a baseline going forward, and interest expense will soon start increasing by ultimately another $550B/yr.
And Obama has proposed $1.6T in tax increases over a 10 year period to cover this, while it will not cover even 24 months of new debt.
The world’s capital will soon go on a creditors’ strike against the Treasury and Fed Reserve.
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