With more than $23 trillion pumped into the financial system via monetary and fiscal policy in the last 12 months, there's good reason to fear a rise in inflation, particularly if the U.S. Federal Reserve's quantitative easing is not withdrawn in time. Further, rising inflation accompanied by competition for capital from abroad would invariably lead to rising interest rates in the United States, but so far, higher interest rates have not manifested themselves. One example: The U.S. Treasury this week sold $44 billion in two-year notes for 0.802%, Bloomberg News reported. In other words it borrowed $44 billion for less than 1% -- an astoundingly low rate.
What's behind the low rate? There remains a great deal of demand from institutional investors (IIs) for safe investments, and U.S. Treasuries are about as safe an instrument as one can get. Moreover, at least a portion of these IIs believe the bull market in stocks in the U.S. and abroad this year has gotten ahead of economic fundamentals -- i.e. that higher risk investments may not generate the return many in investing circles expect. If these bearish IIs are right, and stock markets correct or tumble 20 or 30%, Treasuries will in retrospect look like a very good investment.
The benefit for U.S. taxpayers? Obviously the low rates are gratifying, in that they lower the U.S. government's financing costs for its large budget deficit and national debt. The low rates should be not serve as an excuse for Washington's policy makers to avoiding cutting the budget deficit -- including passing the health care reform bill that will finally contain Medicare and Medicaid spending -- but for now, policy makers can move forward knowing that the U.S. can borrow the hundreds of billions of dollars to service its debt at reasonable rates.
Closing Bell: When We All Love the PIIGS (NBG, SQNM, PG, ERTS, KO)
Serious Money: Cheapest Stocks List Shrinks from 26 to 21
Chasing Value: Hasbro Earnings Makes My Point
Reader Comments (Page 1 of 1)
11-25-2009 @ 8:00PM
Peter Van Schaik said...
And the Federal government will be able to borrow at relatively low rates for quite some time: Even when rates begin to rise, which they eventually will, it won't take much of a rise to slow the already shaky recovery. A long term interest rate peak ignited the Great Bull Market which started in 1982, just as a long term interest rate peak set the stage for the Bull Market of the Roaring '20's. Now we are witnessing a long term interest rate bottom. We haven't seen anything similar since the Great Depression. Low interest rates are the new normal. We will not see substantially higher rates until more excesses are purged from the economy. If we are lucky it can be accomplished with a few harsh recessions instead of a severe depression. Then we can see another generation of robust growth. http://jpetervanschaik.googlepages.com
11-26-2009 @ 7:06AM
MyKisa said...
....at my house, we always borrow more money to make the payment on money that I have borrowed....this is really great....earn that money, nah, just borrow it
11-26-2009 @ 9:22AM
Peter Van Schaik said...
MyKisa, I appreciate your efforts to keep our economy humming. When you're mired in recession, any spending beats no spending. http://jpetervanschaik.googlepages.com
11-26-2009 @ 4:21PM
ray Luchi said...
obamas the worse their ever was ill never back a dem again ever look at the money they gave the banks trillions while guys like me middle class live in a threard worrying sick about bills and money and my 2 kids future , justa fraction of what this idiot gave them would make a guy like me set for life why doesnt anyone complain and protest ???? I say they should not have gave the banks a penney since when is the us gov in the banking business using our tax payers dollar, makes me sick to my stomach why didn this left leaning skinny idiot give 250k to requirement meeting families in need???? witht he trillion the devils given out he could have given 20 million familes 250k each to survive
11-27-2009 @ 6:04PM
william lindblad said...
Joe, is you want a good answer - look between the lines.
Just who are we borrowing from?
I have said this before and I will say it again.
Peculiar, there seems to be a never ending supply of debt buying, mostly from the same place? Same place must have invested wisely as it never seems to have had any banking problems. Strange place. No 401K's, just put your money in the bank and they will make it grow for retirement. I guess those bankers must not get paid much and only make the most conservative investments.
See anything wrong?
This is a place that DID NOT have swine flu until it was so obvious that it could not be denied. Do you think that anyone would tell?
Dubai was a bit of a surprise - and there will be more.