Friday, January 28, 2011
On the precipice of a vicious circle
The top left chart is the weekly 30 year treasury bond price. As the price falls interest rates rise. The top right chart is the U.S. dollar index daily chart. As you can see both charts show pronounced trends down. The vicious circle I have pointed out is that if interest rates keep rising it means that the US gov't will have to pay ever larger amounts of interest on our huge debt. The latest figure I have is the average interest rate on treasury debt is a blessedly low 2.365%. That is a pretty low number compared to past years and has to do with our weak economy. What scares the hell out of me right now is that interest rates are rising as the dollar is falling, usually higher interest rates would attract foreign money because it would signal a strong economy, but that isn't happening and it might be because interest rates are rising because of fear of default. When fear takes over there is no telling how far markets will go.
Keep that in mind when looking at the stock market. If this vicious circle takes grip there is no way the stock market can continue its up trend. There is a point when all of this will dawn on the average investor and there will be a mad stampede. That stampede will be worse if the people are caught unaware that a problem existed. Look at the stock market as your indicator that the problem of higher interest rates on a huge government debt has been recognized and get out before the crowd runs for the door.
Your point of recognition illustrated:
“Although deficits during or shortly after a recession generally hasten economic recovery, persistent deficits and continually mounting debt would have ... negative economic consequences for the United States”—among them, reduced investment, output, and incomes; less room for maneuver when the next economic crisis erupts; and worst of all higher probability that investors would eventually lose confidence in our country’s creditworthiness and demand much higher interest rates. While no one can predict when that “tipping point” might occur, the report notes that as the global economic recovery gathers strength, investors will be less inclined to purchase U.S. government debt as a safe haven and will focus instead on its rising risks. [Emphasis added.]