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Brace yourself for one of the greatest interest-rate surges in decades — beginning first in the long-term Treasury markets … later spreading to shorter term Treasuries … and ultimately enveloping nearly every loan, debt, credit, and money market instrument on the planet.
This rise may not begin with great fanfare. Nor will it immediately upset the apple cart of the economic recovery. But with the march of time, it WILL gain momentum and reach critical mass.
We have little doubt about this outcome. And today, we begin a two-part series to explain why — plus what to do about it.
Four BIG Reasons Interest Rates MUST Rise
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The first big reason is the growing RISK of lending money to sovereign countries.
Naturally, the more that lenders distrust their borrowers, the more interest they must charge to offset the risk.
And right now, the distrust of sovereign debts is going through the roof!
Indeed, last week, just when everyone thought the canary in the Treasury coal mine — Greece — had quieted down, it began to scream bloody murder.
This is directly relevant because Greece’s fiscal and financial disaster bears uncanny resemblance to what America’s could be in the future.
And based on the current cost of insuring against a Greek default within the next five years, that disaster is now measurably WORSE than it was last month, last year, or at any time in prior history!
Result: Much higher borrowing costs — not only for the Greek government, but for any government that has lost control over its spending, borrowing, and money printing, which leads us to …
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The second big reason interest rates must rise — massive federal deficits in the United States.
The bigger the deficit, the more Washington must borrow. And the more it borrows, the more it must bid up the rate it pays.
Look. If today’s massive federal deficits were merely a typical, cyclical phenomenon, we might be less concerned.
But nothing could be further from the truth! What we are witnessing now is a dramatic fiscal upheaval of historic dimensions.
Except for those during major wars, today’s federal deficit is, by far, the largest in U.S. history as a percent of GDP. And it’s more than TWICE as bad as the worst deficits during the Great Depression.
Direct implication: Unprecedented upward pressure on interest rates.
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The third big reason is Washington’s unfortunate reliance on foreign lenders to finance its follies — the worst since Benjamin Franklin went to Paris, hat in hand, pleading for money to help pay for America’s war of independence.
Fast forward to the 20th century: Until the 1970s, the U.S. government rarely relied on foreign lenders for more than a small fraction of its privately held debt — less than 10 percent. Now, it relies on them to the tune of 51.4 percent.
Implication: Any international loss of confidence in the U.S. — in its economy, credit rating, or overall future — could make it that much harder for Washington to raise the funds it desperately needs to cover its gaping budget deficits, forcing it to bid even HIGHER interest rates.
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The fourth big reason: Inflationary forces and fears!
While Fed Chairman Bernanke says he’s not too worried about rising consumer prices right now, a growing minority of Fed governors say the true inflationary signs are being temporarily covered up by depressed housing costs.
Moreover, Bernanke is conveniently ignoring the elephant-in-the-room monetary explosion he himself has engineered.
As we explained last month in “Bernanke Running Amuck,”
“From September 10, 2008 to March 10 of this year, he has increased the nation’s monetary base from $850 billion to $2.1 trillion — an irresponsible, irrational, and insane growth of 2.5 times in just 18 months.
“It is, by far, the greatest monetary expansion in U.S. history. And you must not underestimate its sweeping historical significance.
“Precisely 218 years ago, Treasury Secretary Alexander Hamilton established the dollar as America’s national currency when Congress passed the Coinage Act of 1792.
“Since that memorable date, the United States has suffered through one pandemic, two depressions, 11 major wars, and 44 recessions.
“Four U.S. presidents have been assassinated while in office. Hundreds of thousands of businesses have gone bankrupt; tens of millions of Americans have lost their jobs.
“In the wake of these disasters, there were, to be sure, monetary and fiscal excesses. But never did the U.S. government resort to extreme abuses of its money-printing power!
“Until now.
“Now, all those years of suffering and sacrifice — all that history of leadership and discipline — have been trashed. All for the sake of perpetuating America’s addiction to spending, borrowing, and the wildest speculations of all time.”
End result: Powerful inflationary pressures and worries, naturally driving interest rates higher.
Part II: Coming Next Monday
Don’t underestimate the potential impact of these forces. At the same time, be sure to learn more about the great yield and profit opportunities they can open up for savers and investors, as we’ll detail here next week.
Best wishes,
Martin and Mike
About Money and MarketsFor more information and archived issues, visit http://legacy.weissinc.comMoney and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
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