<p>I am not interested in political debate as I do not care about political aspect. I would like to hear your input on the economic aspect rather than political aspect. Following article has made me think…</p>
<p>How? The Fed is a private organization (answering to Congress) but it can’t increase the national debt. The Treasury and other branches of the Federal Government can issue national debt.</p>
<p>The next sentence has problems too. The Fed controls short-term debt rates. If they raise short-term rates, will this affect medium and long-term rates? Maybe it will and maybe it won’t. The debt already outstanding will remain at the same rate though.</p>
<p>The US dollar is fairly strong right now - mainly on the weakness of the Euro. I would expect to see dollar dumping if there were a problem on interest rates around the corner.</p>
<p>The Fed’s quantitative easing has nothing to do with increasing the national debt. The national debt is caused by fiscal policy, which the Fed has nothting to do with (the Fed only handles monetary policy). The increase in the debt is due to the US government running $1.5 trillion a year deficits for several years in a row.</p>
<p>That being said - yes, an increase in interest rates will have a signficant negative impact on the Federal budget (with an increase in rates impacting the short term US Treasury Bills almost immediately, as they mature and are refinanced), which no one has really spoken about. That isssue is far down everyone’s list - the big issue being a persistant 9% unemployment rate and the inability of the current economy to grow jobs.</p>
<p>(Did I do a good job of staying away from politics?)</p>
<p>Personally, I’d be happy if the interest rate went up. I think it’s artificially low. I’ll defer to posters above me for the national scheme of things, but on an individual note, my student loans were 9% (highest ever rate), my first car was 14%, and my first house was 10%. I lived like a pauper for years (decades) to pay those off. Now, I get older and have money saved, and what’s it get me? Interest rates with decimals before them…seems really unfair :(</p>
<p>That’s how banks make money: they borrow from you at low rates and loan to others at high rates. Though in the modern era, they might borrow from the Fed at low rates and loan to others at high rates.</p>
<p>Ok…I did not read all of what Ron Paul wrote because I think he is a nut case…</p>
<p>But from what was highlighted in post 1… </p>
<p>I think what Ron Paul is saying is that if it wasn’t for the Fed, the debt would not be able to be financed…who could buy that much debt? And therefore, the Fed created the ability for the treasury to issue that debt. And of course the treasury issued that much debt because government debt is out of control.</p>
<p>The treasury could issue $5 trillion of 30 year paper with the Fed as a buyer…and the interest rates costs would be chump change compared to the size of the deficit…$5 trillion would go a long way to solving the depessive nature of this economy…of course…we would end up with other problems…</p>
<p>Looks like Europe is going to print $1 to 2 trillion. It’s called something else… Stock markets around the world like this. I’m not sure I like this. :)</p>
<p>With interest rates so low (10 year Treasuries at 2.2%, lower than AAA corporates or just about any other fixed income issuer), apparently there is a big appetite for Treasury securities (like everyone says - where else are you going to invest?) and a lot more debt could be issued by the Federal government - it would just mean that interest rates would go up.</p>
<p>Don’t need the Fed to buy it - plenty of foreign governments hold huge amounts of US Treasuries (China and Japan to name two).</p>
<p>Quick rule of thumb - a 100 basis point change in interest rates [say from 2.10% to 3.10%] will result in a percent change in bond prices equal to the duration, or the weighted average maturity of interest & principal. For example, the duration of the 10yr bond is approx 9yrs, so a 100 basis point increase in rates will result in a 9% decrease in the value of a 10yr bond.</p>
<ol>
<li><p>If I understand correctly until the world believes in Dollar/US for investment as safe heaven, interest rate will not likely to go up for a very long time. </p></li>
<li><p>By keeping the interest rate lower, the fixed income group is going to suffer, as FED’s move does not allow these people to make money on interest income. Fed indirectly is forcing people to move money into riskier investments in order to make money Thus, people will move money moved from non risky treasury to riskier account such as stock market. </p></li>
<li><p>Another thing is if the FED keeps the interest rate too lows for a very long period of time, say 15-year period, many savings and or credit union will eventually start having issues. Why? Because these entities make money in the spread and if spread is too low, they are not making any money that can meet their cost structure and allow them to have many people working for these companies. They need to lay off people in order to save. </p></li>
<li><p>If there are additional downgrade by Fitch and Moody, we should start seeing some erosion in Almighty Dollar. How much I do not know.</p></li>
<li><p>I am still searching for a link where it states that largest holder of treasury debt is the social security trust fund. I would if anyone can elaborate on this issue.</p></li>
</ol>
<p>Here’s a perverse benefit higher interest rates will have: pension funds will be more solvent, as the discount rate used to value the future payouts will go up, so the present value will be lower. (just nod - it’s like bond math!). Given most funds are not 100% fixed income, this will have a huge benefit and help with the solvency of many plans. </p>
<p>Regarding additional downgrades of the US - people need to wake up to the possible consequences of the EU mess. These countries are linked by a common currency, but have separate economies and separate bond ratings. One traditional method of control of your currency is debt issuance, which is not available to countries that rely on the Euro. My European colleagues are quite cognizant of this and are surprised US investors aren’t as scared as they are of the Euro’s future.</p>
<p>“Fed indirectly is forcing people to move money into riskier investments in order to make money Thus, people will move money moved from non risky treasury to riskier account such as stock market.”</p>
<p>Nothing indirect about it. Helicopter Ben was quite explicit about his purpose.</p>
<p>Low interest rates are good for young people trying to buy houses and cars. Old people who don’t like low interest returns should suck it up. Old people are getting much more money from social security than they ever put in to the social security system and those profits are on the backs of young people. </p>
<p>I hope these low interest rates continue for as long as possible, but they are not sustainable given the inflation that is coming.</p>
Stock markets around the world like this. I’m not sure I like this. :)</p>