What Will Happen When the Interest Rates Rise?

[Conley]

We all know interest rates are a historically low rate and have been for a while now. What happens when they rise?

Don't be lulled to sleep by super-low interest rates -- it seems close to inevitable that interest rates will rise. This matters because the ginormous national debt is financed using very cheap T-bills and T-bonds selling for 3 percent or less. When interest rates rise -- as they must, unless neoclassical economics is totally wrong -- federal debt-service payments will skyrocket, pushing the nation further into the red. This complication has simply been ignored by presidents George W. Bush and Barack Obama, and by Democrats and Republicans in Congress, in the past five years of reckless debt-based federal spending.

Lawrence Lindsey, who was head of Bush's Council of Economic Advisors, warned a few months ago that if the interest the Treasury pays to borrow money simply rises to the 20-year average of 5.7 percent, this will add another $4.9 trillion to the national debt in the next decade -- more than wiping out the savings the congressional "supercommittee" is supposed to agree upon.

Lindsey's is a credible voice. Before the invasion of Iraq, when Lindsey was working in the Bush White House, he said an American occupation of that nation would cost about $200 billion a year. Defense Secretary Donald Rumsfeld called Lindsey's estimate "baloney." At that time President Bush was asserting an irresponsible fiction that an attack on Iraq would be quick and cheap. Bush wanted to run the war entirely on borrowed money, thus foisting the cost onto future generations -- not to raise taxes for war, the honorable course, as was done during World War II and Vietnam. Bush fired Lindsey shortly after he issued his cost estimate, because Lindsey said something the president and defense secretary did not want the public to hear. So far, according to the Congressional Budget Office, the Iraq occupation has cost about $1.3 trillion over eight years, about what Lindsey predicted. Every penny of that cost, under Bush and now Obama, has been billed to the young, so the reckless men and women running Washington can spend without accountability.

In recent years, Bush and Rumsfeld have tried to argue away their blunder in Iraq by saying they had no way of knowing how costly it would be. They claim this even though the White House chief economist warned them! If interest rates rise, and the national debt skyrockets owing to debt-service expenses, look for Obama and Nancy Pelosi to claim they had no way of knowing that could happen.

http://espn.go.com/espn/page2/story/_/id/6962791/is-door-closing-indianapolis-colts-nfl-narnia

[MMC]

Plus now the Chinese will not buy any More US Bonds. Still both wars put together for 10 yrs is less than 3 yrs of spending by Obama.

[Conley]

I think the Chinese are more likely to gradually scale back their purchases. If they just announce they are going to quit cold turkey everything will collapse and the bonds they currently hold will become worthless. That's really the only thing keeping the whole shebang together I think.

[Mister D]

Plus now the Chinese will not buy any More US Bonds. Still both wars put together for 10 yrs is less than 3 yrs of spending by Obama.


True. No doubt the wars added to the deficiit but lets not pretend that they are its primary cause. That would be entitlement spending.

[MMC]

Plus now the Chinese will not buy any More US Bonds. Still both wars put together for 10 yrs is less than 3 yrs of spending by Obama.


True. No doubt the wars added to the deficiit but lets not pretend that they are its primary cause. That would be entitlement spending.


Spending and robbing. Both parties have been doing it and now they know they have been busted. If they would have never stole funds from it all it might not have been in this shape. Moreover they knew they could cut costs by removing most of the bureaucracy. They have known all along tht they could have set up reforms that would have worked. Even if the money was all sitting in a bank. It would be accruing interest. It would have always been making money from the start.

[MMC]

Right now they are talking about hyper-inflation.....and then what that will bring.

[Pendragon]

Right now they are talking about hyper-inflation.....and then what that will bring.


How long has the Right been sounding the warning bells of hyperinflation? That tired drum has been beaten incessantly, and yet the currency remains in a position of strength. Don't fall for the partisan rhetoric and think for yourself!

[MMC]

Right now they are talking about hyper-inflation.....and then what that will bring.


How long has the Right been sounding the warning bells of hyperinflation? That tired drum has been beaten incessantly, and yet the currency remains in a position of strength. Don't fall for the partisan rhetoric and think for yourself!


Really those are lefty econmists that were saying such. Also would that be like when the UK stated they were not into hyper-inflation and how they got it wrong.

[wingrider]

if China does not buy any more bonds, and the feds start to increase the interest rate,, ummmmmm

can you all say wiemer republic?

[waltky]

Looks like an interest rate hike comin'...
http://www.politicalforum.com/images/smilies/confused.gif
Data shows U.S. economy strengthening on eve of Trump presidency
Nov 23 2016 | WASHINGTON - New orders for U.S. manufactured capital goods rebounded in October, driven by rising demand for machinery and a range of other equipment, the latest indication of an acceleration in economic growth early in the fourth quarter.


The brightening economic outlook received a further boost from other data on Wednesday showing a jump in consumer sentiment this month following the election of Donald Trump as the next president. Consumers embraced the business mogul's victory, which they viewed as positive for their personal finances and the economy's prospects. While the number of Americans filing for unemployment benefits rose from a 43-year low last week, the trend in jobless claims remained consistent with a tightening labor market.


http://s3.reutersmedia.net/resources/r/?m=02&d=20161123&t=2&i=1162798778&w=&fh=&fw=&ll=780&pl=468&sq=&r=LYNXMPECAM0Y7
Equipment stored at the Machinery Auctioneers lot for an upcoming auction in Odessa, Texas

The data reinforced expectations the Federal Reserve would hike interest rates at its December meeting and minutes of the bank's November policy meeting showed rate setters appeared confident that a rise would come "relatively soon". "Everything seems to be moving in the right direction in the economy," said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania. "The weak links are recovering and the strengths are staying strong. The Fed is not going to continue doing nothing." The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 0.4 percent after declining 1.4 percent in September. These so-called core capital goods orders have now increased in four of the last five months.


http://s1.reutersmedia.net/resources/r/?m=02&d=20161123&t=2&i=1162798777&w=&fh=&fw=&ll=780&pl=468&sq=&r=LYNXMPECAM0Y0
A view of machinery being used to open up bays along the Mississippi River to the Bonnet Carre spillway is seen through iron gates in Norco, Louisiana

Shipments of core capital goods rose 0.2 percent last month after a 0.4 percent gain in September. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement. A 12 percent surge in demand for transportation equipment buoyed overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, which jumped 4.8 percent last month. That was the biggest rise in a year and followed a 0.4 percent increase in September. Even as the economy has regained momentum after stumbling in late 2015 and early 2016, business spending remained weak as companies struggled with the impact of a strong dollar and lower oil prices on profits. Business spending on equipment has declined for four straight quarters, weighing heavily on manufacturing, which accounts for 12 percent of the U.S. economy. With core capital goods orders steadily increasing in tandem with rising gas and oil well drilling activity, there is cautious optimism that business investment on equipment will rebound in the fourth quarter.


http://s3.reutersmedia.net/resources/r/?m=02&d=20161123&t=2&i=1162798779&w=&fh=&fw=&ll=780&pl=468&sq=&r=LYNXMPECAM0XL
Workers walk past Caterpillar excavator machines at a factory in Gosselies

But gains are likely to be modest amid renewed strength in the dollar. The greenback's rally had appeared to run out of steam for much of the year. Still, the rise in both core capital goods orders and shipments mirrored data on industrial production and surveys in showing a nascent recovery in manufacturing. "Activity in the manufacturing sector is getting a little better, but is still far from robust. The recent strengthening in the dollar does pose a renewed risk to growth in the industrial sector," said Michael Feroli, an economist at JPMorgan in New York. In a separate report, the University of Michigan said its consumer sentiment index rose 8.2 points from the pre-election reading to 93.8. That put the index 6.6 points above the October reading. UMich said the post-election surge in optimism was widespread, with gains recorded among all income and age subgroups and across all regions of the country.

BULLISH ECONOMIC SIGNALS (http://www.reuters.com/article/us-usa-economy-durable-idUSKBN13I1DR)

See also:

Fed policymakers confident of need for rate hikes on eve of Trump win
Nov 23 2016 | WASHINGTON - Federal Reserve policymakers appeared confident on the eve of the U.S. presidential election that the economy was strengthening enough to warrant interest rate increases soon, minutes from the Fed's Nov. 1-2 meeting showed.


The minutes released on Wednesday back the consensus view on Wall Street that the Fed is poised to raise rates in December. Policymakers left borrowing costs unchanged earlier this month, just days before Republican Donald Trump triumphed in the Nov. 8 presidential contest. Voting members of the Fed's rate-setting committee saw equal risks the economy would overshoot or undershoot their forecasts for continued growth and a tightening labor market. "Almost all of them continued to judge that near-term risks to the economic outlook were roughly balanced," according to the minutes.

Most of the voting policymakers backed holding off on rate increases "for the time being," according to the minutes, a view that was reflected in the language of the Nov. 2 policy statement. Seventeen policymakers participated at the November policy meeting, of whom 10 had a vote. Among the wider group of participants, most said it "could well become appropriate" to raise rates "relatively soon," according to the minutes.

Some argued a hike should come at the Fed's December meeting in order to preserve the central bank's "credibility." Fed officials have already downplayed the significance of Trump's election for near-term policy decisions, although they have warned the Fed could raise rates more quickly if the federal budget deficit widens under Trump. Fed Chair Janet Yellen said last week in congressional testimony that Trump's election did nothing to change the Fed's plans for a rate increase "relatively soon."

http://www.reuters.com/article/us-usa-fed-minutes-idUSKBN13I2AD

[Peter1469]

Now the debt, and deficit, will become more of an issue.

[Mini Me]

When Fed rates climb, that's when the music stops!

It could create another recession!

[Peter1469]

When Fed rates climb, that's when the music stops!

It could create another recession!


Untrue. Interest rates rising will likely help the economy. It prevents malinvestment and bad loans.

However, it also causes the cost of servicing the debt to skyrocket. Which is why the concept of using a lot of credit when it was cheap was fraudulent- with no plan to pay it back quickly.

[Mini Me]

Untrue. Interest rates rising will likely help the economy. It prevents malinvestment and bad loans.

However, it also causes the cost of servicing the debt to skyrocket. Which is why the concept of using a lot of credit when it was cheap was fraudulent- with no plan to pay it back quickly.
Well, it will kill the mortgage markets, according to what loan officers say!

Unless the shitcan the CFPB!

[Peter1469]

Well, it will kill the mortgage markets, according to what loan officers say!

Unless the shitcan the CFPB!


It should prevent people from buying houses that they can't afford.

Home ownership was cheaper in the 70s and 80s than today- and interest rates were sky high then.

[Peter1469]

The world doesn't only have a debt crisis within government. It has a serious debt crisis in businesses. The various QE schemes made money cheap. So there was a lot of malinvestment that has not paid off. Expect a large crash as this debt is deleveraged.