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American Capital Agency Corp. Message Board

  • ray858945 ray858945 Aug 28, 2013 9:50 PM Flag

    Why do you want higher rates?

    Seems like quite a few people not only predict higher rates, but want them. Why? For every 100 bp increase in treasury rates, it costs another $160,000,000,000 in interest charges per year. If the rates climb 300 bp to historically average rates, that's a half TRILLION a year in additional interest rates. I can't see this country ever recovering if we face that kind of debt service. If you don't think the Fed has kept us from being flushed direct to bankruptcy .... well, I am pretty nervous about some of the things that Summers has said [as reported here] as he would be the one person capable of killing this country without starting a war.

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    • Your not qualified to do that calculation, only incremental deficit spending needs to be borrowed at the new higher rates. Past spending has already been borrowed with 30 yr. treasuries at 3%. Current spending is paid for with current tax receipts for the year. Only deficits or shorfalls have to be financed and 2-3% of maturing treasuries. So if the budget is balanced like they said they would in 10 years from the sequester, there will be no deficits and the next 10 years you will see the deficits shrinking even faster with higher rates. Here is the governments own figures showing what numbers would look like with rates going back to 4.5% from the record lows of earlier this year. OVER A $1 TRILLION A YEAR REDUCTION IN THE DEFICIT. If rates go to 5.5-6% a HUGE SURPLUS. DO THE MATH, THE FED HAS ALREADY DONE IT AND REPORTED ON IT AT JACKSON HOLE, read the testimony of those who want QE ended fast, the government needs the extra $1, 2 o3 3 trillion per year more from higher interest rates.
      Year ---------Receipts---- Outlays -----(Surplus, Deficit(-))------------------------
      2008 2,523,991, 2,982,544, -458,553,
      2009 2,104,989, 3,517,677, -1,412,688,
      2010 2,162,706, 3,457,079, -1,294,373,
      2011 2,303,466, 3,603,059, -1,299,593,
      2012 2,450,164, 3,537,127, -1,086,963,
      2013 2,712,045, 3,684,947, -972,902,
      2014 3,033,618, 3,777,807, -744,189,
      2015 3,331,685, 3,908,157, -576,472,
      2016 3,561,451, 4,089,836, -528,385,
      2017 3,760,542, 4,247,448, -486,906,
      2018 3,973,974, 4,449,240, -475,266,

      Add a positive $1 trillion to Surplus/Deficit column with each 1% increase in Treasury Yields. Assuming all other variables stay the same, which in reality doesn't happen, but within 5%, assumes no new taxation, etc. Hence, back in 2008, when PNC just bought out NCC bank and was paying 5.25% yield on 3-5 yr. CD's, the deficit was more than 3 times smaller.

      • 1 Reply to dr_klumps
      • The odd part about your fixation on the notion of raising interest rates to increase revenues - you dont seem to know that its tax capital gains from juicing the stock market that plays that role.

        Raising interest rates for fiscal reasons: guy thats not heterodox, its not orthodox. Its just not even dox of any sort.

        We live in times when all arguments and notions can come out of the caverns to enjoy their moment of a place in the sun.

    • I see you are not an accountant. Low interest rates cost the government alot of money and it is only to bring unemployment down which is the FED stated goal and they even said it cost them money. THEY MAKE HUGE AMOUNT WHEN RATES RISE. Money made in stock market is taxed at very low 0% - 20% capital gains rate. If interest rates double, that goes directly on the 1040 and people pay regular tax rates 10-39.5%. When rates rose in late 1970's and early 1980's, to double digits, the government needed the additional tax revenue on interest income to fund the Bob Hope generations social security payments and medicare costs. Same thing is needed now because the biggest holder of US Treasuries is Social Security and their trust fund manager said they need the rates back to 6-7% of they will eat huge amounts into principal to pay the baby boomers retiring in the next 2-5 years. They actually need rates high for the next 20-30 years, watch and learn. Rate cycles run in 25-30 years cycles. We had a bond bull market since 1982 for 30 years, now we will have the downward bond bear market with lower prices and higher yields. This cycle is 400 years old and never has changed, this will happen.

      • 1 Reply to dr_klumps
      • Doc klumps,

        You are sustaining a level of certainty in your ability to forecast complex dynamic market systems that can be dangerous to your portfolio.

        Also, some of your assertions are begging for your reexamination:

        -An accountant would point out that while incremental revenues would increase through taxing interest income on increased rates, he would also point out that the carrying cost of US debt would also increase. Let me try to anticipate your instant reflex response that one would somehow dwarf the other by reminding you that you would need to run complex advanced econometric simulations to try to arrive at the actual net effect of rising interest rates on net Federal fiscal expenditures.

        -Many people think the purpose of QE is to lower interest rates. In fact QE was actually designed to delever the balance sheets of lending institutions to unfreeze lending. Setting the Fed funds rate is all good and well, but financial instutitions canot lend money against scuttled balance sheets. QE is designed to refloat balance sheets to enable lending. By that intent, it has been a success, to the point that Tapering is now on the table many months before anyone anticipated, including in conversations on this messageboard last novemeber when I could find noone here to agree w my expectation that QE would be dialed by before the end of '13.

        I can understand how someone using the past as a guide might be alarmed as you are.

        However, this is not 1970s America.

        There is a fundamental structural imbalance caused by the acceleration of the American economy away from low-information jobs.

        The result of this is that 80 percent of the American population finds itself in economic stagnation, unable to take advantage of historic low interest rates.

        At the same time that 80 struggle, 20 percent are actually overrheated due to QE.

        Combining the 20 percent with the hapless 80 percent does not produce enough aggregate demand to support inflation or high rates.

    • Summers is an idiot. QE is the only thing keeping the economy going. It certainly isn't Republican austerity or Obama's pusillanimous response.

    • Because low rates if left for too long create economic bubbles which lead to deep crashes.

    • There's a fundamental rule in economics that the Fed can not control long term interest rates. Such rates are controlled by inflation and growth. If you look carefully at the interest rate responses to all three episodes of QE, it perfectly confirms the fundamental rule.

      QE is designed to stimulate the economy, which leads to increased inflation and growth, which leads to higher interest rates. Interest rates dropped between QE1 and QE2, and between QE2 and QE3, simply because the economy had not reached escape velocity. Whether the Fed begins to taper in September or not, rates are headed up. All you have to do is look at the direction of the economy. Don't fight the Fed. If the Fed wants the economy to expand, interest rates will most assuredly rise.

      All mREITs are in an unfortunate position. Bond market volatility is generally bad for mREITs because it increases hedging costs without increasing interest income. They're a casualty of an improving economy.

    • 1. Savers have a right to ask for higher rate without having to risk their capital directly in the stock market. Basically the scenario before the housing and stock market collapsed.
      2. Your numbers aren't entirely fair: the increase would be on result borrowed money -- so maybe it implies much lower borrowing in the future.
      3. You've touched on the inflation / deflation debate.
      4. No sense in blaming Obama (or whoever the next President is) for dealing with the backed of a very long-term problem.
      5. From a more cynical perspective: no-one cares about the Middle Class (see the end result of the Occupy Wall Street protests -- ie nothing). The poor have nothing to lose irrespective of what happens, and the rich will reallocate their assets and profit accordingly.

    • You think Obama's economic policies are helping the country? And how about Obamacare inflating folks healthcare premiums, including those who are now part-time workers due to it. I guess people should invest in the company that makes Cruise Missiles. Looks like we'll be needing to replace a few real soon.

      • 2 Replies to lenyw
      • Leny ...

        Obama is not part of the Fed, and has no direct control over it.

        As for ObamaCare: It is a carbon copy of the plan developed by Romney for Massachusetts. He's a Republican, I think.

        As for Syria, any of the big name Republicans would have already started a full blown war with them. I'd be happy if BO keeps it to a few missiles.

        BTW, do you have any thoughts on the point of my post?

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