[MonteQuest]

In June of 2003, Greenspan slashed the federal funds rate to 1 percent and vowed to keep it there. Banks loved this, as historically, it allowed them to use their credit to borrow money at low rates and then put it into higher-return investments like mortgages, or lending to consumers through credit cards. Of course, these types of loans exposed the lender to ever increasing credit risks as the housing bubble expanded to include the less credit-worthy and private household debt increased. A borrower can default or get into trouble. So it was easier for the banks to lend money to—or buy the debt of—a borrower who will never default, such as the federal government.

And it's easiest of all when you can buy that risk-free debt with money that's essentially free. This, in essence, is the carry trade. The carry trade depends on a nice, steady interest rate for short-term borrowing. A bank borrows money at the federal funds rate of 1 percent, then uses it to buy a security like the 10-year Treasury bond, which, in 2003, yielded around 4 percent. The bank paid the minuscule 1% interest every day, and then collected the quarterly interest payments on the Treasury securities. When the difference between short and long-term rates is great— that is to say when the yield curve is steep—this strategy is practically a free money printing machine.

Now enter the summer of 2005. The FED has raised the federal funds rate to 3.5% (the tenth consecutive quarter-point rate hike) while the 10 year bond is now about 4.18%. There are all indications that the federal funds rate will reach 4-4.25% by years end. What Greenspan calls the “removal of excess accommodation.”

If nothing “breaks”, and energy prices continue to fuel inflation, I think we can expect short-term rates in 2006 around 4.75 to 5.5%, or higher.
$this->bbcode_second_pass_quote('', '"')It looks like we will have quarter of a point increases for the rest of our natural lives or the next recession, whichever comes first. The Fed has not shown an ability to engineer a soft landing," said Barry Ritholtz, chief market strategist with Maxim Group, a New York-based money-management firm.

[MonteQuest]

Hmm...not much comment on probably the next "key" turning point.

[Permanently_Baffled]

$this->bbcode_second_pass_quote('', '
')If nothing “breaks”, and energy prices continue to fuel inflation, I think we can expect short-term rates in 2006 around 4.75 to 5.5%, or higher.

[MonteQuest]

It depends on the time frame that is set in the ARM. It may be at x % for 3 three years, then Y% thereafter, for example. Many people just have not reached their "change of rate date". It's like when you get those credit cards that offer free balance transfer intersst for 6 months or so. If you don't pay it off by then, the current rates kick in.

[Permanently_Baffled]

$this->bbcode_second_pass_quote('MonteQuest', 'I')t depends on the time frame that is set in the ARM. It may be at x % for 3 three years, then Y% thereafter, for example. Many people just have not reached their "change of rate date". It's like when you get those credit cards that offer free balance transfer intersst for 6 months or so. If you don't pay it off by then, the current rates kick in.

[Kez]

$this->bbcode_second_pass_quote('Permanently_Baffled', 'W')hen the interest rate rises here in the UK (boe base rate) it is passed on immediately and my payments go up. If for example I took my mortgage out at 1% (the US low point) and I was now exposed to 3.5% I would be completely screwed as the interest would more than triple?

Is this the same in America? The reason I ask is that I get the impression from some on Team speak that even though they have variable rate mortgages there repayments have not gone up?

[MonteQuest]

$this->bbcode_second_pass_quote('Kez', ' ')There are a lot of options for mortgages here in America. I'm not sure, but I think the main choice lately has been fixed mortgages, since the rates are so low already.

[cube]

$this->bbcode_second_pass_quote('MonteQuest', '.')..........
Nope. 75% of recent home mortgages are ARM's or interest only; some just minimum payments, especially in California.

[MD]

It sure is nice to be debt free.

[cube]

$this->bbcode_second_pass_quote('Kez', '.').......
Why would anyone buy a 10 year note for a measly 4%? You can get 3.30% in a savings account right now and have access to the cash within 24 hours. ............

[MonteQuest]

$this->bbcode_second_pass_quote('cube', '')$this->bbcode_second_pass_quote('MonteQuest', '.')..........
Nope. 75% of recent home mortgages are ARM's or interest only; some just minimum payments, especially in California.

[MonteQuest]

$this->bbcode_second_pass_quote('Kez', ' ') Why would anyone buy a 10 year note for a measly 4%? You can get 3.30% in a savings account right now and have access to the cash within 24 hours. They need to raise the rate to encourage savings and to force credit card addicts to cut back. Plus they need a better payback to continue to get the foreign investment money flowing into the system.

[mpg]

Monte and Cube - You may both be right. I'm too lazy to do some research
on it but the ARM and zero down mortgages have become the majority written in the last couple of years because of the rising prices. Soon the rates will go up.. The total of risky mortgages to all outstandings mortgages better be closer to 35%. As far as the carry trade goes it seems there is a lot of money being invested poorly to chase smaller returns. (mortgages, zero % credit cards, condo flips)

[MicroHydro]

Are people not aware that the US Government has begun monetizing the debt? What is meant by that is that the Fed is creating money out of thin air to buy T-bonds. This is the end stage of a bankrupt nation, ala Weimar Germany.

http://www.kitco.com/ind/Daughty/printe ... 2005p.html

[MonteQuest]

$this->bbcode_second_pass_quote('MicroHydro', 'A')re people not aware that the US Government has begun monetizing the debt? What is meant by that is that the Fed is creating money out of thin air to buy T-bonds. This is the end stage of a bankrupt nation, ala Weimar Germany.

http://www.kitco.com/ind/Daughty/printe ... 2005p.html

[DantesPeak]

The Fed is only a minor palyer in the last two years in the creation of fiat money, which explains why this carry trade money is available in the first place.

Part of the reason that the world economic structure can support higher rates of inflation (mostly energy inflation) is that other countries are creating money out of thin air to buy dollars. In 2004, this was Japan. In 2005, it is China.

In the first quarter of 2004 only, the Japanese created $100 billion in paper (fiat) money. That is where the money mostly used in the carry trade described above came from. However since then, the Japanese have been much more conservative about this policy.

I estimate that China was creating new money at a rate of $150 billion per year in the first half of 2005. The Chinese revaluation was partly motivated to move away from the very inflationary policy of creating money to buy US dollars (coming to China as part of the trade surplus).

[MonteQuest]

$this->bbcode_second_pass_quote('DantesPeak', 'T')he Fed is only a minor palyer in the last two years in the creation of fiat money, which explains why this carry trade money is available in the first place.

Part of the reason that the world economic structure can support higher rates of inflation (mostly energy inflation) is that other countries are creating money out of thin air to buy dollars. In 2004, this was Japan. In 2005, it is China.

In the first quarter of 2004 only, the Japanese created $100 billion in paper (fiat) money. That is where the money mostly used in the carry trade described above came from. However since then, the Japanese have been much more conservative about this policy.

I estimate that China was creating new money at a rate of $150 billion per year in the first half of 2005. The Chinese revaluation was partly motivated to move away from the very inflationary policy of creating money to buy US dollars (coming to China as part of the trade surplus).

[CARVER]

The article was from a year ago. Some quotes:

$this->bbcode_second_pass_quote('', 'M')any have forgotten what can happen to the equity markets when the Fed embarks on a rate raising cycle. The last time this happened in June of 1999, it took only a 1.75 percentage point increase in the Fed funds rate to bring about a stock market collapse and a recession. Yet, Wall Street repeats the mantra that as long as the Fed rate hikes are gradual, the party will continue. Nothing could be further from the truth. Nearly all rate raising cycles end in financial and economic mishaps. When the Fed begins raising rates, bad things happen to the financial markets and the economy. It won’t be any different this time. The only difference will be that it will take fewer rate hikes to send the markets and the economy into a downward spiral.

[jimmydean]

Guys as a side newbie question what protections are there against other nation governments simply printing currency and buying $USD? With China's huge trade surplus printing a few more $billion Yuan and using it to buy treasuries would go almost unnoticed? By doing so they devalue their own currency but due to fixed conversion rates on the Yuan they are still laughing?

I saw a related item on MSNBC. Essentially this economist was discussing the near term problem we are facing as mortgage rates increase over the next year there will be some people that cannot afford them (they are at capacity) and others that will drastically drop discretionary spending to continue paying their mortgages.

Either of those situations means we are in for a helluva ride the next year or so.

[MicroHydro]

$this->bbcode_second_pass_quote('MonteQuest', '[')b]PIRATES OF THE CARIBBEAN

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