Way-low US Interest Rates ‘Backfired’

[Blower]

Way-low US Interest Rates ‘Backfired’
By Dan Spillane, The Liberty Whistle
-Inflation, mergers-but ever fewer jobs
-Phony ‘Job Creation Act' Adds Oomph to Fed Mistake

(SEATTLE) 02/01/05 - The recent flurry of US acquisitions and mergers is being attributed to several factors. First, record low US interest rates for an extended period have led to bubbly stock prices, providing the capital and confidence permitting corporate CEOs to reel in whatever small fry they desire. Next, record low interest rates have driven up a wide range of material prices, leading to so-called “entrenched” price rises to producers, often at double and triple-digit rates. These rises are not only expected to continue, but of late, are contractually bound to lofty levels, as corporate supply agreements expire and are renewed. So for example, it makes a lot of sense for Procter and Gamble to buy Gillette--offsetting inflation by gaining market share. Indeed, since the US Federal Reserve failed to act to contain inflation, the Gillette board has compensated on its own. Yet, the effect of pricy imported materials on the trade deficit has become increasingly “locked in” when supply inflation is accommodated in this fashion.

Sadly, that’s not all, the so-called “Jobs Creation Act of 2004” passed last October in US Congress provides further incentive, by allowing preferential tax treatment of certain funds to be used as capital for acquisitions. But as everyone knows, mergers lead to job losses, often in the tens of thousands-such is the estimate for the AT&T/SBC merger. It follows then, that this provision of the “Job Creation Act’ is an utter legislative abomination, having the opposite effect of what its title suggests. A “Jobs Creation Act” which leads to mergers and massive job loss? Why--that would be like passing a "Clean Air Act" which have a loophole that allows SUVs! Or, like attacking a country to displace a tyrant who tortures--but doing so yourself when you got there!

So utterly contradictory too, have been interest rate moves of the US Federal Reserve, if you consider their “dual mandate” of full employment and stable prices--they’ve missed on both counts. To wit, extended low interest rates and a “measured” pace haven’t worked--in fact, low rates backfired because they were both too severe and lengthy, as evidenced by a host of recent market indicators and actions. Consequently, the US is left with ever fewer jobs, entrenched inflation, and a yawning trade deficit. But wait--don't worry, there is no housing bubble.

Whoops.

www.libertywhistle.us

[Blower]

1. Kick

[Blower]

2. Kick

[Blower]

3. Kick

[Demeter]

4. Oh, I Don't Know

That may have been the intent all along...there surely was no economic reason for the interest rates to rise in the late Clinton Administration.

So after trying desperately to reinflate the economy (following the evaporation of trillions of Other Peoples' money, their savings, retirement, etc.) Greenspan has nothing to show for it except the Bush tax grab.

[Blower]

5. Thanks for the comment--

How then can we claim "democracy" if the legislation and policy moves which are made by those in power have a secret agenda--which is at odds with the claimed purpose of such?

[Demeter]

6. I Defy Anyone To Call the US a Democracy Now

It just isn't so. Maybe later, when the ICC prosecutes the Regime and the good Doctor fixes what ails the political system. (I don't dare say IF; to admit that things might stay this way is to succumb to eternal Despair.)

[Blower]

7. So what is the next step--?

I don't see how the trade deficit will fall soon, nor how the jobs and debt problems will lessen over the next year or so.

I see a re-pricing of debt instruments to reflect credit risks, as the next move. Recently, GM bonds were downgraded...

The internal Federal Reserve models say housing is in a bubble, since about a year ago, when their computer model said prices could only rise a few percent in the next year--a level already exceeded.

[indepat]

21. Interest rates way too low for too long allowed issuers of callable bonds

to redeem their bonds at, in most cases, far below market value, all to the incredible detriment of bondholders and thereby giving the issuers an incredible bonanza. Greenspan should live in infamy IMHO, but no one else seems to care.

[Wright Patman]

8. Any country

which has a privately-held central bank which is only extremely remotely connected to the political system is a "democracy" in name only.

The two greatest icons of the early Democratic Party, Thomas Jefferson and Andrew Jackson, feared the creation of a Federal Reserve System-style central bank above anything else.

All their predictions of what would ensue have come true. Jefferson predicted that one day their descendants would wake up as slaves on the continent their forefathers conquered.

Debt slavery is not as extreme as what the blacks faced, but it is a form of slavery nonetheless.

[Blower]

9. "Slaves"-How about finding wars to feed China's oil appetite, for pay...

200 billion or more in debt to China, in the last year alone?

We, AND our children are becoming slaves.

[KissMeKate]

10. liberal think tanks could have counteres this legislation with analysis

and publicity- one more reason Im glad people like George Soros are stepping up to the plate. We need that Think Tank infrastructure.

[Blower]

11. But they did not--

WHICH democratic congress members voted for this ABOMINATION?!?

[Blower]

12. Anyone-post a list of who voted in favor of the absurd "Jobs Creation Act"

[Blower]

13. Kick

[Stockholm]

14. Kick!!

[indepat]

15. Issuers of callable bonds made out like bandits with low interest rates

being too severe and lengthy at the expense of the bondholders. And don't tell me this was not a big part of the reason for low interest rates being too severe and lengthy because I watched bond and bond in my rollover IRA (bearing 6% to 7.5%) being called with the only viable option IMO being MM at/about 1%. It had approximately the same impact as if my Federal taxes had been tripled, even quadrupled. So Greenspan has supported reckless tax cuts, bushwhacked the rollover IRAs of countless millions, and has proffered SS benefits will need to be lowered to pay for tax cuts he supported. Wonder if he will make the most loathsome 50 list?

[Blower]

16. What percent of US Federal Debt is callable, and has been called?

I hadn't thought about the effects on callable bonds. Wouldn't such a change where many callable bonds are nuked show up in personal income figures at some point?

[mulethree]

17. rare

Generally treasuries are not callable. An exception was in the late 70's/early 80's when interest rates were astronomical. They issued 30 year treasuries that could be called in 25 years. The treasury is currently calling in some 11 3/4% and 10% bonds issued in 1980. I see they issued callable 30 year bonds up until 1985. I'm sure they will keep calling all of them as the call date comes up as they can be re-financed at 4%.

Nowadays they don't even sell 30 year bonds. The max is 20 year TIPS - inflation protected. So a 25 year call option is obsolete.

[Blower]

18. Well

If they are rare, that explains why personal income statistics (which would include interest income from bonds, no?) haven't had a massive drop due to callable bonds.

Unless inflation really breaks out, I'm afraid of TIPS. They have fudged the inflation indices since the early eighties...increasingly. Read the piece on the sidebar of my site by Bill Gross, as well as my earlier musings on the subject, near the bottom of my long blog.

"The Liberty Whistle Blows where the Bell Stops Ringing"
www.libertywhistle.us

[mulethree]

19. thanks - interesting

that deal on how they fudge the inflation numbers.

RE: callable bonds, it's just the treasuries that are not callable,
most corporate bonds are callable and thats a pretty large market.

Plus theres a huge mortgage market and all those refinancings were
essentially consumers 'calling in' their mortgage loans.

So tons of 'fixed income' investments did get 'called' and replaced
with lower-yielding replacements. Lots of new mortgages, bigger mortgages, lots of home equity loans, escalating credit card debt, and the increased federal debt on top of that. And still, near record-low interest rates with some being near the reported inflation rate and many below the actual inflation as represented by the un-tinkered Core CPI in the article you reference and of course the 15%+ energy prices, ?8%?+ food prices and 12%+ health care prices.

Seems there must be scads of excess cash out there if people are willing to invest so much of it in investments that barely break even.

[Blower]

20. "WHOOPS" it only gets worse from here--

Payrolls Grow at Lackluster Pace in Jan.

The 146,000 gain in payrolls in January -- while the most since October -- still fell short of economists' forecasts for a more robust gain of around 200,000 for the month. Jobs gains for December came in at 133,000, down from an initial estimate of 157,000 just a month ago.

---

Even Wall Street is struggling to put a good face on this, in light of high stock prices, high deficit, and high debt levels.

How soon will the dollar crash? Or will it be debt instruments like MBS first???

http://biz.yahoo.com/ap/050204/economy_14.html

[Blower]

28. Kick

[indepat]

22. Don't think direct obligations of the Federal government are callable

[teryang]

23. Predatory economic actions of a banana republic

Debtors with low fixed rate debt wisely invested can make out okay if they hold on. The problem is huge numbers won't be able to.

How many used a.r.m.'s or extended their payment periods beyond their working lives or means to pay?

I'm getting calls every night almost again to loan me money. When does it stop?

I'm not well off and my colleagues are buying high ticket items, mostly used, claiming "they're giving it away."

[Blower]

24. Well, according to the NY Times article today, "they are lining up"

People are waiting in line to borrow more money for houses and condos going up at double digit prices.

[teryang]

25. For the top one percent it may not matter

for the rest, they are mortgaging not the real estate but themselves. For one thing consider the low utility of the high end condos. Most of these are vacant here most of the time. How to justify the high price. You can rent a 350,000-500,000 luxury beachfront condo here for a very reasonable price BY THE WEEK. Why buy it? They sit year round mostly unoccupied. I guess the answer is, the owners have so much money, that such considerations are irrelevant.

[teryang]

26. I rarely see commercial property worth its price

...for a small business anyway on a income theory of value. You have to spend so much more than what the income from the property will support.

Most of the wealth is grandfathered in, you have to go to untapped and undiscovered areas with new growth mostly on the potential side to try to get ahead of the curve.

One of my friends discounts this, but he is a manufacturer with a math degree and innate engineering skills who contracts out facilities designed and built by his own hand. It is only in this way that he beats the overhead.

I don't see much liquidity in this market, instead I perceive hucksterism and the devil take the last sucker mentality.

[Blower]

27. Kick