Many people in real estate related industries are keen on speculating about the future of interest rates in America. One issue that is relevant to this topic is how long can we continue to run massive deficits?
How long can America continue to run a deficit of over $1 trillion per year? When will the credit rating of the United States become damaged to the point that interest rates start to increase like we are seeing in Greece and Spain?
In a previous post, I noted that Alan Greenspan commented “Simpson-Bowles will be passed. It’s just a question of whether it’s before or after the bond market crisis.”
What is a bond market crisis? What happens when it comes? When could it happen in America? These are the questions to be considered in this post.
Every few days the U.S. Treasury Department sells bonds to fund the spending binge of Congress. Treasury lets everyone around the world know what types of bonds will be sold that particular day. Maybe some 90-day notes today, some five-year bonds next week followed by a nice selection of fresh ten-year bonds a few days later.
In normal times, bond buyers from all over the world place their orders to buy these beauties.
But times are far from normal these days. When something goes wrong in Europe, investors sell their bonds there and buy U.S. bonds instead. When Venezuela threatens to steal private property from their citizens, they try to move money out of their country and buy U.S. bonds too. A U.S. Treasury bond has been viewed for decades as the safest harbor in a world full of economic storms.
That’s one reason why our rates are so low today. People all over the world are moving their savings to the United States and a few other countries like Switzerland.
What happens when the crisis comes? I’ll discuss that in my next post.
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