More Fallout From Uncle Sam’s Heavy Hand
July 13, 2009 by Brien Lundin
In the June 23 article, “Money is Scurrying Away From the Dollar,” I touched on the radical lurch to the left that our nation is experiencing as Congress and the Obama administration proceed in their piece-by-piece dismantling of our capitalist system.
As any student of history could have predicted, this trend toward a more socialistic system of government is having a number of unintended consequences. The most immediate of these, of course, has been the growing disdain for the U.S. dollar (and a corresponding growth in affection for gold) among the world’s investors and savers.
But more repercussions are now becoming evident. The recent selloff in U.S. Treasuries sent rates spiking higher and pushed the yield curve to its steepest slope in history.
The problem is that traders have had to sell Treasuries to hedge against rising rates in mortgages. But now that selling in Treasuries is rippling into the mortgage market. That is sending rates higher and endangering the fragile healing process in the nation’s housing market.
The Fed simply cannot allow this to happen. But again, there’s a problem: The Fed has been buying mortgages and Treasuries through their quantitative easing program to keep rates low. Now, they’re going to have to ramp up that program, to a very large degree, to keep rates at levels conducive to an economic recovery.
“You can’t have a spike in interest rates in the long end without it impacting the economy,” warned Brian Edmonds, head of interest rate trading at Cantor Fitzgerald. “That’s why the Fed has been a supporter of the quantitative easing. They have a choice. They could walk away from it or they could increase it to the point where it’s meaningful. The $300 billion is not effective….You’ve got to start to talk trillions.”
The end result, of course, will be double-digit inflation rates, a collapse in the dollar, and a correspondingly large increase in the value of gold. There will be other unintended consequences of this new, more socialistic America. The most frightening of these will be the significant erosion of our individual rights. We need to prepare for these events, not only as investors, but as American citizens.