Rep. Ron Paul schedules hearing on 'manipulation of interest rates'

[asurfaholic]

The Fed's policy of keeping interest rates low has an effect on the yield of Gov't bonds, since these bonds have to compete for the investor's money. Low interest rates in the market will keep the yield on bonds lower. Higher interest rates, through a tightening of the money supply, will put pressure on bonds to have a higher yield. Bond yields are not divorced from market interest rates.

The Fed's interference in markets is proportional to our debt situation. As our debt has gone up, interest rates have gone down. This has been the only way we have been able to afford such debt.

For example, in 1988 we paid $214,145,028,847.73 in interest on a debt of $2,602,337,712,041.16. Jump ahead to 2010 and we paid $413,954,825,362.17 on a debt of $13,561,623,030,891.79. As you can see, we paid less than double the amount of interest in 2010 in relation to 1988 even though our debt load had increased roughly 5 fold. That is directly due to interest rates.

Now, with a debt of $16 trillion and rising, it's easy to see that an increase in interest rates would kill our entire economy. It would have done so long ago without the Fed.

The info I used on the debt and interest paid comes from the Treasury Dept. at the following links.

http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

Im still a newbie, but sounds like minime was suggesting that the interest rate for the 16t pf debt we already have is already established, so raising the interest rate now would only effect future debt aquired.

I dont know which is the case, though. If interest rates rise does it affect all our current debt, or only new debt?

 

[sailingaway]

Im still a newbie, but sounds like minime was suggesting that the interest rate for the 16t pf debt we already have is already established, so raising the interest rate now would only effect future debt aquired.

I dont know which is the case, though. If interest rates rise does it affect all our current debt, or only new debt?

my understanding is that up until very recently the bonds were sold at short term rates so needed a market of buyers to stay at that rate or they would come due, and since they couldn't be paid off all at once would need to be 'refinanced' so to speak and that refinance rate is not established.

I don't know when the next offering wave comes due, but we sell a lot of bonds, I would expect some to come due each year.

 

[Mini-Me]

The Fed's policy of keeping interest rates low has an effect on the yield of Gov't bonds, since these bonds have to compete for the investor's money. Low interest rates in the market will keep the yield on bonds lower. Higher interest rates, through a tightening of the money supply, will put pressure on bonds to have a higher yield. Bond yields are not divorced from market interest rates.

The Fed's interference in markets is proportional to our debt situation. As our debt has gone up, interest rates have gone down. This has been the only way we have been able to afford such debt.

For example, in 1988 we paid $214,145,028,847.73 in interest on a debt of $2,602,337,712,041.16. Jump ahead to 2010 and we paid $413,954,825,362.17 on a debt of $13,561,623,030,891.79. As you can see, we paid less than double the amount of interest in 2010 in relation to 1988 even though our debt load had increased roughly 5 fold. That is directly due to interest rates.

Now, with a debt of $16 trillion and rising, it's easy to see that an increase in interest rates would kill our entire economy. It would have done so long ago without the Fed.

The info I used on the debt and interest paid comes from the Treasury Dept. at the following links.

http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

I would expect the opposite effect: With a tighter money supply, investors have greater confidence that bonds will actually be paid upon maturation (without government default), resulting in higher auction prices and lower yields. With a loose money supply, investors have less confidence that bonds will actually be paid, and the need to factor inflation into investments puts pressure on all market interest rates (including bond rates) to rise. The Fed funds rate would not be affected by this pressure, because it's arbitrarily set, and it has a disproportionate effect on other banking rates which cause them to resist this pressure as well, but it should cause bonds to drop in value.

On some level, I think I can see your point: The further the government goes into debt, the more it depends on loose monetary policy to raise enough taxes to come even close to covering its obligations. Therefore, beyond a certain point, investors know they're playing musical chairs, and they'd have to realize they can only even hope to redeem their e.g. 30 year bond on maturation if the government is still printing money as usual.

Is that what you're saying is happening? If so, I think there are two problems with the explanation: First, the money supply isn't exactly dictated by the Fed funds rate, because IIRC most money is actually created through government debt anyway, so AFAIK we could technically still have monetary inflation even in the presence of high interest rates as long as government spending remains high (and if it doesn't remain high, that changes expectations of default significantly for the better anyway). Second, as you seem to suggest, rising interest rates would signal a shift in monetary policy and a tightening of credit, which could signal to investors that the "game" is almost up, causing bond prices to plummet (and yields to skyrocket, as if they'd ever be paid)...but nevertheless, prices should still be gradually decreasing as the inflationary game goes on, because most investors do know that it can't last forever, and every passing day is another day closer to default.

As a result, I may be missing something, but I'm not seeing a logical connection between a low Fed funds rate and lower interest payments on the national debt. If what you're saying is true, and bond yields are decreasing over time, then bond prices should have been increasing over the past few decades. I looked around for historical bond prices to confirm this, but I couldn't find a chart.

It would surprise me if bonds have really gained strength over the past few decades, but that may not be necessary for interest payments as a percentage of debt to fall: Keep in mind that the interest is paid 1, 5, 10, or 30 (etc.) years out from when it's actually set by the Treasury auction, so even if bonds have fallen in value over the past few decades, the interest payments being made today still reflect somewhat (and sometimes much) older expectations. (Actually, scratch that: As sailingaway said, the market is dominated by short-term bills and notes and such. Also, 30 year bonds actually pay interest every six months, though I'm not familiar enough with them to know what that rate is based upon...)

If sailingaway is right, it appears Treasuries have really been getting stronger over the past few decades, though I'd need a chart to really believe it. If so, my best guess is still that it still isn't coming from a low Fed funds rate though. Instead, I would expect it to come from increased subsidization by a large buyer with atypical investment behavior and a disproportionate effect on the bond market, like China. It could hypothetically happen as a result of Fed monetization too, but that hasn't happened too much yet.

 

[jay_dub]

my understanding is that up until very recently the bonds were sold at short term rates so needed a market of buyers to stay at that rate or they would come due, and since they couldn't be paid off all at once would need to be 'refinanced' so to speak and that refinance rate is not established.

I don't know when the next offering wave comes due, but we sell a lot of bonds, I would expect some to come due each year.

LOL...I think we all have to use the caveat of 'my understanding'. With that said.....

My understanding is that treasury securities are a mixed bag of short and long term. There are various yields attached to each with the longer term having the highest yields. These bonds are not like a loan where there is a linear schedule of interest. On any given month our interest payments may go up or down depending on what bonds matured in that period.

No matter the specifics of each bond, since we are not actually retiring any of our debt, we are constantly re-issuing bonds to make up for those that matured. These new issues are subject to have higher or lower yield depending on market conditions. This is where higher interest rates will affect what we pay in interest on our debt.

There has been a recent history of strong demand for bonds despite the low yields due to the perception of zero chance of default. That veneer is beginning to crack with each debt ceiling increase and credit downgrades. At some point there will be no market without our credit costing us more. The Fed is running out of tools in the toolbox to keep the charade up. There is pressure on the USD as world's reserve, which adds to the chance of the dollar being further devalued. To me, the writing is on the wall....get our house in order quick or we face collapse.

There was significant news this month with China announcing they are ready to use the Yuan instead of the Dollar for all international oil trades. IOW, the recent wars we have fought and all our meddling in the ME will have been for naught if China's ambitions are fruitful. If a weaker nation had done this, we would be off to overthrow the government of that country. We did that in Iraq and Libya. We can't do that so easily with China.

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On Sept. 11, Pastor Lindsey Williams, former minister to the global oil companies during the building of the Alaskan pipeline, announced the most significant event to affect the U.S. dollar since its inception as a currency. For the first time since the 1970's, when Henry Kissenger forged a trade agreement with the Royal house of Saud to sell oil using only U.S. dollars, China announced its intention to bypass the dollar for global oil customers and began selling the commodity using their own currency.

Lindsey Williams: "The most significant day in the history of the American dollar, since its inception, happened on Thursday, Sept. 6. On that day, something took place that is going to affect your life, your family, your dinner table more than you can possibly imagine."

"On Thursday, Sept. 6... just a few days ago, China made the official announcement. China said on that day, our banking system is ready, all of our communication systems are ready, all of the transfer systems are ready, and as of that day, Thursday, Sept. 6, any nation in the world that wishes from this point on, to buy, sell, or trade crude oil, can do using the Chinese currency, not the American dollar.

This announcement by China is one of the most significant sea changes in the global economic and monetary systems, but was barely reported on due to its announcement taking place during the Democratic convention last week. The ramifications of this new action are vast, and could very well be the catalyst that brings down the dollar as the global reserve currency, and change the entire landscape of how the world purchases energy.

http://www.examiner.com/article/dol...rrency-as-china-begins-to-sell-oil-using-yuan

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Dark times lie ahead for the U.S. dollar as its future as the world’s reserve currency looks to be in great jeopardy. For more than 50 years the U.S. dollar has been the chief monetary instrument used by the nations of the world to facilitate trade involving commodities such as petroleum, manufactured products, and gold. But the times are changing and many of these nations, with China at the forefront, are finalizing trade agreements that utilize only their own currencies.

So it appears that the reign of the U.S. dollar as the world’s reserve currency will, quite likely, be coming to an end within the next ten years. It is certainly no surprise that China, widely considered to be the premier economic power of the future, is wasting no time in exerting its growing power and influence in these matters. China is actively working with nations in Asia, the Middle East and other regions of the world to bring dramatic changes to the way world commerce is conducted and money is exchanged.

Many of these countries who are moving away from the dollar no longer view America as a stable and reliable force on the world economic stage and they are seeking alternatives as a hedge against a severe future decline in the dollar’s value.

More at:

http://economyincrisis.org/content/...-the-u-s-dollar-as-the-world-reserve-currency

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As the Dollar loses its status (and value), we WILL be paying more for our debt, no matter the Fed's tinkering. At this level of debt, paying more will mean economic collapse. China has declared economic war against us and we are losing. All the debtor nations (meaning the West) will feel this as their fate is tied to ours. Our only option is to get our house in order or we could be staring at two choices.....collapse or a major war.