Recently I wrote a post called, "Government Drives Interest Rates Higher" which was about how the government's current spending levels has put the US in a position where in order to finance the national debt that they have to keep interest rates high enough to attract foreign investors. This post so far has a grand total of 1 comment!
Now, I realize that to most people reading about governmental economic policy is about as exciting as reading about moisture content in bee dung, so I'm going to try and spice this up. There, is that better?
Anyway, while it might not be as exciting as reading about Lindsay Lohan's recent arrest, this is something that anybody in the real estate and/or mortgage banking world should be concerned with. The reason is that economically we are in a very similar set of circumstances to what we were in back in the early 70's.
That is, government spending is out of control, we're fighting an expensive war and in order to finance these deficits we are relying upon foreign investors to buy our bonds. The only thing that is missing from the recipe of stagflation is an oil shock.
Back in 1973 that oil shock came in the form of the Arab Oil Embargo. How many of you remember back that far? I was only 12, but I remember sitting in line at the gas station only to see the lights on the sign turned off when they ran out of gas. A few years later I remember going to look at a stereo system and the salesman talking me into putting it into layaway in order to avoid having it go up in price on me while I saved my money to buy it.
Prices were going up while jobs were going away. The term for this is "Stagflation". First coined in 1965 by Lain MacLeod in a speech to the British Parliament, the term became widely known after the oil shock of the early 70's.
The government tried numerous ways to stop this downward spiral. Anybody remember the "WIN" (Whip Inflation Now) buttons that the Ford administration passed out? None of these band aid fixes worked.
It took some very strong medicine to get us out of this situation. What happened was that Paul Volcker, the chairman of the Federal Reserve under President Carter, tightened the money supply (i.e. he raised interest rates) in order to cool the economy enough to do away with the inflation.
This all sounds good unless you're the one who gets laid off from your job in this "cooling" economy. Can you imagine what it would be like to be a real estate agent with interest rates approaching and even surpassing 20%? And you think THIS market is tough!
"But Bob....you're getting your panties in a bunch over something that hasn't happened yet!"
This is true. So far. Also, a little bit of the pressure has been relieved by oil prices going up over a period of years (pretty much since Bush got elected?????Hmmmm???I wonder if there might be a connection there??) Anyway, oil prices aren't our only worries here. One of the things that scare me is just who is buying our debt. China for example holds a tremendous amount of US Treasury Bonds. Enough to where if they "dumped" them, that is sold a large amount of them at one time, they could throw the US economy into recession or even depression!
Do you feel comfortable with China having us by the short hairs? I don't.
What can we do? Vote! Vote for candidates who will be responsible stewards of our economy. Who will not spend more than we make for extended periods of time. Vote for candidates who will pursue real change in regards to embracing "alternative" sources of energy. You can't tell me that we could put a hydrogen powered vehicle on the moon in 1969, but we can't have at least a large percentage of our vehicles powered by hydrogen now.
If you've read this far, I thank you. Here's your rewards:
for the ladies:
P.S. Since I wrote my post last week on government debt, we now owe China and other foreign investors
that's an increase since last week of 26 Billion, 936 Million, 283 Thousand, 398 Dollars and 99 Cents!