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Can Somebody Please Help Me Understand this Interest Rate Thing.......

Interest rates move higher for the 2nd straight week

Frankly interest rates are starting to bore me. Interest rates are one of the very most important factors that control the direction the real estate market is heading. I watch them daily, have for years as they are that important. It was drilled into my head. But I am giving up. Somebody please help me understand.

We all know interest rates are closely tied to the 10 year Treasury note. We know the interest rate on the 10 year Treasury note is set by the Federal Reserve and then sold to bidders to pay for the debt our country runs on. If somebody buys the notes they are guaranteed that rate but who buys them, and why?  Our debt started to grow uncontrollably since about 1981 and hasn't stopped. The United States debt as of this minute is over 17.5 trillion dollars. We are certainly not alone as the total debt of the world is about ready to hit 58.5 trillion dollars.

So everybody is busted and I for one see no way of paying this debt. I keep telling you we live in an economic scenario that doesn't make sense. It is hard to believe a movie of how crazy this all is would be believable. The Fed sets interest rates so low and decides to buy their own debt because nobody else would accept such a low return on their investment. They know rates have to go lower to work our way out of this real estate bubble that just exploded. So they buy, and they buy and they buy in a program dubbed Quantitative Easing. They buy more of our debt so much it moves from Quantitative Easing 1 to Quantitative Easing 2 and they buy more debt. They continue to buy and Quantitative Easing 2 turns into Quantitative Easing 3. Years go buy and the Feds' debt grows and grows.

Then someone at the Fed starts wondering what the heck are they doing. The Fed is now the 2nd largest creditor of the United States. They have all of a sudden taken on trillions of dollars of our debt. More than China, more than Japan, more than anyone except our own Social Security trust fund (that is a another story). They say we better stop buying this junk or we are going to go broke.

So they stop, or at least start putting on the brakes. They slice 10 billion off their monthly purchases of United States debt, then another 10 billion, and then another 10 billion and another 10 billion. But interest rates go down further with each cut. Somebody help me understand this. Who is buying the debt now that the Fed decided they better pull back? Why did the Fed start buying if somebody else would? Why haven't rates shot up like a rocket? What is going on?

I have contended that interest rates cannot go much higher. Today, the average overnight rate on a 30 year conforming loan sits at 4.21% up 4 basis points for the second straight week. Big deal. Can they really go much higher? Each point the interest rate goes higher creates an additional 175.5 billion annual dollar debt payment for the United States. If they go up 3 points that is over 525 billion. If they go up to 18% where they stood when I bought my first home that is over 3 trillion dollars a year in additional debt payments. We cannot balance a budget without these costs; not even close.

So our debt will grow and grow and grow. 17 trillion will soon be 18 trillion. Then 20 trillion and on and on and on. Can somebody explain this to me? Only half of America pays taxes now. How much more can they pay as the debt continues to climb. Doesn't this debt bubble have to burst? Please somebody help me understand? Anybody? Please?

Always interesting, always fun......

Tom Priester
Principal Broker

Paradise Sharks Real Estate