Another interest rate thought

[Wildbill]

If rates continue to be low and hence drive away a lot of investors, at what point does the US government start to crowd out the debt market? Everyone wants to increase debt right now, companies good and bad, but they have to fight off moneybags Uncle Sam who MUST place his debt. Most companies are making discretionary moves to the debt markets, Uncle Sam has no choice as long as Congress keeps plugging away. So evenutally it stands to reason that Treasury activity will drive up rates to the point where corporates will no longer find it appealing to come to the market, and that could be a quick jump almost to the point you could say it breaks resistance and then runs. Does anyone else worry about this? Once again, the only cure seems to be cut the deficit and have the Fed raise the short term rates.

One thing to look for in the future will be how much the US is affected by the current administration's Treasury department and their belief that there is no reason for the US to borrow with long-term bonds. I think that could be a mistake we pay for until we die, think about how the government could be sitting on a lot of fresh 30 year paper right now, instead it is mostly 5 and 10 year paper because of misguided people saying "well why pay an extra 1%". Yes we are lucky right now, paying very low rates. Without that the deficit would be even worse. In the future we could be a country that is generating a surplus and still not able to do much to reduce our debt. Just look at Brazil, they are at 4.5% surplus and the Debt/GDP is actually getting worse. Caused by government debt crowding out the market and by a mountain of debt that mostly has a duration of 3 years and less.

[Ray Zee]

we will see higher rates as the market is already pushing upward. as you well know it is not the govt. but the market that sets the interest rates. right now they are low and will only go up slowly. why even today consumer prices showed a decline. that will hold interest rates.
itis a big mistake for the govt. to fund such masssive debt. if they have to spend they should tax immediately. that is what would put a hold on the spending as the govt. would have to answer today for their actions.
you are right that they need to do 30 year bonds for the good of the country as they have the time to retire them if needed.
corporate debt always has to pay alot more than the bond rate so they are stuck with that. and the rates are so slow that any company can get money if they are solid. it is just that with the business uncertainty it may not be wise to go into debt more for expansion.

[Wildbill]

Few companies are getting into it for expansion actually. Many are doing it to change their capital structure or refinance old debt. Very little expansion from business is going on, they just are being opportunistic while low rates are still around. The problem will be when the rates start creeping up and defaults start to hit. The bond market will see a lot of money coming out of it and Uncle Sam will have to duke it out with the others, always having that big amortization about to hit and having to get funded.

I like your idea Ray about forcing immediate tax increases, that is purely logical and therefore will never be adopted. Better idea is to limit the length of the Congressional year. They shouldn't be in Washington more than 3 or 4 months a year, it would keep them from wasting time passing stupid laws and filling everything up with pork. If they had a short period of time they would only spend time working on the truly pressing items and they would have less time to negotiate in pieces of pork while the bill sits idly waiting its turn. If something major happens, a 9/11, then they can call a special session, but the year-round Congress has to go.