Rising Interest Rates on Long Term Government Bonds Will Stall Our Economic Recovery

Originally submitted at rising interest rates on long term government bonds.

Few Americans are concerned about rising interest rates on long-term government bonds.

But chances are that these rising rates could nip any economic recovery in the bud before it ever gets started.

I can hear you now. “I don’t plan on buying any long-term government bonds. What do rising interest rates on these bonds have to do with me?”

The answer is “a lot!!”

For years, our federal government has spent well beyond its means. It has spent more than the revenue it has received resulting in large budget deficits. There have only been a few years in our recent history where we have had a balanced budget.

Rising Interest rates on long-term government bonds have gone from 2.1% in January this year to 4.26% in early November. How does this affect you?

The rising interest rates are causing significant increases in rates for fixed rate mortgages, auto loans, credit cards, student loans, commercial loans, and other debt. These rising rates will stop any attempted recovery of a fragile economy in its tracks. 

Fixed rate mortgages are often tied to long-term government instruments. Mortgage interest rates went from a record low of less than 4% a few months ago to more than 5% today.

The Federal Reserve has tried to keep mortgage interest rates low by buying long-term government bonds and mortgage-backed securities. However, mortgage interest rates have actually increased since the Fed started this program in March.

As a result, mortgage refinancing has dropped 70% since peaking in April this year.

Probably most corporate professionals, as well as astute investors, are aware of the consequences of these rising rates.

What is causing these rising interest rates?

The government must borrow money to cover its huge budget deficits – to cover all the money we are spending in excess of our revenues. The deficit was over 1.4 trillion for this past year alone. This represents over 13% of our Gross Domestic Product (our country’s total revenue for the year).

The only times in history that our budget deficit has exceeded 10% of GDP were during major wars – the Civil War, World War I, and World War II. Each time the borrowing began and ended quickly.

Keep in mind, the cost of the wars in Iraq and Afghanistan represent only a very small percentage of the current deficit.

In addition, the federal government has assumed the obligations for over $14 trillion in debt to bail out banks, insurers (including AIG), automobile companies, mortgage holders, etc.

When you add spending on government health care and other programs, the deficits will be far worse.

The only way the government has to pay off these deficits is to borrow money or raise taxes.

Right now, well over 50% of our borrowing is from foreign countries – primarily China, Japan, and Europe.

These countries are now starting to balk at buying our long-term bonds because of our wild spending policies and resulting deficits. The only way to convince them to buy our debt is to raise the interest rates we pay them. These rates will continue to rise as we borrow more.

As these rates go up, rates on all other consumer loans, including mortgages, will go up as well. Corporations will also find it more expensive to borrow. This will be a crushing blow to our economy.

President Obama and his administration are optimistic about the economy. They feel that their programs are working.

I feel just the opposite. Although the government is throwing a massive amount of money at the problems in our economy, these same actions will result in stalling our economic recovery.

It’s true that with all the money they are spending, it must have a short term positive impact in the economy. But when we eventually start seeing this significant rise in interest rates, our economy will come to a grinding halt.

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Scott Hubbard has retired from 25 years as a Chief Financial Officer in corporate America.  He now teaches corporate professionals and network marketers how to start a successful internet marketing business. 

You can reach him toll-free at 877-878-4036 or by email at Scott@ScottHubbard-Consulting.com.  He promotes a simple, fun, moderately-priced travel business opportunity.