Ever hear the expression “Everyone needs a hobby.” If one were to try and identify hobbies of the Federal government and Wall Street, (Oh, the possibilities!) one could do worse than identify the practice of sowing myths among the unsuspecting and gullible public.
One such myth was that home prices will never crash on a national basis. Anybody remember how that turned out? Another is that municipal bonds are a foolproof investment. Try telling that to bond holders in Detroit or Stockton.
One of the most enduring myths is that overseas and otherwise foreign entities have no other option than to buy up and support the U.S. debt, ie Treasuries. In June of 2013, the U.S. Treasury recorded that of the $40.8 billion of foreign selling of Treasuries, $40 billion was attributed to Japan and China. These two countries are among our biggest foreign creditors, in which China takes the top spot with $1.27 billion and Japan not far behind with $1.08.
Each month the Fed is buying $45 billion of our own government bonds. If this were not the case, foreign and domestic investors would demand a much higher rate of return. We should all be troubled with the government debt totaling 107 percent of our gross domestic product which amounts to a record $17 trillion.
Without the artificially repressed interest rates, the free market would take over and the borrowing costs would be nearer 7 percent on the 10-year note. The only rational one would have to purchase Treasuries is the notion that our central bank will always be there to push prices up and yields down.
In the past the overnight interbank lending rate has averaged over 5 percent for decades. For the last five years the Fed funds rate has been near zero percent and the long term rates have been forced lower by four doses of massive quantitative easing.
The Quantitative Easing myth was sold as a way to make things better and keep long-term rates low, so it shouldn’t come as a surprise to anyone that its tapering would propel rates higher on the long end. That is like the drug dealer telling the addict that as long as he takes the drug things will feel better, never mind the cost.
When the Fed stops buying Treasuries, it will send a huge signal to foreign and domestic investors as well. This will translate into a time when no one will want to buy Treasuries unless prices dive first and rates rise which will be a huge impact on currencies, equity prices, real estate values and economies around the planet. As we can see, myths have consequences.
The other side of the myth-legend spectrum is the province of gold, where the worth of gold has been legendary for over 5,000 years. We at ITM Trading are well versed in the history and benefits of buying gold coins and would welcome the occasion to share the merits of owning precious metals. Feel free to call us on our toll-free number 1 888 OWN GOLD (1 888 696 4653).