Thursday, February 28, 2008


Stagflation in motion:

This chart shows what has happened to mortgage rates. You'll note that they are actually higher today than the first of the year.

If you're like me, you might think this doesn't make sense. The Fed has been "cutting interest rates" like crazy right? But here's the problem (bear with me a minute). The rates the Fed cuts are very short term rates. Long bonds (primarily the ten year treasury) are the bonds upon which mortgage interest rates are based. Those rates are set by the market and what the bond traders (the market) are telling us is that inflation is the concern and that future interest rates will have to go up to stop inflation. When traders feel that way, they don't buy long bonds which causes the "yield" (interest rate) to go up in order to attract buyers.

So, ironically, while Bernanke and crew are studiously lowering interest rates to help the housing crisis, it ain't working.

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