Interest Rates: Why They Have to Rise

Interest rates are rising in the U.S. due to out-of-control government spending, debt and borrowing.A company would have been bankrupt years ago if it was run like the U.S. government. Why do I say that? Because companies cannot go on forever just borrowing money while losing money on operations! But that is exactly what our governments do.

What has conservatives like me fuming is the request by the U.S. Treasury (again) to have the U.S. Congress raise the amount of money the U.S. can borrow. In February of 2010, Congress increased the limit the U.S. can borrow to $14.29 trillion. We are approximately 300 million dollars away from that limit.

The U.S. Treasury Department wants Congress to raise that limit again, or otherwise the U.S. would default on its debt and the consequences would be “catastrophic.”

If you have five minutes, you really need to read the letter from the secretary of the Treasury, Timothy Geithner, to majority leader of the U.S. Senate, Harry Reid. You can see it here: http://www.treasury.gov/connect/blog/Documents/Letter.pdf.

The letter is scary. It says that if the U.S. government cannot borrow more money, increase its lending limit, the U.S. government would default on many of its obligations.

There is no doubt in my mind that Congress will give in like it always does and increase the limit to which the U.S. government can borrow money. After World War I, Congress imposed a limit on the amount of money the government can borrow. Each year since, the serving President has asked Congress to increase that limit and each year Congress has obliged.

But, as the years have passed, the debt the U.S. has accumulated and the amount of money it borrows has simply ballooned and ballooned to the point the U.S. owes $14.0 trillion and needs to borrow more to stay afloat.

When will the madness of borrowing money like drunken sailors end? It will end when foreigners no longer want to finance our debt.

The numbers are hard to digest. The U.S. government spends over $1.0 billion a day just on interest payments on its debt, while spending $100 billion to $125 billion a month more than it takes in. By the White House’s own estimate, the total debt of the U.S. government will be $20.0 trillion by the end of this decade.

The only way I see for the spiraling debt to continue its rising trend is with higher interest rates. The long-term 10-year U.S. Treasuries are up from a yield of 2.4% in October of 2010 to 3.32% this morning—long-term rates are rising.

Congress just needs to tell the U.S. Treasury, NO. No more increasing the limit up to which the U.S. can borrow. Instead of spending more, which means borrowing more, cut government spending.

Last year, federal government spending accounted for 24% of U.S. GDP, the most since World War II. Oh, but if those politicians ever said NO, they would never get re-elected! So the fantasy of spending money we don’t have continues.

Michael’s Personal Notes:

One of the biggest problems facing America today has to do with local municipal governments and state governments that are close to bankruptcy.

The fear is that these smaller governments will ask the Fed for a bailout, but Fed chief Ben Bernanke made it clear last week that the Federal Reserve can only legally buy municipal debt with maturities of six months or less and that are backed by tax or some other form of assured revenue. Hence, the Fed can only buy about two percent of the total $2.9-trillion municipal debt market.

Five municipalities in the U.S. went bankrupt in 2010. There is growing concern that deficit-laden municipalities and states will not be able to roll over their debt this year. We all know that California is upside-down big-time in respect to what it spends and what it takes in. Many states and local governments are in the same position.

A total of $2.9 trillion in “muni” debt (as it is referred to) is a lot of money for local governments to refinance. Any hiccup in the U.S. economic recovery and the muni bond market will be in big trouble—I’m not ruling out a major U.S. state filing for bankruptcy in 2011 if the government doesn’t offer state government bailouts.

Where the Market Stands; Where it’s Headed:

While I’m turning bearish on stocks early in 2011, I still believe the bear market rally that started in March of 2009 has some life left in it. But let’s not kid ourselves. With investors and analysts turning bullish on stock in “herd” fashion and with long-term interest rates rising, the easy money in this bear market rally has been made.

The Dow Jones Industrial Average opens this week up just less than one percent for the year so far.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public has taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended by Michael’s advisories gained in excess of 100%.