As inflation decelerates, the dollar continues on its steady ascendency to the throne, portending the much-feared arrival of consumer deflation.
Treasury bond (T-bond) yields, which directly affect mortgage rates, dropped-off after the Federal Reserve announced inflation has fallen to dangerously low rates, signaling the need for further intervention from the Fed in order to mitigate the risk of impending consumer deflation. [For more information of the perils of deflation, see the October 2010 first tuesday article, Deflation’s push on the real estate recovery.]
10-year Treasury note (T-note) yields, upon which fixed rates for 30-year mortgages are set at generally 1.4% higher, have dropped dramatically to 2.52%. Two-year T-note yields have fallen to record lows in October, hovering near .38% and declining.
With the core consumer price index registering a mere 0.9% for the last five months and dropping, the Fed is becoming increasingly nervous of what appears to be inevitable deflation. The Fed has pledged it will do whatever is necessary to ensure the overall health of the economy, which requires maintaining a minimum level of consumer inflation. The Fed’s actions will include the purchase of vast amounts of Treasury bonds in order to fuel the much-needed inflation by stimulating consumer lending.
first tuesday take:. The Fed has three responsibilities: distribute sufficient money into circulation, keep the labor market stable and maintain a proper level of inflation (2-3% is the time-honored target). Right now the Fed has a diminishing supply of monetary weapons to wield in the fight to attain these goals and they are left to act with the Treasury, as Congress is in rigor mortis, unable to enact the needed stimulus to directly create jobs and induce bank lending. It has thus far not been successful in controlling the rate of inflation by simply lowering interest rates. Inflation will not rise to healthy levels until consumers start spending money once again or the supply-siders lose influence.
Lenders are behaving in the same fashion as consumers — they are hoarding funds and only engaging in the lowest risk ventures possible. This means they lend to the government using zero-cost government borrowed money held in their massive cash reserves, thus eliminating virtually all risk and turning a healthy 3-4% annual return. Until now, lenders have had no motivation to lend money to a higher-risk borrower in the consumer market when they are reaping the rewards of their cozy relationship with government agencies.
The Fed’s decision to buy mega-billions of dollars worth of 30-year T-bonds to invigorate consumer spending is unprecedented in the U.S. (Japan was unsuccessful with quantitative easing in the early 2000s). When purchasing long-term T-bonds at higher prices than the banks are willing to pay, the Fed will continue lending to banks at the virtually 0% interest rate that is integral to maintaining lender solvency. They will, however, simultaneously and indirectly lower interest rates for consumers since reduced earnings on bonds will force lenders to lend to the consumer again.
What are the implications of this strategy for the real estate market? Real estate prices are now set to trend lower and will do so for some time as lenders reluctantly foreclose and declare their losses as shadow inventory is resold on the market.
Real estate prices will not stabilize by 2011 for two main reasons: lack of consumer confidence (read: hoarding) and the present unwillingness of lenders to make consumer and small business loans with 100% government guarantees. The Fed’s decision to dominate the T-bond market will force lenders to start making loans again to those on California’s Main Street. In turn, consumers will soon regain their confidence as they qualify for loans and start buying houses again. [For more information of consumer confidence in the real estate market, see the May 2010 first tuesday article, Homebuyers feel ready and willing to buy, but not financially able.]
Re: “Fed makes clear that it wants to boost inflation” from the Los Angeles Times
I can’t really explain myself why the FED didn’t start to act so agressiv earlier. Now we have to hope it isn’t to late and the us economy can be saved.
BANKS ARE ” BANK-RUPTING” AMERICA! CHANGE YOUR BANKS AND DISCOVER JUST HOW MUCH POWER YOU HAVE BEFORE IT’S TOO LATE!
WOW! I have to agree with all of the prior blogs and want to know how we, as tax payers, can stop this insanity? If “investors” have invested in the American dream…why has this turned into a nightmare for tax payers? I so agree with Kris Ingalls and we need to use “buy downs” to stimulate our economy.
Homeless people and renters do not pay property taxes, which is how communities run governments.
What would happen if we all stopped paying property taxes, State and Federal taxes? We all need to withdraw our funds from ALL banks not cooperating to lower our mortgage payments to the current “Market Values”. Investors..invest “at risk” of the marlet going up or down. Investors..take your lumps like the rest of us who were duped by the fraud of the bank’s underwriters who padded our loan applications to sell off to class A Investors in pools of assets. Take back your power and demand CHANGE NOW! Change banks!
How does this compare to Hitler’s eleminating of the Jews & desire to controll? Stand up and take back your power! United we stand..divided we FALL. Banks are GREEDY, lie, give you runaround and outsource our personal information t oforeign countries as their “out-source” TELETUBIES! GEE… why is Identy Theft so rampant? Feds solution..print more Monopoly money. TAKE BACK YOUR POWER NOW!
SNOOZE AND LOOZE AMERICANS!
HEY KURT. I agree with most of your views. Makes sense to me,
I HAVE ONE BETTER, I started to plant an orchard of citus and fruit and nut trees in my yard and my families yards, guess what, NO TAXES, NO gasoline needed.
Ilive where the underground water will keep the trees alive, I figure 3 years of watering and then they are on their own, This will feed the coming generations with out any tax or labor.
I woke up and relaized I owe $12.50 every day for my property taxes, My home is in a subdivisoin full of homes with decorative trees, I cut down some and planted orange trees.. We have no home owners assc. So if you can go to Home depot and buy 100 bucks worth of trees I think you will enjoy the freedom coming your way, BTW I planted 3 avocado trees from the pit/seed/ it takes about 4 months to sprout, takes about 2 years to get going, 5 feet or so, I have in pot I can bring inside in the freezing weather, I enjoy the citus trees green leaves in the gray days of winter, ENJOY…..ZERO RENTS ARE COMING!!!! Every foreclosure SCREAMS RENTS Are too high…..Housing will drag on for years, Look the fed is going banks money at ZERO PERCENT, now take a look at your credit card or mortgage, 9000 banks in USA cant be wrong, they are making profits somewhere. Wanna start a new bank????/ Happy Halloween
The Fed has already flooded the economy with dollars has increased the monetary base by over 100%. The problem is velocity, i.e., banks are risk adverse to lending money. Why would banks be interested in making long term loans at historically low interest rates unlikely to be seen again in a lifetime?
The problem is fiscal policy is out of control. We don’t need more “stimulus”. The only thing stimulus stimulates is government, cronyism, and private sector unemployment. Keynesian Economics is a fallacy. It has rarely if ever worked and is one of the reasons for the Great Depression being “Great”. The idea that the government can tax a dollar from one person and give the dollar to another person and somehow end up with $1.50 in GDP is a farce. That is the equivalent of trying to raise the water level in a pool by taking buckets of water from one end and pouring them in the other end. Add in the fact that the government uses a very leaky bucket and it becomes a losing proposition.
Think of it this way. The government taxes a dollar from a business with a 20% margin on sales. The dollar reduces profits by 100% of the dollar. The government then gives that dollar to person who digs holes and fills them back up again. That person then goes to the business and uses that dollar to buy a product. So in effect the business gets 20 cents of profit for the dollar of profit that was taken away. Meanwhile no meaningful productivity came from the use of the dollar in the meantime. As Say’s law of economics says, one must produce before one can consume.
Consumption does not create employment, investment does. If you don’t think so, try and start a business and see how far you get with no capital investment.
Excessive government spending signals to investors and businesses that they will have to pay more in taxes sometime in the future. Add on top of that higher healthcare costs, higher energy costs, and excessive regulations which require additional costs. All of this gives investors and businesses negative rational economic expectations of the future and discourages investment in income producing businesses that employ people. Wealth is invested in gold, land, tax-free bonds, etc. that shelter money from taxes and require no operational costs, e.g., labor, etc.
There is a reason why the 1990’s in Japan is called The Lost Decade. They tried stimulus after stimulus and all they have to show for it was being more in debt and still a stagnant economy.
Is there any news on the Equity Relief Refinance or the Principal Reduction Program??? Why isn’t there any information on applying for this help? The greeds are going to end up paying a lot more for forclosures than adjusting the principal balance of loans on homes that are underwater. Modifications are not the answer, as we have found out. We needed the principal reduced to entice us to stay in our home…not just a drop of approximately $100.00 a month and a longer loan term after over 2 yrs of paper shuffle, promises, lies, and the runaround. The “maybe’s” don’t happen and the depression of the matter is worse after the modification papers actually arrive. What a joke it is!! Our home’s equity was our retirement. Now we have absolutely nothing, oh, I take that back!!! We have a loan for payments on a home worth 1/2 the loan value!! Now isn’t that incentive to stay???? We are 7 yrs from retirement age…would anyone in their right mind keep the steak and lobster in the fat “greeds” mouth or run away to who’s knows what which couldn’t worse!! What is their problem?? At this point I don’t care what interest rate we get, just give us back something to work towards where we are! So much waste of time and energy waiting for them to play their games of who gets more before end! Level the field for gods sake. It’s people not dollars they are working with, and it is our dollars they are wasting!! God Bless America if the people can stand to keep backing this nation with the “greeds” running us into Sherwood Forrest!! Any investors willing to get the ball rolling before it is really too late to help???