What Rising Bond Rates Mean to Jeremy Siegel
In an Op-ed in the December 14th Wall Street Journal, Jeremy Siegel states that rising interest rates on the 10-year and 30-year treasuries are a sign of economic growth. He also says that the rising rates show that the Fed's "quantitative easing" policies are working.
Then, in notes released by the Fed from their recent December meeting, the same point is made. Of course, they had some 'splainin' to do since they originally said their quantitative easing (aka QE2) was going to drive longer bond interest rates down.
I understand that you can make the case that when economic activity heats up, rates go up. But didn't the Fed say that they were buying treasuries in the open market (that's what they mean by the mysterious name "quantitative easing") in order to keep interest rates down? And didn't they want to keep rates down so that people would find it easier to borrow? And wasn't the idea here that if companies and individuals borrowed, the money they borrowed would spur economic growth?
How spur economic growth? Well, if you borrow, it's assumed you're doing that either to buy something you don't have the cash for, or you're investing in some enterprise that you believe is worthy of investment? Or that, if you're a company, you're borrowing money to expand operations? You get the idea, right?
So if the Fed says that their quantitative easing is intended to keep rates down and rates go up, how is that a success?
Well, no matter. Siegel figures that rates going up means that there's a big surge of economic activity. People are feeling good about the economy and it's future possibilities. So they're out there borrowing money. And that borrowing will increase economic activity even more. We should be seeing economic activity literally spiking up pretty soon.
Now, maybe you're not seeing all this activity, and I'm not seeing it. But that's OK. We don't have to actually see any economic activity happening for it to be actually happening. After all, lots of stuff goes on around me that I'm unaware of. Isn't that true for you too?
But what about all those unemployed people? Shouldn't they be getting jobs - and soon? Well, we should be seeing lots of that too next year. And then lots more after that as well. And, frankly, it couldn't come a moment too soon. What with unemployment trending right back up again recently. But not to worry.
And what about all those homes in foreclosure, going into foreclosure, and those 1 in 4 Americans whose mortgages are worth more than their homes? Well, with economic activity about to spike up, you can figure that those house prices should start spiking too, right? We'll have all these employed people, making (I have to suppose) lots more money so they can afford to buy a house. And all those folks "underwater" with their mortgages won't be underwater anymore as those house prices start going up from all those people buying homes, starting next year.
And then, when the interest rates spike up on treasuries, well, we can all start buying treasuries again and get something that pays us some kind of interest we can use to buy more stuff.
Of course that might start pushing up prices, which could mean that we're getting higher inflation...er, forget what I said. It kind of spoils the fun. Let's just stick with the idea that interest rates going up means things are getting better and better. That sure sounds a lot better than inflation to me.
Then, in notes released by the Fed from their recent December meeting, the same point is made. Of course, they had some 'splainin' to do since they originally said their quantitative easing (aka QE2) was going to drive longer bond interest rates down.
I understand that you can make the case that when economic activity heats up, rates go up. But didn't the Fed say that they were buying treasuries in the open market (that's what they mean by the mysterious name "quantitative easing") in order to keep interest rates down? And didn't they want to keep rates down so that people would find it easier to borrow? And wasn't the idea here that if companies and individuals borrowed, the money they borrowed would spur economic growth?
How spur economic growth? Well, if you borrow, it's assumed you're doing that either to buy something you don't have the cash for, or you're investing in some enterprise that you believe is worthy of investment? Or that, if you're a company, you're borrowing money to expand operations? You get the idea, right?
So if the Fed says that their quantitative easing is intended to keep rates down and rates go up, how is that a success?
Well, no matter. Siegel figures that rates going up means that there's a big surge of economic activity. People are feeling good about the economy and it's future possibilities. So they're out there borrowing money. And that borrowing will increase economic activity even more. We should be seeing economic activity literally spiking up pretty soon.
Now, maybe you're not seeing all this activity, and I'm not seeing it. But that's OK. We don't have to actually see any economic activity happening for it to be actually happening. After all, lots of stuff goes on around me that I'm unaware of. Isn't that true for you too?
But what about all those unemployed people? Shouldn't they be getting jobs - and soon? Well, we should be seeing lots of that too next year. And then lots more after that as well. And, frankly, it couldn't come a moment too soon. What with unemployment trending right back up again recently. But not to worry.
And what about all those homes in foreclosure, going into foreclosure, and those 1 in 4 Americans whose mortgages are worth more than their homes? Well, with economic activity about to spike up, you can figure that those house prices should start spiking too, right? We'll have all these employed people, making (I have to suppose) lots more money so they can afford to buy a house. And all those folks "underwater" with their mortgages won't be underwater anymore as those house prices start going up from all those people buying homes, starting next year.
And then, when the interest rates spike up on treasuries, well, we can all start buying treasuries again and get something that pays us some kind of interest we can use to buy more stuff.
Of course that might start pushing up prices, which could mean that we're getting higher inflation...er, forget what I said. It kind of spoils the fun. Let's just stick with the idea that interest rates going up means things are getting better and better. That sure sounds a lot better than inflation to me.
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