[quote=TheBreeze]By the way, I think these higher rates show that there is no way government can stop a deflationary spiral. The more they muck with the market, the higher rates are going to go and the less credit that will ultimately be available. Less credit=deflation.
Rich would argue that the government can just cut everyone a check for $10 million, but there would be a massive taxpayer revolt if that happened. Household wealth has decreased $20 trillion in two years ( http://www.atimes.com/atimes/Global_Economy/KA23Dj07.html ) and there is starting to be some serious resistance to the paltry-in-comparison $800 billion stimulus that would be spent over the next two years.
There will also probably be some additional TARPs and other things that may amount to two or three trillion overall, but there is no way that the government is going to be able to keep up with the $10 trillion/year decline in household wealth.
Deflation here we come. I for one look forward to more reasonably priced goods and services. [/quote]
If we’re in a deflationary environment, in which prices are declining, then shouldn’t bond investors require a lower coupon (that is, the spread between the coupon and the rate of inflation stays the same, all else being equal) on the debt they hold? That’s why treasuries have such low yields, right? Because prices, overall, are declining. So if you believe in future deflation, shouldn’t mortgage rates drop? I think ultimately we’re going to end up with a meaningful amount of inflation, but that’s probably a few years off. But anyone that thinks we’re going to have deflation for the foreseeable future should expect mortgage rates to decline, not rise. Given the deflationary environment that we’re in, lower mortgage rates is not a big surprise (nor is the tightening of terms and conditions).
