“Another artificial factor stimulating investors’ demand for U.S. debt is the lack of alternatives. Because of Europe’s problems, investors there are limited in their choices of finding safe government-backed securities. In other words, interest rates on U.S. debt remain low because we are the best-looking horse in the glue factory.”

“Eventually Europe will solve its problems, or another country’s debt may unexpectedly emerge as a more attractive investment than U.S. Treasury obligations. Understanding that our budget deficits and national debt are on an unsustainable path, bond investors will put their money elsewhere. The fundamentals of our fiscal health do not support the low interest rates bond investors are now paying. Just as the poor credit quality of securitized mortgages did not support the high values assigned to mortgage-backed securities before the crisis, the poor credit quality of our overleveraged government does not support low U.S. bond yields.

When investors do eventually turn to safer alternatives, interest rates will skyrocket, with devastating consequences for our financial system and our economy. Just about every interest rate on every financial credit product offered in the U.S. is influenced by the rate the U.S. Treasury pays on its debt. Banks and other financial institutions will have to start paying higher interest rates on their deposits and other borrowings to fund themselves, even though the loans they have on their balance sheets are paying lower rates

Excerpt From: Bair, Sheila. “Bull by the Horns.” Free Press. iBooks.

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HKO

American interest rates are low and our treasury securities are in demand not because we are great but because we are the best of many bad options. We remain vulnerable to others that may get their act together faster than us.

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