Badtux lists three possible reasons:
1) Inflation expectations are setting in, which is good, because it will force folks to take money out of the mattress and start lending it or otherwise making use of it. (If a dollar in 5 years will be worth less than a dollar today, you should either spend it or invest it in something which lets it at least keep its value.)
2) Deflation means there isn’t enough money to buy treasuries because people are hiding it in their matresses or overseas.
3) The deficit’s so big it’s eating up all the money, and therefore higher interest rates are necessary.
Commenter Jay adds a fourth, the Chinese have made decisions which have reduced the demand for treasuries.
I’ll add a fifth: foreign investors fear that the dollar is overvalued and will decline. Any decline in the dollar, if you need your money in another currency eventually, is a loss. When interest rates are very low, it wouldn’t take much of a decline for you to fall into a loss position, and the entire point of buying treasuries is safety.
Which is it? Badtux thinks some of 1 and 2, with a bit of 3. I don’t see why not some of all 5. Unlike Badtux, who thinks that if #2 is the case the Fed should just buy more treasuries, I’m less sure that’s the correct response, because all this printing money (which is what that amounts to) is making me really twitchy.
Why? Because I think that all this money is
a) going to have to be paid back eventually, and that paying it back is going to depress standards of livings for much longer than people think, because I don’t believe that this money has led to any realy likelihood of significant real increases in real world (as opposed to fantasy financial world) productivity.
b) I do think there’s a real possibility of inflation, and while as Badtux notes, a little inflation is a good thing, it’s not clear to me that it’ll be contained. Of course, if it isn’t contained, #1 becomes less of a problem, since the debts will be inflated away, but serious inflation isn’t something to be laughed at, less because of the economic consequences (which are bad enough) than because of the political consequences (which are almost always a very rightward political swing.)
For the record, I’m sticking to my prediction of riptide inflation – some sectors deflating (such as wages, which is now evident but which was obvious months ago) and others inflating (like oil).
In any case, go read Badtux’s article, he’s got more good stuff there.
senecal
Higher T-bill interest rates clearly indicates there’s a shortage of buyers; they can’t sell the quantities they need to at lower rates.
Does that mean inflation is coming? I dont think so. 3% is not much protection against real inflation, which might add up to 100% over a ten year period.
In fact, in so far as Treasury rates affect other borrowing rates in the economy, higher rates now should lead to further contraction of the economy, or Deflation.
Ten Bears
“FOREIGN INVESTORS fear that the dollar is overvalued and will decline” ??
Ian, the sun is shining down here on The Oregon High Desert, and while that is in fact ordinary here on the white bread side of the mountains most “ordinary” folks around here fear that the dollar is overvalued and will decline, and that ain’t ordinary. And they ain’t blamin’ Obama, and that ain’t ordinary!
I want to agree with BadTux but in the best of worlds I think it more the likely all five, barring, of course, an overwhelming Coriolis of it all joining the plastic dumped twixt here and Hawii.