Low rates until 2022 and Crypto Currencies...What's the connection?

Last week the Federal Reserve announced it will keep rates near ‘Zero’ until 2022. That groan you heard was from every operational staff in the country ?? As expected, they also made some strong statements designed to comfort the economy. As the recession continues it pledged to do “whatever we can, for as long as it takes”, “at least at the current pace”, and until the economy has “weathered” the negative impact ….implying more Fed buying may be coming if rates start rising.

This was expected commentary, if you want to read more about how this affects the mortgage industry, check out this article I wrote a few weeks ago: https://www.dhirubhai.net/pulse/how-much-pent-up-demand-we-looking-some-thoughts-rich-phillips

The reasons for statements like this from the Fed are obvious. Any upward movement in interest rates will put the brakes on economic recovery. Whether or not they actually are still aggressively buying in the year 2022 is yet to be seen, but the statement alone should hold the Treasury market in check. Also, adding in the term ‘near zero’ implies we should stay right about where we are now. This is because they have used that term for the current situation a number of different times. So as a loan officer your marketing plan should be built around interest rates that are going to be relatively close to where we're at now for a year or two. Lender capacity will likely dictate micro-movements in rates. 

This brings me to another topic that I mentioned in a previous email. I have always found the idea of pegging interest rates very compelling. I know a few of the Fed governors are now actively talking about it as well. The way this works is instead of vaguely talking about holding the rates near zero, they would actually pick a point for the treasuries and peg it there. Let's just say they would peg the 10 year Treasury at 75 basis points right now. The Fed could then buy and sell around that point to ensure it stayed there, and the market would have clarity. If you're going to manipulate it, you might as well be precise. Actually, what's also really interesting is that very little buying and selling actually occurs in this environment because the market self-adjust to what it knows will happen. So by simply pegging the interest rates the Fed could potentially become a little less active, because who would want to get too far on either side of that trade. This is my opinion only ?? And, frankly, it would take a deeper dive to really think that through.

And of course this also brings into the discussion about how long can we do this for, and what are the implications of artificially holding rates low for a long period of time. The answer is: The US can do this for a long period of time because our economy is that dynamic, and there is no other plausible alternative as a world currency. Nobody is close, like ‘forget about it’ not close.

In fact, we are long past the point of ever being able to actually pay the debt we hold. On paper this now stands at 20 trillion dollars, but that is not including our massively underfunded obligations to Social Security and long-term underfunded commitments to Medicare (like $20-40 trillion for both, ouch, but hey, over a longer period of time, lol). We currently bring in about $3.5 trillion a year in tax receipts, and we are currently running about a $1 trillion annual budget deficit which has been the case for about a decade and a half now. So even with massive tax increases, there is no way to get in front of the debt that we're holding and issuing. All we can do now is simply try to finance it at the lowest possible rates. Smile everyone ??

But when I say there's no plausible alternative that exists today, there is an alternative that will eventually take over as the world currency. This alternative will be in the form of a crypto currency or something of that construct. Something that is separate from individual government control, as individual governments have now turned to endless debt to finance their societies. And endless debt is a lousy proposition for investors. You will eventually see crypto become such a threat to the United States that there will be a massive reckoning of sorts where governments try to control it. Outcome is uncertain. It will play out over decades of time due to government resistance, but I believe it is inevitable. The tipping point will be when said alternative becomes functionally transactional on a global scale.

Smart capital will flee and look for un-burdened alternatives. It would be very smart for the United States to get every crypto genius in the world to live here immediately. If the world thinks there is a better alternative than the American dollar because of the debt we hold, we are all up the creek without a paddle. And no, I am NOT advising running out and buying crypto currencies today ??

Loan Officers should be busy for years, enjoy the ride. Thanks for reading everybody. Please feel free to share.

If you are not a Home Point Partner, let’s get it going! https://tpo.homepointfinancial.com/partner

Rich Phillips. Senior Account Executive. Wholesale/Correspondent Lending. Southern California.

Almost at $3 billion in career funded volume! Named one of America’s top 100 Wholesale AEs by the Scotsman Guide.

To see more of my archived articles, please visit me at www.dhirubhai.net/in/richphillipsAE