Posted by
Andrews on Sunday, May 31, 2009 6:26:22 PM
Well, it is hard to know how to read this.
The WSJ is reporting an increase in mortgage rates, which I would normally take as a positive, but there is also the very real possibility this is the first sign of a much worse trend.
Before, in "
Playing Cassandra" , I wrote how it was suicidal for the government to continue to try to keep mortgage rates low while bailing out buyers of bad mortgages. Not only did this continue the flow of bad mortgages into the economy, but the credit expansion caused by the number of new mortgages would exacerbate inflation. So, in one way, this is very good news. The rising rates will certainly lead to a decrease in both mortgages in general and especially in highly risky mortgages. And, as refinance mortgages show a continued tendency to default, as I wrote in "
More Shocking News", this is especially good, as it will likely stop the attempts at refinancing, and cause lenders to finally, sensibly, allow bad mortgage to lapse and just be liquidated. After all, if a mortgage is going to default, better to do it now rather than continue pretending it has some value.
But there is a possibility which is much more troubling. It is possible that the rise in mortgage rates is not just a sign of mortgage lenders coming to their senses and resisting federal pressures. As the rates are rising in response to an increase in long term federal bonds, this could be the first step in a general rise of interest rates. That is especially troubling as we are not even feeling the first price increases from the Obama inflation yet, however lenders are already responding to expected inflation. That means that we could, very realistically, be looking at double digit rates before a year passes and drifting into hyperinflation as I described in "
Hair of the Dog?" and "
I Should Not Watch Financial News". As I said, as we are already in an inflation caused crisis, if additional inflation does not succeed in postponing the crash, as it did in the late 90's and 2001, at the expense of the worse crisis we now face, then most likely Obama's massive spending and subsequent inflation would cause a massive rise in prices and interest, with rates racing well ahead of money supply growth.
On the plus side, if this is the first sign of a worse inflationary crisis, it bodes well for 2010 and especially 2012, not just making Democrats less popular, but also likely increasing tension between the Democrats and Obama. Even more significantly, just as in 1980, inflation has a way of making financial issues foremost in voters' minds, which could succeed in pushing the Republicans into a fiscal conservative position, whether they want to or not.
On the other hand, any Republican gains will come at the expense of the economy, which is never desirable. We can only hope that between Democrat obstruction, at least once the economy turns south again, and any Republican gains in 2010, the worst will be avoided until we can correct this mistake in 2012.
POSTSCRIPT
A list of most of my writing on inflation can be found in the postscripts to "
A Reason to be Afraid" and "
Living Large During the Good Times". My writing on money in general is best summarized in "
Monetary Issues Made Simple Part I" and "
Monetary Issues Made Simple Part II".