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Economics is Not Boring!

12/31/2009

The Wall Street Journal reported today that “The Treasury sold more than $2.1 trillion in notes and bonds this year, more than in the previous two years combined, to fund a widening budget shortfall and finance programs to rescue the banking system and support the economy.”

While that sounds dire, here is the kicker: the treasury bonds and notes were extremely popular with US investors as well as those in other countries in spite of very low yields. They sold like hot cakes, providing funds for Treasury (ie the US and its taxpaying citizenry) at a very low cost. If they had NOT been successful, the Treasury would have been forced to raise the interest rates to attract buyers, and that, of course, would have meant higher interest rates for all of us on mortgages, lines of credit, and business loans. And that could have fueled inflation. So, strangely, high demand for low interest bonds and notes helped stabilize our economy.

Watch out for 2010 though. Treasury wants to sell another $2 trillion in notes and bonds in 2010, but there is competition. With the US economy stabilizing, investors are willing to take greater risks for greater rewards – such as the stock market. The Feds may have to increase interest rates to attract buyers. And increased interest rates on treasuries could mean higher interest rates at the consumer level nationwide. And inflation?

Guess which foreign countries bought the most US debt: Japan at $120 billion, followed by China at $71 billion, per the Wall Street Journal. The world benefits when the US is stable – and consuming global goods and services.

The Point? Economics is not boring (OK, I admit that I minored in Economics). It touches all of us everyday. And today’s message is: lock in low interest rates. If you can borrow at locked in low interest rates, this *may* be the time to buy big ticket items that you have been planning to purchase – cars, a second home, home improvements. If you have an ARM, it may have adjusted DOWN for 2010, which is great news. But keep your eye on mortgage rates and be prepared to lock in a rate on a fixed mortgage. Interest rates are bound to go up. And that is even better news for any of us sitting on cash — wouldn’t it be great to earn more than .073% per annum?

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