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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Vosilla who wrote (80250)	3/23/2007 2:43:27 AM
From: Broward Horne	Read Replies (2) \| Respond to of 110194

"fed must keep real inflation over 5% and the 10 year treasury under 5%" Interesting article. It's a detailed derivation of a formula I've used for many years - K = (Total Debt) X (Average Interest Rate). K is roughly a constant, the rate of economic growth. As total debt builds, the only way to maintain the credit bubble is to push down interest rates so that total interest payments stay the same (rougly equal to real economic growth). The Fed has played this game since at least 1991 and it works until the interest rate is so low that investors balk. We probably hit that point in 2003 when 30-year mortgage rates bottomed. That's why you see the rising shift to subprime from 2003 to 2006, a switch from long rates to short rates. I'd want to see a new 30-year low before betting that the Fed can continue. I think the subprime bailout will probably manifest itself directly into the inflation rate.