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Tipping Point

April 5, 2012 – 5:03 pm

On Wednesday I wrote about Spain’s public offering of debt and that it went poorly. Interest rates are rising for their government debt. This is happening in many countries in Europe as they apparently hit the ‘tipping point’ where bond buyers no longer trust the governments to pay them back for loaning the various countries money. Usually government debt is the most secure therefore it garners the lowest interest rates.

The ‘tipping point’ is the issue. At what level of debt do we in the U.S. reach the trigger? There will be a time when the debt is so large that private lenders, those that buy debt, want a higher return to take the risk of loaning our government obscene amounts of money. We, like those countries in Europe, can attempt to keep rates low and we clearly see that effort by the Fed. However, how long can they do that? At what point will they stop that effort and what will happen when they do?

It all comes down to the ‘tipping point’. The U.S. may not be close to that point but then again no one knows or can determine what that point is. We certainly will know when it happens because interest rates will spike and if they do our government will not be able to afford the debt we carry. If that happens we will be called Greece.

It does not have to happen but the way to avoid it is a combination of higher taxes, inflation and much less spending. None of those choices are pleasant.

Good Trading
Steve Peasley

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