If you’ve paid any attention to the news lately you know United States Treasury and mortgage rates are currently at historic lows. The main stream financial media would have us believe these low rates are the work of Federal Reserve policy, and while Fed policy certainly plays a part, I believe the greater cause of our low rate environment are events unfolding in Europe.
The Euro monetary system is under a great deal of strain and this raises doubts about the viability and future of the Euro monetary union, and Euro monetary unit. There’s been talk of Greece and Spain returning to their pre-Euro monetary units, the Drachma and Peseta, as this would give them the ability to print and devalue, as opposed to having to borrow Euros from the European central bank (and go deeper into debt), to make up for their deficits. As a result of this doubt and uncertainty money is fleeing Europe for the relative safety of the United States Dollar, and Dollar denominated bonds, ie United States Treasuries and mortgage-backed securities, and as long as there is trouble over in Europe, the Dollar, Treasuries, and mortgage-backed securities should remain well bid.
Think of it this way, if you had big money in a Greek or Spanish bank would you feel safe leaving it there, or would you seek to move it before your account was frozen and re-denominated into a devalued currency?
It’s really a continental bank run but with a modern twist, instead of depositors lining up at the teller window to withdraw their funds, its computerized now. Just imagine all those electronic 1’s and 0’s, streaming across the Atlantic, seeking safe haven.
Our modern money…