Thursday, February 12, 2009

Money Supply, Mortgage Rates, Inflation

Recent data suggest that the mortgage market is a little skittish...well, it should be. In the cited article, note the following:

"We're going to continue to see volatility in mortgage rates between 5% and 6%. There's a tug of war between the Fed and the Treasury trying to push rates lower, and the volume of government debt issuances that pushes rates higher," McBride said. (my emphasis added)
...well, duh... $1 trillion in new debt, with over $500 billion in the next several months. Somebody PLEASE tell me the Obama administration is anticipating rates having to increase in order to entice investors to Treasuries. Meanwhile...

Does anyone see anything wrong with this picture? The growth in M1 (available money supply) looks like someone lit off a bottle rocket. Can anyone say a closed room with gasoline vapors waiting for a match. In this case, the match is money velocity (the rate at which money turns over in the economy). At this point, no one is spending...but Katie bar the door when they decide to start...I wonder if the Fed can draw down M1 fast enough to avoid double-digit inflation???