E Good Portion Of The Wealth Transfer Were In Risk Free Bonds

If you have been reading my recent articles for TalkMarkets, you will know that I have been showing readers the history of inflation in the United States measured by the Consumer Price Index (CPI) over the past 101 years. And if you have read those articles, you would understand why I say that the last 35-year history of inflation in the United States is different than any other period in history and that we are now living in a “new world economy”, driven by “unparalleled technological advances”, “enhanced productivity increases”, and “globalization”—all driven by the United States of America.

Based upon these rather recent developments in our economic history, I thought it would be worthwhile now to begin showing you what this means in terms of bond rates—focusing today on long-term “risk-free” bond rates—measured by the average annual 30-year fixed mortgage rate.

Why? Well, first, mortgage debt in the United States is significant, affecting both the U.S. economy and investment and middle class income. Secondly, financial theory says that “risk-free interest rates” should track well with inflation with a slight adjustment for variant uncertainty. Thirdly, I want to show you how long it took our esteemed economists at the Federal Reserve to finally recognize this “new world economy”. And fourthly, I want to explain what this “lagging recognition” meant in terms of transfer of wealth. I will deal with other “risk free” rates, such as the 10-year Treasury and 1-year Treasury in future articles.

Oh, and if any of my readers question whether U.S. mortgage rate bonds or securities are “risk-free”, then I just have to laugh. Trust me, they are—at least those issued by Fannie, Freddie, Ginnie, and any other organization that survived our latest financial crisis, which includes the “Big Four” banks.

Now with that said, the following graph plots the 30-year running average of inflation measured by the CPI and the average annual 30-year mortgage rate as recorded by Freddie Mac—the agency who submits these numbers to the Federal Reserve for evaluation.