The financial world is back on a familiar precipice: A giant global-regional economy is on a cusp, all waiting to see if its government will intervene. This time it ain’t us — it’s Europe, again — the shock waves for the moment beneficial to the U.S.

Mortgages are on their 2014 lows, near 4 percent, taken down by the U.S. 10-year T-note now 2.31 percent, itself taken down by a new low on the German 10-year, 0.845 percent. One more inch down and long-term U.S. rates can fall another quarter-point quickly. Not a prediction, but a middling probability.

The immediate push toward this edge has been a new European recession, this time including Germany. Euro foolishness has been clear for several years, poor-productivity nations bolted to the uber-productive German hive and its Deutsche-gelt standard.

The others so love having German money in their wallets that they’ll tolerate 50 percent youth unemployment and German demands to adopt German behavior.

In return, Germany has done everything possible to ruin the experiment: It runs a trade surplus more than 6 percent of GDP (double the treaty maximum), and has this year balanced its budget.

Lou Barnes explains how eurozone troubles can affect U.S. mortgage rates.

Each time Europe has reached a breaking point, the European Central Bank has intervened by jawbone. First a run on non-German banks, then the moon shot of non-German sovereign yields — each time the ECB has threatened to bury anyone trading against it. But the Germans have not allowed the ECB to do anything, especially a Fed-like QE operation.

Each of the prior ECB jawbones has produced global financial relaxation, just like each QE here — rates up, stocks up. This time the ECB’s problem is not a run, it is the fundamental cracking of the European economy.

The Germans in epic rigidity have failed to see that a net-export surplus to others in the same currency will wreck their ability to buy. Germany has allowed the ECB’s rapid devaluation of the euro, a benefit to German exports to non-euro buyers, but within the euro zone a euro is a euro. And so it has come to pass: Germany’s GDP is going negative, its exports failing.

Back to the interest-rate brink: If Germany allows the European Central Bank to take dramatic action or adopts equally dramatic deficit spending, then global markets will quiet, rates back up. Most likely Europe will announce timid measures that will buy time but not stop deflation, and we’ll be back in this soup in months or a year.

Here in the U.S., the world’s best economy, we can enjoy black humor. The events above have put the U.S. Fed in a state of cognitive dissonance. We have to raise the cost of money from zero, and we’re probably late to do it.

Every time we talk about doing something mean, like going all the way to 1 percent in a year or two, the stock market faints. Every time we say we may hold off, stocks take off again. Can’t have the stock market trading on us.

The unemployment rate has fallen faster and farther than ever occurred to us. Only a little more than a year ago we said 6.5 percent would trigger action. New claims for unemployment insurance have reached a 40-year low. Must mean overheating and wages and inflation are nearby. Right?

Housing is soggy at best. Credit card debt is falling. Car sales are propped by subprime loans that are really instant-cancel leases. Wages are not growing at all.

The gap between U.S. performance and the outside world has never been greater — not since World War II. Not after the war, in it. Prices of imported goods fell a half-percent just last month. Commodity prices have tanked. U.S. inflation is going down, not up.

Sensible Fed speakers now sound nuts. Five years ago, the cost of money at zero, the Fed began to reassure markets by saying it would stay there “a considerable period.” Fed Vice Chair Stanley Fischer this week defined the period as “two months to one year” — shorter than anyone in the markets ever believed, and contradicting the whole “considerable” concept.

New York Fed President William Dudley has been the most lucid in the last month, hinting repeatedly that the Fed would be slower to hike than its mid-2015 estimates, but this week said that frame was reasonable.

Watch Europe for now, not this sit-and-shake Fed. If Europe does not save itself, our Fed can be right back in deflation-fighting.

Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.

Show Comments Hide Comments
Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Success!
Thank you for subscribing to Morning Headlines.
Back to top
Only 3 days left to register for Inman Connect Las Vegas before prices go up! Don't miss the premier event for real estate pros.Register Now ×
Limited Time Offer: Get 1 year of Inman Select for $199SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription
×