There's a place where the light won't find you
Holding hands while the walls come tumbling down
When they do
I'll be right behind you
--Tears for Fears
Carolinie Baum is essentially describing our duration mismatch problem. We're financing long term obligations with short term debt. We've been doing this because of the artificially low short term rates which lowers the cost of borrowing.
The risk is that short rates rise when we have to refinance. This would be like financing a 30 year mortgage one year at a time using near term interest rates.
Should this happen at the US sovereign level, then interest expense explodes higher--assuming that the bond markets even are open to us at that point...
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Hence, Operation Twist.
This is a plan to purchase bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years, thereby extending the average maturity of the Fed's own portfolio.
This was originally tried in 1961 and believed to be named after the popular dance of the times.
The Fed has been dancing ever since....
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