Economy: Austerity Policy Leads To Lower Interest Rates

(Drivebycuriosity) - Economists are puzzled: Interest rates for government bonds are falling (bespoke). The pundits had expected rising rates, because:
1. The US economy is getting stronger what usually leads to higher interest rates
2. The Federal Reserve started tapering and is buying less government bonds (exit from QE3).

I suppose that the falling interest rates are a response to the austerity policy of the US government. Austerity means that the government spends less money. Uncle Sam needs less loans to finance the expenses and the public debt is shrinking. Therefore the government is issuing less government bonds (treasuries) to finance its spending. The shrinking supply of government bonds raises the prices for government bonds which is equivalent to falling interest rates.

There is another interpretation for this phenomena: Interest rates are the prices for loans. As always the price is determined by supply and demand. The demand for loans is shrinking because the US government (the largest debtor of the world) needs less money to spend. Therefore the price (interest rate) is falling. 

This throws a new light on the Fed´s tapering: They are buying less government bonds because the supply of these assets is shrinking.  Therefore less bond buying by the Fed doesn`t necessarily cause rising interest rates.

Thus the austerity turns to be positive for the US economy because the interest rates for loans other than treasuries are also falling (less competition from government bonds). For instance mortgage rates also are sinking - against the forecasst - which is good for house buyers and should stimulate the market for homes further and encourage constructing (chicagotribune). The low interest rates are positive for the whole economy.