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Senior Advisor

I really wonder about the value

of contInued artificially low interest rates. Wouldn't a bump up in rates make people consider that investing in assets should be done now before rates go up substantially more. I do know  that the tax incentives for home buyers brought a rush of transactions before it expired.

 

Maybe a half percent or one percent increase would boost people and businesses out of their state of inertia.

27 Replies
Honored Advisor

Re: I really wonder about the value

Great point Kraft,

 

Sitting on interest rates is creating distortions.  Not just overinflated housing and grain prices.  

 

The value of things like personal savings are getting squashed.

 

 

 

 

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Senior Advisor

Re: I really wonder about the value

What do you mean by artificially low?  What do you deem an appropraite interest rate and what economic criteria do you base it on?

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Honored Advisor

Re: I really wonder about the value

Kraft will answer,

But for me,-----IMO-----

An appropriate interest rate is one that  reflects --1)the risk of the individual loan as perceived by those supplying the money.---2)the competition of borrowers to provide the best investment opportunity for the invester.

 

This function of interest rate has been riped out of the economy by government  money supply regulation.  Government is justifying this interferience in normal economic activity by calling it an economic stimulus.  Taking future public money and disbursing it at little or no cost means the loans become irresponsible and limitless,  and eventually disfunctional.

 

Money supply manipulation looks to me like the worst pyramid scheme of all.  Taking money from future citizens to pay for our present lifestyles excesses.   

 

Inflation is the only hope for paying Government debt-------flooded money supply and low interest rates guarantees Inflation-----eventually hyper-inflation.

----------------

Side note Jim,

I saw an article with an illustration comparing 1972-3 profit martins with 2010-11 today.  You probably saw it, but it made some interesting comparisons.  Profit margins were higher in 1972-3  and within three years farm profit margins were 0.----etc.---interesting.

 

http://www.agweb.com/farmjournal/article/the_bottom_line_is_growth_an_objective_or_a_result/

Senior Advisor

Re: I really wonder about the value

Will you admit that the government or the fed  is printing money with the objective to force low rates? That is not the way the market is supposed to work. Supply demand is out of the equation when the fed can create funds to manipulate the money supply.

 

Talk about government deciding winners and losers, this is the height of that effort. 1% cds may give you cheap operating capital but savers are being killed by low rates that are taxable and inflation taking more than the rest.

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Veteran Advisor

Re: I really wonder about the value

I think it is all part of the idea of sparking the economy.  With low interest rates, corporations can borrow money super cheap so they can build a new factory in Mexico more easily, and make the board members stock options go up in value.  The downside is that the retired folks, who are on SS, and have a few bucks in the bank, are seeing the money in the bank actually LOSING value, when compared to the cost of living.  I wonder if that doesn't cause a few of them to put some of their life's savings into stocks, which just pad the fatcats a bit more?  I guess it is OK as long as the stocks don't crash, and put them in more financial trouble.

On the other hand, how much worse off would the US budget be, if interest rates went up another 3-4%?  Maybe it is a scheme to make the national debt more affordable.
Either way, I'm willing to bet, the best off, will still be the best off.

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Senior Advisor

Interest Rates

My dad had a lot of money in CDs that paid from 18% to 21%.  Bought them in the 80's, as I recall.  My guess is you would like to make 18% and pay 5%.  Is that about right?  Smiley Happy

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Senior Advisor

Re: Interest Rates

No Jim. Your suggestion sounds attractive but that is not what I want. I think a 4 or 5% return to savers would be nice and not historically out of line.

 

During the period that your father enjoyed the interest rates were driven by demand and todays market is manipulated by over supply. Supply created by fed with the purpose of destroying rates.

 

Personally , I have pitifully little cash drawing interest precisely because of low ionterest rates. Most of mine is invested in real estate.

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Senior Contributor

Re: Interest Rates

The fed and the gov't has backed themselves into a corner.  They cannot afford to let interest rates rise due to the fact that over 20 percent of the tax receipts are currently being used just to service the interest on the U.S. debt.  If rates jumped to 4-5 percent on local bank CD's, this more than likely means fed rates 6-8 percent.  With this type of rate, the 20 percent of tax receipts currently being used would jump to over 40 percent just to service interest payments. 

 

Here's bacially what we have to look forward to into the unforeseeable future:  low/no growth and extremely low interest rates.  The fed and gov't is basically putting all their eggs into the basket of growth.  Their belief is we'll have to grow our way out of this fiasco growing GDP to levels where current debt doesn't look so bad.  I would have preferred the method of reducing debt, but this doesn't seem to be anyone's agenda in D.C.  It's obvious we need to both grow tax receipts as well as reduce spending, but each party wants to do one without doing the other.  This is why Greece has basically been dealt death to their economy.  They have to drastically reduce spending, but this also destroys their ability to grow. 

 

In case anyone missed it this week, it was announced that the U.S. debt to gdp finally grew to tiple digits coming in at 101%.  Interest rates are going nowhere anytime soon unless people stop buying U.S. debt eventually forcing them higher to take on the risk of buying the debt.  I read a couple of days ago that the next country to fall in Europe is Portugal.  Their 10 year treasuries traded up to 12%, and they have 14% unemployment.  I'm afraid this mess gets worse before we begin to see daylight at the end of the tunnel.

Advisor

Re: I really wonder about the value

i thought you liked big government
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