View Full Version : Low interest rates and current economy
How long can interest rates stay this low? Is it really a bad thing?
We Baby Boomers were young when interest rates were high and we were borrowers. Remember the rates on our mortgages? Inflation was high too.
Now that we are depending on interest income, interest rates are near zero. But inflation is low too.
So isn't it a wash? If we were getting high interest on our CDs, wouldn't the cost of living be going up too?
I get a government pension with an automatic 3% increase per year. Right now I'm keeping pace with the cost of living. If interest rates go up, my pension loses value, but my CD interest income increases. But will stocks or bonds go down?
Don't know much about economics so I'm hoping the smart people in the room can answer these questions.
One thing that doesn't change - it's always smart to get out of debt and stay there. It's smart to be frugal. Then you can ride out almost anything.
I think's it's only a wash so long as you are bringing in new money, either through earnings or investment income. So no, it is not currently a wash, not for folks on a fixed income, in a no interest environment.
What is it that causes interest rates to be low, or high?
What is it that causes interest rates to be low, or high?
Right now, it seems that the banking system is trying to control inflation by keeping interest rates low. I mean the parties who have the power to set rates. It is skewing the results so that corporations are using cheap money to buy back shares thus driving up the price of shares. If one does not have investments in the market but in fixed instruments, it is not a wash. How many pensions that current retirees are relying upon have a built in inflation fighting factor?
Does anyone else here think the economy is being artificially propped up? What will happen when interest rates eventually rise? Will the market tank?
Does anyone else here think the economy is being artificially propped up? What will happen when interest rates eventually rise? Will the market tank?
It definitely feels that way to me most of the time but I don't know enough about economics to speculate fully.
I'm not sure if infinite growth and rampant consumerism is what we all need. It seems to be about everyone being trapped in a viscous cycle of spend lots so we get to keep working 40+ hours a week to afford all the stuff that we are supposed to be buying to keep the economy afloat. If the economy tanked couldn't we all spend less and work less? Especially in Canada where work isn't tied to health care?
Kestra - I agree. The economy can't grow forever. And you are right about us being trapped in a viscous cycle. Wouldn't it be great if we all just spent less and worked less?
Kestra - I agree. The economy can't grow forever. And you are right about us being trapped in a viscous cycle. Wouldn't it be great if we all just spent less and worked less?
I think this depends so much on where you are on the economic security spectrum. I reread your OP and saw that you have a govt pension with a 3% increase each year. So yes, you are in a much better position than many of us, but such pensions are increasingly a rarity in the US, so I don't think that spending less and working less is the answer for many of us. You are quite right about the importance of frugality and the danger of debt, but with health care costs, housing costs, food cost, etc. going up and wages completely stagnant or going down,and in the current no-interest environment--I don't think all of us spending less and working less is going to solve our problems.
I recently read an interesting book called Saved (Hewitt) and it has a lot of thoughts about money in general. According to the author, money as we know it today is fueled by debt. It is a house of cards but as long as we all agree to participate in that system, it will chug along until it vaporizes.
What is it that causes interest rates to be low, or high?
A lot of people talk as if central banks "control" interest rates through reserve requirements, quantitative easing and open market operations. I think it's more complicated than that. Ultimately, the demand for capital in the real economy has to be more important than government policy. If there's insufficient opportunity to profitably use borrowed or invested funds, rates and returns need to decline.
A lot of questions and not as many clear answers. First of all, if interest rates go up, bond fund values will decline a little. If you are in bond funds for the long haul it might not make all that much difference, as the old bonds at the lower rates will rotate out as they mature and be replaced with newer bonds at the higher rate. Stocks may already have the higher rates built into their price as the market has been anticipating higher rates for some time. At least in the short term interest rates will supposedly go up in slow small increments and it shouldn't matter too much, and it's not a good idea to swap things around anticipating some new interest rate. I think the term is timing the market, which is normally discouraged for the conservative investor.
Personally I think rising interest rates are a good thing. We've been too long in an economy where the only way to earn any sort of return on savings or even to stay ahead of inflation is to invest in stocks or other commodities and their inherent risk. There was a time not all that long ago when a person could earn a half-decent return on bank savings, government bonds, or CDs in a safer investment environment than stocks. I have some older government I-bonds that are paying the inflation rate plus a point or two in interest for example. I-bonds currently only pay the going inflation rate with no interest rate premium.
How inflation and interest rates relate is a little more complicated. There is no way interest rates can control inflation by themselves, but it is a tool that the fed uses to try to keep inflation within their target range. Cheap debt is also a tool to encourage business borrowing. Theoretically when interest rates are near zero like they have been, the tool has no ability to provide cheaper debt if the economy is not good. So rising rates not only indicate a good economy but also puts a tool back in the feds basket so they can then lower rates when if the economy turns south. At least that is traditional theory, which I am not sure I buy into.
The most important thing is to get out of debt regardless of the level of interest rates if you can afford to. I personally believe that interest rates will rise only gradually unless the price of oil goes up and stays up, unlikely because there really isn't the demand for goods in the countries which consume the most. People have to more frugal because wages are just about keeping up with prices. China has been an exception-wages have been rising rapidly but jobs are departing for south Asian countries like Bangladesh, India, Vietnam, Pakistan and Indonesia.
I recommend checking out the Vanguard Group of mutual funds as they offer a variety of bond funds with different levels of interest and risk depending on the nature of the bonds and the duration of the bonds. They are the rock bottom as far as management costs and give good customer service. I have been customer of Vanguard since the 1980's Bicyclist
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