Interest Rates Have Nowhere to Go but Up

[Synicus Maximus]

Source: NY times

Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

Read more: http://www.nytimes.com/2010/04/11/business/economy/11rates.html

[msongs]

1. for people who worked and saved their money rising rates are great. nt

[virgogal]

2. I'm one of them. CD rates are abysmal.

[CountAllVotes]

3. misery loves company

:hug: I know what you mean - 1.3% online is the highest savings rate I've seen! :puke:

Why bother?

:kick:

[Skittles]

4. THANK YOU

[Iowa]

15. Yes, assuming they aren't invested in long/intermediate-term bonds when rates spike...

... and assuming inflation doesn't rise as fast as interest rates.

As everyone knows, when interest rates go up, existing bond prices go down. And sometimes they REALLY go down... painfully and brutally down. Furthermore, higher rates don't really help savers if inflation is rising right along with rates. In other words, interest rates are only part of the picture. The only "rate" that really matters is one's personal return after inflation and taxes.

Except for TIPS and I-Bonds (which I plan to hold long-term), I have my bond allocation in short maturities now. I expect we'll see both inflation and rising rates going forward. But who knows?

[Psephos]

16. I can't agree with that. Rising rates are inflationary. They will devalue your savings.

In 1979, mortgage rates hit 18%.

Cash was losing one and a half percent of its value EVERY MONTH.

[Iowa]

19. Not necessarily...

"Rising rates... will devalue your savings"

It depends on how you invest what you save. If you're putting cash into a safe deposit box, then yes, you will get hammered. But who would do that?

Let's take 1979 as an example. The average 6 month CD was yielding about 11% then. Inflation was roughly 13%. So the average 6 month CD holder was netting about -2% per YEAR after inflation (not negative 1.5% per MONTH). Certainly losing 2% in a year would be a poor return, but for most savers 1979 was not nearly as bad as you believe it to have been. And if one had invested in a 5 year CD back then, the yield would have been enough to keep pace with (or beat) inflation.

Furthermore, negative inflation-adjusted returns have occurred in both low inflation and high inflation years.

[safeinOhio]

5. Not that long ago

they said the same thing about home prices.

just saying.

[Roland99]

6. This is far from the same thing.

[Iowa]

18. Home prices were at all-time highs.

Interest rates are hovering near historical lows, and there are pressures building in the system that are likely to push interest rates (and inflation) up. It would make absolutely no sense to believe that interest rates will trend downward going forward because housing prices did.

[PSPS]

7. Yes, this is actually a welcome prospect

First, for those of us who saved and didn't buy things they couldn't afford, this will be welcome. As the piece says, "spending habits were shaped by a historic 30-year decline in the cost of borrowing." Add to that the complete lack of evaluating credit worthiness and you have the mix that destroyed the economy -- people living far beyond their means as if debt somehow equaled wealth. So, if rising interest rates help shake that non sequitur out of the system, that would be very welcome.

Also, although the interest rates they're talking about here aren't directly linked to mortgage rates, higher mortgage interest rates would be very welcome now. It would help the real estate market because, when buying a house, the cost is always the same. It's just a matter of how much is interest and how much is "house." Knowledgeable buyers know that higher mortgage interest rates allow far more room for negotiation.

[Lucky Luciano]

11. so...you are saying the prices of homes will go down

this does not help the housing market. It helps buyers...it does not help desperate sellers and unemployed who need to monetize their homes.

[Roland99]

8. This is a big reason why I just might be a homebuyer instead of a renter

in the next few months.

Esp. with incentives on new construction in the Orlando area from some developers. We can own for the price of renting (well, own after 20-30 years anyway)

[OnlinePoker]

14. I bought my first home thanks to the Ontario Teachers Pension Fund

In 2000, the fund bought the 200 unit building I was living in at the time, did $250k in renos (cosmetic...paint and carpeting in the hallways plus landscaping) and then jacked my rent up by $250 per month. Cheaper to buy and my mortgage was only $60 more than my original rent. 25 year mortgage with the first 5 years at 4%, it only went up to 5.4% when it was renewal time. Stay away from variable rates of any kind.

[Roland99]

20. Fixed rate all the way!

Wouldn't even do a 6-month variable! :)

[earcandle]

9. We need a rise in interest on savings, not debt.

[Aristus]

10. We're not going to get it. The corporations that run the country don't want people saving.

They want people SPENDING!

No savings interest rate bump any time soon...

[Zoeisright]

12. Well, that should end any recovery.

[madrchsod]

13. inflation?

i guess the banksters have run out of ponzi schemes so they will start raising interest rates.

tens of millions unemployed and millions facing the prospect of never regaining their previous income. the lack of a trade policy that would create permanent jobs in the usa and the bankruptcy of the states causing the lay-offs of millions of public service workers...ya "the future is so bright i have to wear shades"

[Psephos]

17. The far bigger Ponzi scheme is the government's.

No one in Washington is doing anything about deficits except to worsen them. This will not change.

The external debt (the "National Debt") is contractually obligated in fixed numbers of dollars, not a fixed amount of value. If the dollars become inflated without the government doing anything to control it, or if they are artificially inflated directly by the government (essentially, LIHOP or MIHOP), then the debt begins to evaporate.

Of course, this brings extraordinary problems of its own.