While the Fed has pumped trillions into private banks via QE, banks have been loath to lend. While partly due to the rebuilding of bank capital and changing federal regulations, it’s also due to low rates. Making fixed rate loans makes no sense because as rates rise, loan values fall. Variable rate loans are also unappealing because when rates reset at a higher rate, borrowers have higher chances of defaulting.
Tag Archives: Low interest rates
Money in my Pocket
Total debt service payments as percentage of disposable income have fallen from a peak of 14.1% in 7/07 to just 10.6% today, a level last seen in 10/93; a decline of 25%. This is due to a combination of low interest rates, rising disposable income, and lots of mortgage defaults, which have reduced household debt from 100% of GDP in 4/09 to just 86% now.
Hooked on Stimulus
On 6/30/12 the weak economic recovery we’re experiencing will be three years old. Yet, absent microscopic interest rates and huge budget deficits there would be no recovery. Simply put, we’re hooked on cheap money and big spending and aren’t yet in a self sustaining recovery (SSR). Worse, the average post WWII recovery lasts 48 months. My fear is we don’t get to an SSR before the next recession hits.
Poor Granny
To put the absolutely dismal interest rates we are getting on savings into perspective think of it this way. The highest yielding 1-yr CD pays 1%. At that rate, it takes 70 years to double your money. By contrast at 5% it takes only 14 years. And, at 10%, it takes just 7 glorious years. Because rates are so low, investors speculate in gold, oil, copper, and other commodities while interest poor granny sits alone in the dark.
Can I Interest you?
While low interest rates are designed to encourage consumers and businesses to borrow and invest (with little success) the policy has hurt millions of older and retired persons. With money market funds paying 0.10%, 5-yr Treasuries paying 1.0% and 10-yr Treasuries paying 2.0%, interest income has drastically fallen. These folks now eat out less, buy less and with inflation at 3.6% are seeing their real incomes rapidly decline.
Winners and Losers
Because Quantitative Easing Two (QE2), which is soon ending, forced interest rates down to record lows, stocks and commodities soared as investors’ searched for better returns than those available on Treasuries. US exporters also enjoyed the lift they received from the weak dollar. But, seniors were pounded as their savings have been earning virtually nothing. Granny can’t wait for QE2 to end.
Weak Growth, Low Rates
The output gap, the difference between what GDP is and what it could be, at 5.2% has never been this large this late in an economic recovery. Usually the gap has completely disappeared by the 2nd anniversary of the expansion which is why interest rates usually rise at that point. And, this is precisely why this time around the Fed is not going to tighten any time soon.