Highly Interested In Why Rising Rates Is Just A Matter Of Time?
Efforts by the Obama administration, and more notably the federal reserve
, to revive the economy from this deep and prolonged recession have brought down interest rates on all forms of borrowing to some of the lowest levels seen in more than a half century. Low interest rates have given a needed shot in the arm to the flailing real estate market and other segments of the economy dependent on borrowing. However, with the economy now appearing to be on the mend, the fed is likely to change course and tighten, which means higher rates.More importantly, within a very few years the fiscal condition of the federal government threatens to swamp the credit markets with more federal debt, putting indefinite pressure on the economy's most vital tool for growth the cost of borrowing money. The more entities, government and private, wanting to borrow, the greater the supply of debt instruments people and governments of other nations (e.g., China and Japan) will have to absorb. That will mean the incentives to buy those instruments (interest rates) will have to rise enough to entice lenders.
There is also the question of trust. Too much debt raises the specter of default. Will those seeking to borrow be able to repay what they owe? In short, the greater the degree of borrowing in the economy, the higher interest rates will have to be. There are limits however. Those higher interest rates can choke off not only residential home buying but investment by business and industry. In effect, large government budget deficits and the gross debt they generate can stifle the future economy.
The principal culprit is the rising cost of the federal government's entitlement programs, health care (medicare and medicaid) and social security being the largest. The government's efforts of the past year to keep us from falling into a depression--as constructive as they may have been--have created the highest budget deficits in history, reaching $1.4 trillion last year. And they will remain high for a number of years as we ride the recovery.
But the cyclical ups and downs of the economy will shortly be overwhelmed by a tidal wave of aged baby boomers drawing on their government benefits. Many more people on the entitlement rolls means much larger expenditures. Absent large tax increase, an anathema to most politician, those costs will have to be covered by much more government borrowing.
Like the technology bubble of the late 1990s, and the home price bubble of the past decade, the low interest rates we see today are another artificial bubble. The wise investor, home buyer or otherwise, will grab a hold of these low rates, and the longer the term of their indebtedness, the better they are likely to fare over the long run.
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