Tuesday, April 13, 2010

Back to Reality on Interest rates

It was inevitable that news will come out stating that the end of era of cheap credit is coming. But the point here is that the interest rates which were somewhat stabilized (or artificially kept low ) by the Fed with its mortgage rate subsidy and almost zero short term interest rates will not be seen by us for a very long time (bar some very unusual events).

This is due to the increasing amount of debt that the Federal Government has taken upon itself and also the fear by the Fed that too low an interest rate when the economic indicators are stating that the recovery is on its way will invite inflation which is their number one enemy. The housing recovery has not yet started in earnest and the mortgages have started to rise, which may mean slow housing recovery, but more importantly the economy recovery is not generating much job which is the key engine of growth in any economy. If the jobs are not there or if there is low confidence of gaining and keeping employment than how it should be expected that people will buy houses even if the rates are low. People buy houses because they have jobs even if the rates are high. Even when the rates on mortgages were low, people were short selling or foreclosing their houses since they did not have the means to pay for their mortgages.

So if the rates are going to rise (which it will certainly) then all the interest rates on all types of debt will rise making it even more difficult for people even with jobs to buy and hold onto their cars and houses.

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