Low Interest Rates Make No Cents

The economy is doing just great. If you are retired, your savings are generating just gobs of interest–right! Figure a million dollars in the bank is generating about $10,000 a year. Remember when interest rates were about 8% and your return would be more like $80,000 a year?

If you are into buying bonds, there is no reason to buy any further out than 5 years at these interest rates. They can’t go much lower, and if they do, why even buy them? Do you want to hold a 100K 3% 30 year bond if interest rates double. Can you wait 30 years to redeem them? Or take a 50% haircut when you redeem them early.

The interest carry costs for futures are warped out of place. For a futures contract, 100 oz of gold one year out, a majority of the option cost is figured as interest on the actual amount of money tied up in the contract till delivery, plus storage fees and a volatility premium. So the commodities game right now is in play, with very low interest rates. It’s not rocket science to figure out that borrowing the money to buy gold futures is a money making proposition, the interest costs are negligible. Sounds a little like the housing boom doesn’t it?

Your health care and auto insurance companies invest the premiums received, into the financial markets to get an additional return. These returns allow them to reduce premiums charged on policies. This nice little cost cutter has gone to hell.

Retirement plans like CalPERS have assumed that the return on investment would be around 8.5%%. Guess what, it is not even close. Figure 100% of all state government plans are in some form of denial, “This can’t be happening.” If they were marked to market and held to realistic return rates, a lot more money would have to be ponied up by the states. Naturally the legislatures hope that this problem will just go away given enough time—Translation: After they are dead and gone.

Real Estate loans, you want to buy a home? Fannie and Freddie still offer nothing down loans at competitive low interest rates. If your credit rating isn’t up to par, that will not stop you from getting the loan. The aggravating thing, is that if the government got out of real estate financing, the sale prices would be a hell of a lot lower than what Fannie and Freddie are offering with government financing. To compound matters, there is no one out there to buy 30 year paper at these interest rates. By no one, I mean the banks, investment firms, and anything else you can think of. This is why Mr. Bernanke has decided to go with a 40 billion dollar a month re-purchase of mortgage securities.

The question has to be asked, who really benefits? The government can still borrow at ridiculously low rates. The interest on the national debt remains lower than normal, and Congress can spend more than it takes in in taxes and kick this can further down the road.

The big thing to understand here is that the current interest rate keeps the government debt manageable. Plus it facilitates the borrowing of more money. Why not borrow instead of tax the constituents? The concept of borrowing and putting it on the national debt has no real tie to the world most people live in. The national debt is just a place where we park debt we have no plans of ever repaying.

Americans are led to believe that the Arab crisis is the reason for the doubling of gasoline prices, when in reality; it is due to the massive printing of dollars. The US government is going to tax everyone with a savings account 50%. You have the same amount of dollars in the bank, but it only buys half as much. Bank depositors need to ask one question, why keep your money in the bank at these rates, where is the reward?

Our government has borrowed 17 trillion dollars. As long as interest rates are artificially low Congress will have no problems, but the minute they rise, we as a nation are in serious trouble. The funny thing is, the money they borrowed, was from people preparing for retirement, the silver foxes were going to live off of the interest. It’s a little like having retirees stand on a chair with a rope around their necks. They bought the rope and the chair and now the government wants the chair. Their savings were their lifeline to comfort in retirement. But by God, the government will not fiddle with your Social Security, all $1,200 a month of it. They are going to fiddle with the million you have in the bank. You’ll now get $800 instead of the $6,600 a month in interest; you had counted on for your golden years.

Ben has to buy all paper presented in order to keep interest rates low. If he doesn’t, you’ll get more interest on your savings, and we can’t have that, can we? Risk has been taken out of the financial markets. Government guarantees for everyone, drinks on the house. What ever happen to plain old common sense?

Romney says he’ll replace Ben if elected, so we do know when the party ends— November 6th. At that point the movie is over and reality sets in—Got Food Stamps? Looking on the bright side, the Sunday paper is now cheaper than a roll of toilet paper and goes further if cut right.