Are You Interested…
In interest rates?
In 2022, my dad gets a 5.9% social security payment increase which he will promptly spend on the 5.4% increase of goods that the consumer price index says we have had in the last 12 months.
In a related story, the Fed has stated that they will be tapering their bond purchases. What on earth does that mean, anyway, and why do you care?
One of the goals during the great recession was for the fed to keep interest rates low. They did this by buying bonds. Any kind of bonds: corporate bonds, junk bonds, treasury bonds, municipal bonds. They created a huge market for a variety of bonds.
Incidentally, the Fed also sets the interest cost for when banks borrow from the Fed, also known as the Fed Funds Rate. Yep, banks do have to borrow and when they do, they go to the Federal Reserve.
Why did they do this? It created an artificial demand for the bonds, keeping the rates low, which was the object. With rates low, more companies (and people) borrow, stimulating growth by expanding the cash supply.
One of the benefits was home loans dipping to 2% for 15 year loans and under 3% for 30 year loans. Crazy.
Now the government is thinking that inflation might be a thing because prices are going up; so they need to stem the flow of cash after pumping over $2.6 trillion ($2,600,000,000,000) into the economy for covid. That does NOT include the $2+ trillion that congress is kicking around now.
So they stop buying bonds, which raises rates, which reduces borrowing, which reduces spending and slows down the money supply, slowing down the demand for goods. When demand goes down, so do prices. In theory.
And they also increase the rate that they charge banks to borrow, so banks charge their borrowers (you) more, so you pay more for a loan, you borrow less and it decreases the cash in the money supply. In theory.
And inflation cools. In theory.
But what if there is a huge pile of cash you have to burn through first?
And you care because your borrowing costs will increase. You can reduce expenses all you want, but you can’t reduce your interest expense unless you pay down the loan.
The good news is that if you are in a fixed rate loan, like your house, you payment will stay the same.
For many businesses, their loans are variable rate loans and the interest rate will rise like the tide, lifting the cost of everyone’s borrowing.
That’s why you care; because as costs go up, including interest costs, those costs get passed on to you. That is reality.
That’s just a nutshell. If it were really that easy, your Econ 101 textbook would be a tri-fold pamphlet.
Heavy stuff. I will have lighter stuff next week, but I close with the following thoughts on General Colin Powell.
General Colin Powell passed away this past week. In an interview in the 90’s he offered this leadership motto: “A great leader is someone whose troops would follow him anywhere, if just out of curiosity…somebody who they’d follow just to see where the hell he’s going.” I had the pleasure of hearing General Powell speak at, of all things, a sales motivational conference. It was in the 90’s and the conference included the usual motivational speakers and was at the Anaheim Pond with about 8000 people attending. Powell was the keynote speaker and he was talking to us about the goals and objectives of America’s Promise Alliance, an organization he founded. Such was his stature, charisma and personality that at the end of his speech, all 8000 people would have followed him anywhere, no matter where the hell he was going. It was truly astounding. That man was a leader.
Until next week, be the very best leader you can possibly be, and I hope your employees will follow you anywhere, if only to see where the hell you are going. What the heck, it’s worked so far.
