“And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” — Thomas Jefferson

Spending is bad when it’s on credit and made frivolous on non-essential items. On the other side of the coin, spending is good when it’s out of savings without compromising the future. Living off credit is very, very bad and interest rates will need to go up eventually to help savers, not borrowers.

The problem is that interest rates have been manipulated by central banks in the majority of industrialized countries since about the beginning of the 20th century. Coincidentally, this is when central banks were introduced en-mass to countries around the world as a form of supposed financial stability which couldn’t be further from the truth.

Recently, we’ve seen interest rates held artificially low by countres like the US in attempts to stimulate the economy with artificially cheap money flooded into financial markets. The real problem, however, is the lack of income growth in the lower middle class in Canada and the US which used to fund a large majority of democratic countries’ governments’ budgets and economic growth. It is an un-avoidable result of our move to a service economy as the developing world takes on the manufacturing base we once had but was sent to these slave labour countries for the de-industrialization agenda proclaimed coined often as the “information economy,” and “free trade.” It’s the fault of the offshoring of jobs allowed by the likes of the World Trade Organization.

The Canadian situation is of course not the American one because the latter is done for no matter what. Their dollar will decouple from other currencies with hyper-inflation due to over-printing and this is and will be shooting up the price of gold. Looking today (as with many recently) we can confidently predict that the Canadian dollar seems to have gone up relative to all the major currencies; gold’s price in Canadian dollars is down for that reason while not as much in others (and up in some other currencies); and Canada tries to manipulate their dollar to be lower than the US dollar during their hyper-inflation, this will kill the Canadian economy and people will have to leave it (as business investors) for years.

Lower mortgage interest rates encourage borrowing for the purchase of either an existing or new home. With low rates you get a higher demand for consumer products including housing which supposedly stimulates the economy creating jobs. It is probable to think that the lower rates have done this to some extent, tut at the present time all indicators show we are still in a recession, and by increasing the interest rates (which must happen) will only make things worse. Do central bankers think that by increasing interest rates the economy will jump start or we are going to have more jobs? It is a short cut, slash and burn method akin to the closing of trade agreements with other countries.

The demand for housing and other consumer products will go down because it will cost more to own them, thus spending will drop, which means jobs will be lost (because if you don’t have the demand for the products, you don’t need to produce them). How does this make the American economy any better? It wont be any easier for people to purchase homes because even if prices drop, the increase in the interest payments will offset that. The reason for lower rates is to stimulate the so called economy in the first place for the bankers benefit. As we see from former US Federal Reserve Chairman Alan Greenspan, he is predicting another bout of double digit interest rates:

Greenspan sees double-digit rates: report

WASHINGTON (Reuters) – Former Federal Reserve Chairman Alan Greenspan said in an interview published on Monday the Fed would have to raise interest rates to double-digit levels in coming years to thwart inflation.

US lurching towards ‘debt explosion’ with long-term interest rates on course to double

Philip Aldrick Telegraph July 8, 2009

In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.

The impact would be devastating by making it punitively expensive to finance national borrowings and leading to what Tim Congdon, founder of Lombard Street Research, called a “debt explosion”. Mr Laubach’s study has implications for the UK, too, as public debt is soaring. A US crisis would have implications for the rest of the world, in any case.

There is no economy to begin with. All we have is the bankers controlling the public and the politicians going along with all of it. Add consumer stupidity to the mix and you have a huge mess that the bankers cannot control no matter how much they think they can. The central banking system is a huge problem. They don’t know the consumer and base their decisions on black and white data favourable to the bank only.

The problem is that low interest rates have artificially inflated real estate prices. People no longer look at the value of the underlying asset, they are not buying a house but buying a mortgage payment. Also the recent drop in interest rates over the last 10-15 yrs has resulted in a period of increased housing prices. People develop a false sense of security in thinking their ouse will continue to rise in value and borrow against the equity in their current home to purchase other things on credit.

A house that doubled in value from $150,000 to $300,000 in the last 10 years cannot and will not double again to 600K in the next ten years. Incomes cannot rise enough in 10 yrs to justify another doubling in value. How did they double in the last 10 yrs? They doubled because interest rates fell and peoples buyin and borrowing capacity increased. The Federal Reserve prime rate is already near zero (.25%) as opposed to 5% 10 yrs ago. There is no room for interest rates to fall further unless central bankers have hyperinflation on their minds.

In fact when interest rates rise housing prices will fall; how fast and how much will be a function of interest rates. Housing prices are a function of demand, and low interest rates have inflated demand by making housing affordable to more people in the short term.

Will we see the crazy rates of the 80’s again? Even if we do or not, a 2 or 3 point increase will have major effects on any economy. Increasing rates to 5 points where we were 10 yrs ago does not seem unreasonable. As an example, a 200,000 25 year mortgage at 5 percent yields a 1163 payment monthly. Increase that by 2.5% to 7,5% and that payment balloons to 1463 per month or 300 a month.

What can we do to stay out of trouble? Don’t borrow to your maximum capacity. If you can afford a 1500 payment at 5% which implies a 258,000 mortgage, buy a smaller house and borrow 200K max so that at a 3 % increase in rate you can still make a 1500 payment.

Related posts:

1. Canadian Interest rates set to rise in 2011: Economist As predicted by many economists like Peter Schiff, central bank interest rates around the world are beginning to rise, or are predicted to rise in a controlled manner in...
2. Interest Rates To Rise Significantly Worldwide It has been predicted by many financial analysts that the interest rates which central banks around the world set their prices at is about to swiftly move upward due...
3. Interest rates jump for credit cards “You know, it doesn’t take a rocket scientist to figure out that if you keep borrowing and borrowing in order to consume now, eventually you crash and burn,” said...
4. US Interest Rates Will Stay At Zero: Marc Faber“I think interest rates forever in the US will be at zero. By zero I mean below the rate of inflation,” Marc Faber, editor & publisher of The Gloom, Boom...
5. There will be no double dip “.. after the tumultuous and very painful times that we are likely to experience in the next few years, the West will have a sustained period of decline. All...
6. World headed for second recession, or double-dip depression “When the Great Depression started after it [market crash of 1929], it’s thought that politicians actually started the Great Depression by putting through too many rules and regulations…” —...

This entry was posted on Tuesday, January 26th, 2010 at 3:25 pm and is filed under Bankruptcy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.