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21
Nov

Interest Rates: High or Low? Which is better? This Remains The Key Question.

Posted by on in Current Events

We have been hearing about the coming change in policy by the Federal Reserve. It is commonly referred to as The Fed but its official name is The Board of Governors of the Federal Reserve System. Most people think that interest rates will rise as a result of the Fed’s meetings sometime early in 2014. We've seen some rates shoot up 1% very quickly since the chatter escalated last May but subsequently things settled down for a while. The Federal Reserve has been artificially keeps rates down by buying bonds on the open market. The more bonds that are purchased drives up the price of bonds and their respective yields lower. You may have heard the term quantitative easing, or QE, which refers to the Fed’s bond buying program. The question becomes why is the Federal Reserve so intent on keeping rates low?

b2ap3_thumbnail_interest-rate-dice.jpgThe theory is that if interest rates are low people will be encouraged to borrow money and spend it. The banks will be encouraged to lend money to people who will spend it. The more people spend, the more the economy grows. The more the economy grows, the higher rates will go because otherwise inflation will spiral out of control. If inflation becomes too rampant, the value of currency will fall. If the value of your currency falls, foreigners won’t want it because it is losing value. Therefore we can see that there is a delicate balance between interest rates, inflation and currency values.

Some people just dismiss the relationship between these factors as the normal result of a cause and effect situation. Let's use an example of inflation rising. Just because the rate of inflation rises doesn't automatically mean that rates should suddenly increase. What if the rate of inflation increased due to temporary shortages of certain durable goods or raw materials? This might be a short-term spike which will correct itself over time and the effects should only be limited to the respective industry. If rates were to move up quickly, the entire economy would now be affected instead of limiting it to the particular industry. Sometimes having a lower valued currency encourages outside investment which is a good thing for the economy. Again, just because the currency value goes down doesn't automatically mean that inflation is out of control.

If all these factors are interrelated, it must mean that there is an ideal and delicate balance between interest rates, inflation and currency values. If you earn more on your savings, you’ll pay more to borrow. If you earn less on your savings, you’ll pay less to borrow. Lower rates generally mean lower inflation. Higher rates generally mean higher inflation. It would seem they cancel each other out; if you earn more and pay more and earn less but pay less, they balance each other out. Not so fast! When you borrow don’t you lock in rates for a period of time? If you obtain a 30-year mortgage and choose a fixed rate, your rate will stay the same for the 30-years. This means that the timing of spending or purchases is critical to the “effect” of interest rate changes. Wouldn't there be a huge difference between locking in a mortgage at 8% versus 4%? Wouldn't a 4% mortgage buy more house than an 8% mortgage?

People always have an answer or a counter-claim. You were probably just thinking that it would be easy just to refinance when rates went back down. What if rates didn't go back down for a long period of time? You would think that it would be better to lock in rates for the long term when rates are really low. Rates have been very low for years now yet people are encouraged to lock in rates for 10 or 15 years instead of 30 years. Wouldn't it make more sense to lock in low rates for a longer period of time than a shorter one? Wouldn't it make more sense to lock in high rates for a shorter period of time than a longer one? Don’t many people end up buying high and selling low? Why do so many people do the exact opposite of what makes the most common sense?

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10
Oct

What is Washington Thinking? A Special Current Events Blogpost...

Posted by on in Current Events

It has been more than one week since the partial government shutdown began. We have not seen much movement from either side on getting the situation resolved, either for the short-term or the long-term. Several band-aids were used in order to limit the public outcry such as making sure all our military personnel get paid, the all furloughed government works would receive retroactive pay and that the families of fallen service men and women would receive immediate death benefits. Congress was able to pass these very limited bills because of the overwhelming public support but that's about as far as they have been able to go in more than 10 days.b2ap3_thumbnail_capital-dc.jpg

You might be wondering why this is able to happen so often. The answer is rather simple. We allow it to happen. That's it; plain and simple. Our country has come to a point in time where everyone is concerned mostly about the issues that concern them in the most direct way. We built this country by putting the country first. During World War II all Americans sacrificed for the good of the country and to help win the war. What exactly has any American sacrificed during the last 3 Wars except for the service men and women (and their immediate families)? Have we driven less? Have we consumed less?  Have we entertained less? Have we traveled less? Have we purchased less? Have we given more? I would say that most Americans have gone about their normal business throughout the first Gulf War, the Afghanistan War and the Iraq invasion. So Congress has responded much in the same way. Why should your Congressman worry about something that does not directly affect his/her district?

Until we, as Americans, begin to act differently our representatives will not change the way they act. They see this as the only way to survive the next election. The U.S. Senate is a more deliberate body and the Senators are more protected from everyday politics because they only face reelection every 6 years. This is only one body. The other body, the House of Representatives, is much more affected by local politics. Each member of the House is up for reelection every 2 years. By the time they get to Washington after one election it's almost time to start campaigning and raising money for the next election cycle. Senators may work together in a more bipartisan fashion but they can't pass any legislation unless the House agrees to go along. This is where you and I come into the picture. We need to convince our representatives that we send them to Washington to protect our interests as well as the interests of the American republic. We need to stop this one-issue style of governing. Yes every issue is important. We all have one issue that is incredibly important to ourselves. This shouldn't mean that we focus on that one issue and nothing else. Sometimes we need to help the other guy and put someone else first. Isn't this what we teach our children?b2ap3_thumbnail_whitehouse.jpg

This governing by the abyss is destroying the full faith and credit of the United States. We are beginning to be perceived more like a banana republic than the most successful republic in history. This needs to stop. The markets have reacted negatively to this governance because no one particularly likes uncertainty. Our elected officials can fight the good fight without threatening to destroy the full faith and credit of the United States of America. Holding the country hostage over raising the debt ceiling is beyond comprehension. Raising the debt ceiling does not involve any new spending by Congress. It allows the U.S. Treasury to borrow money to pay for the expenditures that the Congress has already passed in previous legislation should it not have enough money on hand. This is not something that should ever be debated. The debate should be happening when Congress authorizes the spending in the first place. Again, every House member and Senator has a voice during the legislative process.  Why don't they speak up? Not very many politicians want to go against their own party on major spending issues because it could cost them in their local districts. Yes, once again it all comes down to protecting our own self-interests above everyone else's. Are you surprised? You shouldn't be. We quietly rubber stamp this nonsense every day that we say nothing. Nothing will change until we change it.

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