Saturday, August 18, 2012

Low Interest Rates Distort The Economy

We are living through a very interesting economic phenomena, you cannot underestimate the distortions being caused by the artificial low interest rates the Federal Reserve is using to combat our financial crisis. While we lack "true or real demand," we are seeing demand as being redefined, as to the idea of a mere preference at a time of over supply. Four key areas exist where the effects are being magnified and the implications are turning the economic system upside-down, this impacts all of us. These key areas are;

     * The effect on real estate prices and values, while helping to support prices by allowing people to borrow and refinance homes, low interest rates are also allowing more unneeded new construction at a time when many houses and commercial properties remain vacant. This will act as a double edge sword, when rates begin to rise and we can no longer play "extent and pretend" we will see more downward pressure on prices because empty buildings are costly to maintain.

     * The effect on commodity prices, low interest rates allows and encourages people to speculate on commodities. True demand no longer is the driver of prices, instead pricing is held hostage to a force based on what things will be worth in the future as to much money chases a limited number of goods.

       * The effect on the dollar, the only reason it has not crashed is that other currencies are in even worse shape. The dollar has been viewed as a safe haven because of its role as the world's reserve currency. This has allowed us to escape reality but that cannot go on forever. As more money is printed we are debasing our currency.

        *The effect on pension funds and on those living on the interest from savings. The impact is and will be incredible, we are seeing years of hard work and savings being washed away. How will funds be able to pay out as promised billions of dollars when they are being paid little or nothing on what they invest.What is safe, and what is not?

To complicate matters we are forced to wonder how this all dovetails with the possibility of future inflation. It is true that many people go about their lives oblivious to the twisting, tearing, and ripping that is occurring to our economic fabric. We are seeing years of economic theory and wisdom cast aside as the effects of these low rates play out. The low interest rates are causing major distortions and disrupting, and putting in jeopardy plans and schemes laid out over decades to insure many a comfortable retirement.

The struggle to adjust has an army of "professionals" who gather together funds from the masses and manage vast sums of money throwing themselves in all directions. One day they are fleeing Europe, the next day they are rushing to it in hopes of benefiting from a "fire sale" of asset's before a central bank move that will sort things out and put everything right. Bottom line no silver bullet exist and they will continue to kick the can further down the road. We should be afraid, very afraid. How long can they keep pushing on a string?

Remember this is occurring at a time that we are all being asked to invest in riskier assets, we are being told it is our only hope in keeping up with what is approaching. We should not underestimate the many ways that exist for those controlling, or trying to control this game, to fleece us of our future. This almost leads one to ask, are we in a giant economic washing machine in which all "individuals" will see their money and purchasing power removed in the final cycle?

Footnote; Your comments are welcome and encouraged. If you have time check out the archives for other post that may be of interest.

1 comment:

  1. If more money is printed, the dollar is worth less and therefore prices higher. How then can real estate prices go down (even with oversupply)? Gold and real estate will only go up as inflation increases. Also, interest rates will rise, giving a "boost" to savings accounts. Strange times indeed.