Interesting Thing About Interest Rates (November 29, 2010)

. . .

K         “It really is hard to get rich when they are paying .000000001 percent per annum interest.”

J          “Unless it is compounded every second.”

K         “We are told that we should save, yet there is no economic incentive.  There is no interest when there is no interest.  Senior citizens who counted on a five to ten percent interest rate for their money to fund their retirements are being flat lined by the flat line interest rates.”

J          “Some of the negative economic impact of the contemporary economic excess is being inflicted on the current generation.  Doesn’t seem unfair.  Although there is more saving, only a thin sliver of the populace is saving because there is no other safe haven for the money.  The money is just parked.  Another problem may be brewing.  The banks are given free money by the federal government and are loaning it at positive but low rates to a few apparently credit-worthy borrowers.  What will happen in three years when interest rates are forced to go up and the rate of return on the current mortgages and deeds of trust is less sexy?  Will the banks try to call the loans early?  I assume the banks will enforce provisions precluding assignment of the obligations to get them off the books as quickly as possible.”

K         “They will find a way.  Some astute homeowners will secure a low interest rate mortgage and use the funds to invest in savings accounts that should start paying substantial interest rates.  That stratagem may be the only way to ride rising interest rates in the safest investments in a broken economy.  With so much money in the system and an unresponsive economy, we will see inflation.  Recent purchases of Treasury securities suggest that the smart money anticipates inflation.  When bread rises to $100.00 a loaf, the attendant changes in the economy will lead to interest on your bread rising from the current 00.001%.”

J          “Inflation will make all the current debt much less of an expense in real economic terms.  Inflation will expunge debt.”

K         “Anyone who saves is spent.”

. . .

Bumper stickers of the week:

Paying the highest rate allowed by law (but nothing is allowed?)

Anyone who saves is spent

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