Unless the U.S. economy suffers a major downturn, there is strong reason to expect high interest rates, rate that will remain high for years. Several factors are forcing this trend.
#1. The enormous deficits of the United States will force unprecedented borrowing and new bond issues on the part of the government. Robert Rubin, former Secretary of the Treasury and Goldman Sach’s executive recently said: “It is inevitable, that huge deficits like our government now faces, will lead to higher rates. It could take 20 years for our economy to digest the enormous debt we now have incurred.” The logic is simple. There are only so many investors for bonds in the world, and when investors have to compete with hundreds of billions of bonds issued by the Federal Government, more demand for and more competition for investor dollars will cause interest rates will rise. Call it supply and demand.
#2. The dollar is now so low that international currency traders have little incentive to purchase U.S. Dollar investments, especially when the dollar has dropped now to 20% below the value of the Euro. The U.S. Government will have to encourage higher rates on dollar investments to make the U.S. dollar an attractive investment.
WHAT IS THE RESULT OF HIGHER INTEREST RATES?
The result of higher rates is to make investments of bonds, C.D.’s, and interest paying deposits more competitive when compared to income producing real estate. Or, to put it in another way, if real estate is yielding 6%, and low risk bonds yielding 10%, investors will move out of real estate into other investments. Furthermore, higher interest rates will kill, or reduce the return and desirability of many real estate investments. For example, fewer families will be able to afford home mortgages, fewer companies will be able to afford to build or expand commercial buildings. As the real estate industry declines, other associated industries, such as appliances, dishwashers, air conditioners, roofing materials, lumber, carpet manufacturers, wiring manufactures, landscapers, electricians, plumbers….literally hundreds of industry types will be negatively affected. As real estate declines bank portfolios will become at risk, as collateral values diminish. Foreclosures will find lower bids and fewer buyers. The impact is broad and enormous. This will lead to millions of unemployed workers, which will lead to a decline in retail, consumer, automotive and even the travel industries. The maxim is simple. High interest rates lead to recession and low interest rates lead to recovery.
WHAT IS THE SOLUTION TO STABLE ECONOMIC GROWTH?
The most basic solutions are found in:
- Sound economic leadership.
- Balancing the budget.
- Reducing deficits will not only encourage international investors to have confidence in the dollar, but also will reduce the debt burden on the massive national economy.
- This may require higher taxes.
- This may require lower spending in areas such as defense and other government sectors.
- It may require tax incentives for small business.
- Economic solutions may require higher taxes on those that can afford it, the giant global corporations.
- The government must provide a system wherein farmers, small businesses, small communities, entrepreneurs, and the American people in general can be empowered with economic opportunity and hope.
- This will require a nation at peace, stressing quality of life issues, not spending the nation's treasury acting out the role of the world's policeman.
- U.S. industries will require and need assistance, and protection from foreign exploitation of the U.S. market. Consider this. It is estimated that some 80% of U.S. consumer goods are now made in Asia. This is providing jobs for people in Korea, Japan, and the giant China, while it has cost jobs in America. What if we charge a tariff or have quotas to make these foreign companies (that are enriching their nations and their corporations at the cost of American jobs and prosperity) compensate us for the privilege of selling their merchandise here?
- Continue to encourage new productivity, creativity, and discovery in the market place, even with tax incentives if necessary.
- Require the largest U.S. companies to re-invest in America and in local communities, not to just suck capital and resources into large city centers.
- Reverse the trend toward concentrations, monopolies and giant companies that have little flexibility and then to encourage through government leadership new opportunity for new smaller, creative, locally based businesses.
Economic stability is the only key to the survival of the United States as a world power. Decisions are being made today that threaten our future economy and threaten the hope that our children and grand-children should inherit.