A useful tool and a curse…
Dear Reader,
As most of you know, there are positive things that happen when the Federal Reserve lowers interest rates. People often have lower minimum payments on their loans, such as home equity lines of credit (HELOCs) and credit cards, but there’s bad that comes with those slightly lower payments.
Lower interest rates mean you are making less money on what you’ve got stashed in the bank. As of right now, most Americans are not even breaking even thanks to inflation, the devaluation of the United States dollar, and the almost zero rates. But lowering the rates could mean that saving up for a “rainy day” could get even more difficult.
Ultra-low rates often discourage savings, and while it shouldn’t be your only “fallback,” having that money offers a peace of mind far too many Americans simply don’t have. Discouraging saving even more could have the net result of leaving people without any way to pay for their essentials in the event of income loss during an economic downturn, but that isn’t the only problem low interest rates present.
Another potential kink is that lower rates could stifle economy growth by inhibiting the healthy competition needed in an expanding market. Because we are already experiencing excruciatingly low interest rates in this economic environment, lower rates are more likely to slow growth rather than spur it.
Project Syndicate published an entire article about this phenomena called Could Ultra-Low Interest Rates Be Contractionary?
It contends that lowering interest rates isn’t as great for the economy as we all assumed.
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Although lower interest rates encourage all firms in a sector to invest more, the incentive to do so is greater for market leaders than it is for the followers.
As a result, industries become more monopolistic over time as long-term rates fall, giving the top more power in the market. When industry leaders respond more strongly to a decline in the interest rate, the followers get discouraged and stop investing. This allows the leaders to get so far ahead that they then face no serious competitive threat, creating the monopolies that crush competition.
Competition fuels lower prices, better deals for consumers, and spending. When that’s removed from the marketplace and monopolies form, smaller businesses and the followers can quickly get discouraged, give up, and get taken out.
While most Americans are taking on more debt to buy depreciating assets like cars, I’m buying hard assets with my fiat currency or dollars.
Precious metals can be a good form of currency (or “hard asset”) in this current economic environment in which it’s incredibly easy to see the dollar’s value drop. I don’t ever look at gold or silver as an investment. Instead, I prefer to think of it as insurance against the central bank and government devaluing the dollars I do have.
In my opinion, the only reason to consider borrowing at these low rates should be to capture the spread on an investment you can own that will yield you 7 to 12% while your borrowing costs are in the 3% range.
I’m talking about something like refinancing a mortgage to pull cash out and then taking the cashed-out equity and investing into something like a private REIT (Real Estate Investment Trust).
I’m personally using cash-value whole life policies to borrow at 4.5% and then acquiring passive income investments that are paying me an average of 10%.
This Sunday, I’ll go over why I prefer private REITs for cash flow over a dividend-paying stock or publicly-traded REIT.
Best Regards,
FutureMoneyTrends.com
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Legal Notice:
This work is based on SEC filings, current events, interviews, corporate press releases and what we’ve learned as financial journalists. It may contain errors and you shouldn’t make any investment decision based solely on what you read here. It’s your money and your responsibility. The information herein is not intended to be personal legal or investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the services of a qualified legal, investment or tax professional should be sought.
