THIS IS MY 62ND BLOG ON UNDERSTANDING MONEY TOOLS
Sometimes things occur that have never happened before that
anyone can remember so that always peaks my attention, and I thought I would
discuss the topic in this blog. Perhaps many of you already realize these
issues, but if you don’t this may be of interest, as the long-term effects
could have a big impact worldwide.
The topic is world interest rates and currencies and the
resultant impact on you and me.
Let us address the US first. By now we all know about Quantitative
Easings 1, 2 and 3 with the Federal Reserve that equated to a $4.5 trillion
dilution of our currency that was started shortly after the banking fiasco that
was exposed in August, 2007. Now, other countries deeply in debt are trying for
the same, starting big time with Japan this past October. If you look at the
interest rates on bonds of the top 12, or so, countries in the world, exclusive
of Russia (which is a different story altogether), you will find that the
interest rates offered currently are anywhere from 1.5% to negative .75%,
heralded by Switzerland. Similar to the United States many of these countries
are in major debt (exclusive of Switzerland and Germany), the economies
weakening and deflation is concerning. Why would interest rates go down in
weakened times versus up? Why would countries, including the US do this? What
will the affect be?
The world’s countries have places to go for money, the US
goes to the Federal Reserve, other countries use Central Banks and the
International Monetary Fund. You have heard about the liberal lending going on
these days. The money does not flow to you or me, it goes to Wall Street, the
big banks, the wealthy and emerging countries.
Let’s first address two points for countries initiating low
interest rate policy; one is to counter deflation and economic stagnation, and
second is to dilute a currency so that a country will pay back debt with
cheaper currency. This is all artificially created. Common sense tells a person
that if an economy weakens, to attract buyers to bonds interest rates need to
rise, but just the opposite is happening. Now, we get to the “whys”. Countries have run out of alternatives
for solving economic problems and deflation. No one has an answer remaining,
but to print more money, try to make exported goods more attractive and hope
for the best down the road. The best down the road is normalcy, the worst and
most likely scenario is higher unemployment and high inflation, making it worse
on the Middle Class. Many people in the US feel they are protected from a world
downturn, can’t be. We are very international. The US may only export about 12%
of goods produced here, however we manufacture all over the world and those
profits are booked on Wall Street. If the world’s economies weaken, there will
be an adverse affect on our companies and economy. Some current stats show that
of the Fortune 500 companies overseas sales account for about 45% of their
business and 50% of their profits. The reason that profits are greater in other
countries is cheaper labor and fewer regulations than we have here. Wall Street
doesn’t want selling going on so they are turning a blind eye to this obvious
issue.
One of the worst feared long-term effects is high inflation.
The commodity guys are strongly selling this for people to buy gold as a hedge
and other hard assets like land and real estate. As you see, commodity prices
have fallen. The historical hedge has been gold, but there are no guarantees.
Gold is a commodity that cycles and is volatile in price. It now is trading at
30% discounts from the highs.
Who is hurt the most with the lowering of interest rates
around the world? You see this daily in America and it is no surprise. The
Middle Class person and retirees are hurt the most. The wealthy have plenty of
money, better lawyers and tax accountants to figure out tax loopholes. Also,
they have many more opportunities for investing than the common person. The
poor, on the other hand, don’t have much money.
The government encourages savings. Let’s work through an
example using today’s interest rates. A bank savings account earns perhaps
1/4-1/2% interest. Are you wealthy enough to have $1 million? You are very
lucky if you do. If you are ultra conservative and place that amount in your
bank savings account you earn $2500 to $5000/year. That is relatively nothing
and you will immediately start depleting your principal.
Here is the kicker. It almost forces people to take risk and
where is the risk money going? Into the big banks/investment banks and Wall
Street driving the stock markets irrationally higher.
Ending, let’s address Russia. With the Western countries
sanctions on Russia it has hurt their economy. Russia relies on commodity sales
of natural gas, oil, iron, etc. With their economy weakened it has forced them
into doing what is the norm of a weakened economic situation. To rally their
currency, the Ruble, Russia needed to significantly raise the interest rate on
its bonds to attract money and investors. The OPEC nations, mainly the Saudis, wanting
to hurt oil exporting countries like Russia and Iran have maintained oil
production thus because of supply and demand has lowered oil prices. This may
continue for some time. Russia, Iran and several other countries need $100
plus/barrel of oil to maintain their debt payments, and right now that is not
doable.
Have you heard of BRICS? We have addressed this on previous
blogs. This stands for a group of major countries that have united for economic
reasons and reform their financial institutions. This includes a new form of
currency. BRICS stands for Brazil,
Russia, India, China and South Africa. Recently, Russia has sold military
equipment to India, as well as Turkey, to maintain this unification.
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