Will Rising Interest Rates Threaten Our Fledgling Economic Recovery?

Businessman Looking At Prospect Of Higher Interest Rates

 

 

By Robert W. Dudek

SAN DIEGO, California – Consumer vote with their wallets and so do the markets. It is quite astonishing to watch the bond market and interest rates nowadays. In less than two months, since the beginning of January till the end of February, the 10-year Treasury Note yield had increased by a stunning 54.9% percent, from 0.91% to 1.41%, after briefly hitting 1.52% on February 28th. In the meantime, treasury yields in other industrialized countries are way lower, including Germany, which has a negative yield of -0.25% on its 10-year Treasury Bond.

While some economists argue that this seismic increase in the U.S. Treasury yields is caused by the improving economy, the strongest underlying factor seems to be a fear of an upcoming inflation in the United States attributed to current administration’s appetite to print (borrow) and spend money, including the additional $2 trillion in new economic stimulus package. This is on the top of the money, which was borrowed and pumped into the economy in 2020 by the prior administration, including $1 trillion, which is still unspent.

As the late Senator Everett M. Dirksen used to say ““A billion here, a billion there, and pretty soon you’re talking real money.” Except we are talking about trillions here. How much money is a trillion dollars? In short it is: $1,000,000,000,000 or a thousand billions. Our entire national debt back in 2000 was just around 6 trillion dollars, now it is over $27 trillion and rapidly growing. Of course higher interest rates also mean higher cost of servicing our national debt.

Just to put things in perspective, our U.S. Gross Domestic Product (GDP), which is defined as the total monetary or market value of all finished goods and services produced within our borders, was about $20.9 trillion in 2020. Our total annual federal income tax revenue is approximately $3.5 trillion or about 16% of our GDP. So, our national debt far exceeds our national income. Do we see a problem here?

Printing loads of fiat money as a long-term economic “solution” never brings good lasting results. If in doubt, look at Venezuela. Once the wealthiest country in Latin America, Venezuela is now one of the poorest ones, with inflation so high that its money is not worth the paper it is printed on. How bad is the inflation there? A mere 2,685% in 2020.

For an average person this kinds of numbers are so astronomical that they make little sense. But what the rising interest rates mean for us, the regular folks? Certainly a higher cost of living, including higher mortgage rates (home loans, equity lines of credit), which affect housing expenses, higher cost of consumer credit (credit cards, car loans), higher cost of student loans, and the list goes on. It will also cause higher prices on everyday goods and services. Have you seen the gas prices lately?

The increasing cost of credit will most certainly affect the housing market, putting a downward pressure on its prices and affordability. The housing market is critical to the overall health of the economy as it affects many jobs, consumer spending and the overall wealth of our nation. One may contend that the housing market is due for a correction anyway as the price increases during the pandemic were both steep and unsustainable. That might be true, however, higher interest rates will make this correction much more severe and longer-lasting.

So, just when we started to see some signs of fledgling economic recovery, another presumably well-intended stimulus, or at least its huge size and timing can be counterproductive and harmful. The focus should be on wisely using the unspent “old” stimulus money, which Congress had already approved last year, keeping the interest rates low and re-opening the economy while the vaccination efforts gain momentum and the Covid infections and deaths go down.

 

Source: WSJ

Robert W. Dudek, MSEL is President and Broker Associate of the Blu Summit Real Estate Group at Keller Williams Realty (BluSummit.com). He has over 30 years of businesses and leadership experience and holds undergraduate and graduate degrees in business management and leadership.  He can be reached at 619-280-1400 or rdudek@tbsreg.com