At what point does a bank go out of business or when does it cease to have a purpose? As interest rates approach zero, the money to be made loaning it out disappears. Why keep it in a bank if the inflation rate is higher than the interest rate? Keep it in a shoe box.
Remember back to the Savings & Loan mess of the 1990’s? They loaned money long at low interest rates (home loans) and when short term interest rates went up, these institutions went broke. There sure is a lot of refinancing going on right now. Bill Seidman get ready, we may need you again.
Let’s say you want to buy a car and get it financed. If you have lousy credit, you’ll be looking at 10% interest. But if you are a car manufacturer, the leasing aspect looks real nice. Joe6pack gets to lease it at full book with a roll in of 12 % interest. God Bless GMAC.
The only places getting a realistic return on their money are the credit card companies. And they give you money back for spending money, go figure.
Stock broker loans with stock as collateral are in vogue; the current rate is about 1.5% plus the yield on the 10 year treasury, for a million dollars or more (4.5%). Add two points if you’re a piker and want to borrow less than 50k (6.5%). Hop on; the DOW will hit 30,000 (yea right!).
If you are retired, living off the interest on your investments, I would suggest getting a seed catalogue and carefully pick out what you want to eat/grow a lot of, in the coming years. Step two, chickens are low maintenance, but the local CC&R’s might not allow for it, check first. You’ll be living on straight principle within months. The stress of retirement, isn't it fun?
Something is severely wrong with the current interest rates. The Alt-A paper has been discounted to 18%, of face amount, that equates to an interest rate range between 25% to 50% interest; using an original issue interest rate range of 6% to 12%. A bid of 12 million might buy the whole city of Detroit (the back taxes will kill you)
Figure inflation is 9% and a fair interest rate would be 3% added on, to get a 30 year T bond rate of 12%. The rate is currently at less than 3%. So if an investor went out and bought a million dollar 30 year treasury bond with a 3% rate (paying 30K in interest), what would it be worth if interest rates suddenly went to 12%? The purchaser would have a loss of 3/4th of a million dollars (if they needed to convert it to cash now). They could wait 30 years and get the full million back. Visualize it this way. What amount of money at 12% interest pays 30K per year in interest, answer 225K? That’s how you value a bond if it has a long maturity.
If the real interest rate jumped to 12%, the interest on the national debt would double in size twice. Instead of 412 billion dollars it would be 1.648 trillion dollars PER YEAR(824 billion at 6% and 1.648 trillion at 12%).
Common sense says something is wrong. The government can borrow and print massive amounts of money and the interest rates remains at historic lows? It’s kind of like using grease to wax the floors in a hospital; it keeps your patient count high for all the wrong reasons.
Copyright 2009 All rights reserved