I bet that you like low interest rates. I do, too! They make it much easier for people to borrow and repay loans. That's something that both borrowers and lenders like. Making it easier to repay loans!
Not only are low interest rates good for borrowers and lenders, they can also spur the economy in two ways. First, domestically. If you can afford the mortgage on a new house then I get to build it. Good for the economy!
Plus it makes it easier for people to refinance those nasty adjustable mortgages that are getting all the headlines. Congress, the mortgage lenders and homeowners all like that.
It's also good internationally. Lower interest rates makes American goods cheaper in the world market. That means that we're able to see more 'made in America' product in places like Europe and Asia. Great for the American worker!
So how do we get lower interest rates? Well, when you cut through all the fancy economics talk, the bottom line is that you print more money! Yep, it's that simple. Just crank up those presses a notch or two and dollars are plentiful for all of us.
Sounds pretty good. That's why the Federal Reserve is holding interest rates down and Congress doesn't mind spending money that the government doesn't have. Whirrr! You can just hear those presses run.
And it would be good except for a couple of little problems that need to be worked out. The first is that it makes imported goods more expensive for us. So those Nike's that Junior wants or the (gasp!) gasoline that you put in your tank will cost more. The Saudis know a falling dollar when they see one.
Yes, those cheaper dollars won't buy as much of all the foreign goods that we like so much. We're importing a little over $200 billion a month. So it's not just gasoline and sneakers that will cost more.
Looks like the small problems with cheaper dollars aren't really so little. In fact, at $4 a gallon for gas, it looks like those cheaper dollars could turn out to be very expensive.
So what's the average consumer to do? Be prepared to see imported items (like oil and sneakers) cost more. Don't believe any politician who claims that they can pass a bill and make those things cheaper. They can't (and if they were honest they'd admit it).
Anything that they try to do will only make it worse. If you don't believe it read about the Smoot-Hawley Tarriff Act that was a major cause of the depression of the 1930's. That time they were trying to protect the American worker from low cost foreign goods. It didn't work out too well.
What else can you do? Change your habits to reflect the new prices. Find a way to drive less. Carpool. Switch your workweek to 4 ten hour days. Shift your day so you can commute before or after 'rush hour'. Find some way to reduce the amount of gas that you must buy.
If you have any extra money it's a good time to pay down any variable debt. The higher prices (think inflation) will almost certainly cause higher interest rates some time soon. And, that means that any debt that's tied to interest rates will cost you more. So pay it off now. Make it a priority. The last time that we choked off inflation with higher interest rates unemployment went up. It's much easier for you and I to pay off debts when we have a job.
Have a variable home loan? You'll want to convert it over to a fixed loan. You might even want to pay off your credit cards and add that to the new loan. (a caution: this will only work if you have the discipline to pay off your entire credit card bill each month from now on)
Finally, don't sit back and wait for someone to solve the problem for you. The same people who brought you the problem aren't likely to solve it.
Your best bet is to recognize the change in prices today and make changes to the way you live. Prepare for the changes in interest rates to come. No one is saying that the future will be easy. But, it will be easier if you start making changes now.
Keep on Stretching those Dollars!
Gary Foreman
