Why Ultra-Low Interest Rates are Now BAD for the U.S.

Sounds like heresy, yes? Don’t today’s historically low interest rates allow more people to buy houses and cars and to finance other types of spending as well?

Well, yes, that is true, but only to a point. It has a short-term impact as consumers lower their mortgage payments and some who are on the edge of being able to buy a home find it within their reach. And yes, auto loans have been increasing so much that they are becoming a problem.

But, interest rates have been extremely, historically low ever since 2009. That’s six years now. Is there really a significant number of people left that haven’t refinanced by now or bought a home they can now barely afford but couldn’t at only slightly higher interest rates? I think that has largely run its course.

The problems are these:

1) At these low rates companies are tempted to take on a lot of new debt and they do because it costs so little. But, because the economy is growing at only 2%, many companies are not investing in new projects or in hiring. The household name companies as a group are still creating negative job growth as they continue to ship jobs overseas. Job growth is primarily from mid-size and smaller companies.

Instead, many companies are buying back their own stock with that money. Why? Because most of the net worth of senior executives is in stock and stock options. And their bonuses, which represent most of C-Suite income, are largely based on the stock price. Today’s CEO robber barons are simply padding their pockets with multiple millions of dollars per year. Meanwhile, the economy limps along.

Companies are even taking on debt to pay extra dividends to shareholders (including themselves) because many of them would rather invest in financial assets than in the growth of their company. The Federal Reserve buying bonds and pushing rates nearly to the floor was meant to stimulate the economy. To many big corporations, foreign investment and investment in financial assts looks more appealing.

That’s why the performance of the stock market has been so good the last few years despite tepid overall growth in the actual sales of products. It’s called TINA – “There is No Alternative.” Buy stocks because bonds and cash and costly projects don’t return nearly as much.

2) Banks are finding that lending to consumers or businesses at these rates is not profitable for them. When things are unprofitable, they don’t usually get done.

3) Ultra-low rates provide the ability for our government to keep overspending and continue to borrow nearly a half-trillion dollars each year, further ballooning the national debt. They can do it because the interest cost is almost negligible. Who has been buying that? – the Federal Reserve. The Treasury Dept is also not locking in these low rates for as long as they should be.

Sooner or later rates will go back to normal and the debt that was financed short-term at nearly 0% to 2% interest will be refinanced at 3%, 4%, 5%, 6% or more more – historically normal rates. We tend to forget what normal interest rates look like, our collective memory is so very short. And that will push interest cost as a percentage of the national debt from 12% at today’s rock-bottom rates to a very uncomfortable level or worse.

According to the U.S.Treasury Dept, the average rate on U.S. debt in December 2014 was 2.4% including all the debt still out there. In 2004 the average rate was 5%, so you can see how much has been refinanced lately and how much of the debt load is new.

Going back to the level of 11 years ago would in a few years double the federal interest expense to 1/4 of the federal budget. Then you have to add the new debt that keeps piling up at a another $Trillion every other year and that interest percentage quickly goes to 1/3 of the budget and higher. And President Obama this week proposed multiple new spending programs like free coomunity college, more tax credits, etc. This is madness.

The fact that Europe is set to embark on a quantitative easing program of its own, even with LESS THAN 0% interest rates on the European government debt of more than one country, just shows how desperate Europe is right now. Throw money at it, anything but real reform.

I don’t sell gold coins or bullion and I don’t sell newsletters. I haven’t bought much gold or silver yet, but I have bought more real estate and alternative income sources and of course stocks.

We are already in a situation in which we are now damned if we do (raise rates) and damned if we don’t. That’s what excessive debt does, whether consumer, corporate or government. Let’s not keep going on this course.