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Interest Rates

June 23, 2013

So with all the talk last week about rising interest rates on government bonds, and the subsequent market crash you would assume that any uptick in interest rates is bad news for the economy: but does that really make sense? Let’s think this through logically – if interest rates are rising what does that mean, without political commentary of course.

All other things being equal slightly higher interest rates indicate higher rates of economic growth; the higher interest rates provide a check and balance on the tendency of banks and other lenders to lend money a bit too freely when the economy is good (anybody remember the housing bubble?), and also acts a hedge against the increased rates of inflation that often times accompanies increased economic growth.

Highly leveraged companies (lots of debt) suffer when interest rates rise, as do people who are applying for mortgages, auto loans or student loans, but some groups benefit from higher rates, namely savers. I do not have to tell you guys how low the rates on bank CD’s have been lately: this makes conservative saving much more difficult and forces people into higher risk investments. With slightly higher rates it makes saving easier.

So, in other words, higher interest rates are a trade off that almost everything else in life: it all depends what side of the fence you are sitting on

Thought? Questions?

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