Increasing Interest In Increasing Interest: How Low Can You Go?

For US banks, the Federal Reserve has been playing hard-to-get with their interest rate. Keeping a near-zero interest rate for prolonged periods has meant banks not only offer little to their customers in earned interest and they similarly gain little from customers in interest paid. For anyone buying services from a US bank, the situation with basement level interest rates becomes murky. Sure, you can’t expect to even match inflation with a savings, money market, or even CD account right now, but you can also buy a house at interest rates that seemed impossible for homebuyers in the early 1980’s.

Unemployment in the US has dropped to 5.5%, yet the Fed insists on keeping interest rates down until wage levels improve. Sure, more people are employed, but they aren’t getting paid enough, so says the Fed. The sheer number of jobs can only be so important when considering the health of a nation’s economy, and the amount each person is paid may be even more important to fiscal policy than how many of them have jobs. The interest rates in the US don’t just apply to local banks and their customers. Asian markets are having a hard time dealing with the never-ending question of when the Fed rate will ever go back up. Additionally, the value of the dollar has risen to 121.36 yen. A stronger dollar and low domestic demand could indicative of an even bigger problem for the United States: secular stagnation.

Land of the Free, Home of the Stagnant

Developed economies suffer from secular stagnation when going through a period of perpetually weak demand. This demand usually results from a combination of factors hitting the US right now: pessimism about the future, economic inequality (see wages above), an aging population, slow productivity growth, etc. These come together to make a perfect storm of low growth, low inflation, and low interest rates. But is it really all that bad to have low interest rates?

Who needs higher interest rates and how to win in losing times?

There are a number of groups who suffer the worst when interest and growth rates remain low for extended periods. Retirees with large cash reserves are finding their odds of living indefinitely off of the interest of their savings are watching their accounts steadily diminish. These people saved tens or hundreds of thousands in cash accounts when the Fed rate was much higher. Certain “iron-clad” rules of investing for retirement have been called into question, because those rules were based on Fed rates remaining above 1%. This makes longer periods of depressed interest rates into a form a punishment for savers and retirees. For those Americans who are still employed there is still a problem with artificially cinching down the interest rates: exports. Low inflation and low interest rates actually results in a fairly strong currency. Along with the yen, theeuro has been losing value against the dollar as the Fed rate remains low. This will make US goods more expensive on the international market and likely add to secular stagnation.

So what can you do to make sure you aren’t another suffering saver right now? Sell those dollars. If you can buy euros for the cheapest price to the dollar for the last 12 years, you should buy euros. The same goes for the yen, or any other currency losing to the dollar in this environment. This is a great time for those looking to venture into the world of Foreign Exchange trading and an even better time for those with experience in the game. Don’t wait for the interest rates to go back up. In every situation, someone is making money. Be that person.