The Impact of Bubbles – Week 4

Positive Force – The Fed Raising Rates:

Those of us who survived the early 1980’s remember mortgage rates being 18%, and the interest rates on prime loans being in the low 20’s % annually. We fully understand that a normal mortgage rate is 6% to 8%, not 3.5% to 4%.

Fortunately, the banking industry did not follow The Fed all the way down as The Fed dropped interest rates to zero. While the banks not following The Fed reduced the positive impact of their dropping interest rates so low, it also means that as The Fed raises interest rates there will be a lag before increased interest rates force up mortgage rates. That lag has occurred over the last year.

As The Fed continues to “normalize” interest rates, those individuals and couples that have retained some of their money in savings accounts will begin to enjoy increased interest income. Many of those savers in the United States are seniors who have built up savings accounts in order to fund their retirement. That increased income will be a positive force as it is circulated into the economy as seniors spend their increased interest income and is a positive force.

There is a point, however, where The Fed normalizing interest rates will raise interest rates to a level where the higher cost of money to borrowers will become a negative on a American economy. That will be discussed in the next portion of this blog.

But for right now, focus on the fact it is a positive economic force that increasing interest rates is a way of increasing income into the households that have been savers.

It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is land.