When the financial panic and crash hit the world in 2008, Chairman Bernanke and Secretary of the Treasury Hank Paulson, reacted in a knowledgeable and expert manner. The Chairman of the European Central Bank chose instead to raise interest rates and lecture those two Americans as being foolish.
Four years later we see the stark difference in the two economies. The United States is having a tepid recovery and the European market is in recession, again. The current ratio between the Euro and the US Dollar is unsustainable. I do not know how to invest in currencies and therefore it is dangerous for anyone to follow my suggestion, however, it appears to me that a knowledgeable investor might “short” the Euro because it has no place to go except down.
Because of the apparent ineptness of the European Central Bank (ECB) and the structure of the Euro community, the safest prediction is that interest rates in Europe will be exceptionally low for a very long time. Continued European banking system turmoil and the ECB behind the curve, those low Euro interest rates will impact our American rates.
Logically, the Fed will not want to raise rates disproportionately high in the future, short of some overwhelming, compelling reason. Raising US interest rates too high would result in a serious economic dislocation because it would exaggerate the most likely Euro decline as the dollar gains.
Part of this scenario depends on whether Obama gets re-elected leaving us four more years of being in the ditch economically, or Romney gets elected who at least understands capitalism, management, and leadership.
A prolonged period of low interest rates in Europe will influence the American interest rates keeping ours lower than they might be otherwise. This will ultimately encourage a flood of money into hard assets, as inflation rears its ugly head. In the near term, it means that assets such as land are attractive because their rates of return are exceptionally competitive with those that can be earned by Treasuries, money market accounts, etc.
As inflation occurs, land prices will increase. As commodities, such as timber, increase in value because of both inflation and demand, those price increases will also increase the return to timber land owners. Meanwhile, Treasuries and bonds purchased today will decline in value as interest rates increase.
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