Bankruptcy & Foreclosures

We’re only human right? And as humans it is in our nature to celebrate low interest rates. Lower rates make loans cheaper and therefore the material goodness we all seek (cars, houses, boats, and motor homes) more attainable. After last week’s rate slash, the Federal Reserve has been hinting toward the fact that this may mark the end of the rate cuts in an effort to stimulate the economy. So does this mean goodbye to those material goods mentioned above? Perhaps, but there is no need for panic just yet. Believe it or not, low interest rates sometimes make big trouble as they tend to increase demand and with increases in demand without corresponding increases in supply we experience a little phenomenon known as inflation. In other words, yes, there are a few more dollars left in your pocket after you’ve paid all of your bills, but those dollars are worth a lot less than they would be had your interest rate been a bit higher.

It is true that US consumers could actually benefit by a slight rise in interest rates. It sounds blasphemous but it’s true. For starters, some goods and services would immediately get less expensive on account of a stronger dollar. Less inflation means lower prices of goods imported from other countries. Think about it, since the same amount of dollars will purchase more goods from overseas; expect immediate dives in the cost of clothing, appliances, and many other everyday products.

Additionally, higher rates could put an end to the quickly sliding value of the dollar. In case you’ve been living under a rock, let me be the first to tell you that the value of the dollar has been slipping against foreign currencies such as the euro. And why? Because low interest rates here in the US make it less appealing for foreign investors. After all, we all love high interest rates when it comes to money we make, rather than spend.

Along those lines of reasoning, the Fed’s move to slash interest rates has decreased the amount of money individuals make on their CDs, money market, and savings accounts. An increase in interest works both ways (outgoing and incoming).

Finally, and most pertinent to many, an increase in interest rates could potentially stabilize the cost of oil. As of yet, the trading of oil is still based on the exchange of the dollar (despite pleas from investors to transfer to the euro) so a sinking value of the dollar means that other countries can buy more oil for the same amount of currency. The ability to buy more oil around the globe means increases in demand and lower worldwide supply. Hence, the trouble we’re currently experiencing.

The bottom line is that we all cringe at the thought of interest rate hikes but keep in mind that this doesn’t automatically mean more money flying out of our wallets.