The Lurking Monster

 

 

"Yeah, there's a monster on the loose

It's got our heads into the noose

And it just sits there watching"

 

Monster

 Steppenwolf

 

 

Well, here it comes. It is finally here (we think). Like all good things, they must come to an end. What goes up, must come down. Or in this case, what was down, must come up. What am I talking about? Our interest rates. Those who were able to refinance when they were at almost zero, good job! Anybody who would like to hop on this train before it really pulls out of the station, better hurry. The gravy train is coming to an end and we are about to journey back to the land of financial reality.

 

Right now the rate on a 30 year note is about 4.5%. If you look at the past few months, that appears to be high. However, if you take a longer view, it is very, very low. For example, when we bought our house 29 years ago, a fixed mortgage was 30 year note was about 12%. To qualify for our loan, we had to take out an ARM (adjustable rate mortgage) initially set at 10%. This ARM had a range of 6% either way of the 10%. In other words, it could have gone as low as 4% (never, ever happen), or as high as 16% (a real killer). A few years later the interest rates came down as we "locked" at 8% fixed. We felt like we just robbed a bank.

 

So lets forget this house thing for awhile. Why should anyone care if interest rates go up or down it they are not paying on a house? First off, auto loans are going up. The days of no interest or 1.2% interest are probably over. Next, the cost of revolving charges will probably go up. However, the thing that will affect everyone is the largest bill we have - our national debt.

 

The quickest way to put someone to sleep at a cocktail party these days is to start talking about our national debt. Who cares? Nobody cares. Why? Because having a large debt has become part of our "new normal", just like 13% (U6) unemployment. One of the reasons the debt is so boring is the cost of servicing the debt is almost free. However, once our interest rates start to normalize, people will wake up in a hurry about the size of our debt. Why? The increased cost to service this debt has to come out of something. It will either come out of our discretionary spending or out of taxpayers pockets in the form of new taxes.

 

So this summer in Congress, as we have talked about everything but the debt, the monster is lurking. What about the stock market with the interest rates set to rise? Look at last week when Gentle Ben just "hinted" the era of free money might be over by year's end. When the rates go up for real, there will be a stampede out of this artificial market faster than a blue light special at K Mart.

 

As our free money days start to sunset, we can thank the Fed. The Fed inflated our currency, but who cares? It has been a great ride. However, a much different ride is about to start. Only this one will be bumpy, very bumpy. The time to pay the piper for our free money is drawing near - and the price extracted by the piper might be very, very high.