Central Banks and Interest Rates

Interest rates to rise

The Fed is thinking about raising rates, again. It sounds all sophisticated and important.

Is it?

Interest rates are the price of money

Just like the price of sugar or copper or orange juice, interest rates are the price you pay to have the product available. In a fair market, pricing is orderly.

If a lot of people want something and there is not much of it, the price rises until some of those wanting it drop out. That is a bottom up market system.

Bottom up creates a natural price.

The Fed’s approach is top down.

Central banks signal price and expect the economy to act accordingly. Their success rate has not been high recently. The natural market has denied them on two fronts.

  1. Interest rates at low levels did not stimulate the economy. People did not and do not trust the policymakers to be helpful. Instead they see them as a burden. Even at 1% interest, you still must pay the principle back. No guarantees that will be easy. So, no borrowing and not much investment.
  2. Low rates did not lead to inflation. They should have, but they did not. Just like businesses, people don’t borrow to buy when they are uncertain. Too easy to lose a job.

Top down cannot defeat bottom up. 

Every person acts in their own best interest first. So signals are just hints that are ignored.

That top down fails will not stop the activity. Why? Because it is in the best interest of officialdom to appear important and sophisticated.

People need not pay attention.

The government and economists and other pundits know little about the future. At one time they influenced the markets easily, but now anyone can gather enough information to make their own decision. Better yet they can examine track records and dismiss most of what is passed out by the government

It is just hype. Propaganda even. Make your own way. Expect nothing from governments but regulatory hurdles and foolish allocations of capital.

When you decide to pay interest be sure you get enough value to justify the rate. Your threshold rate might be 10%, or maybe minus 10%. It depends. Thinking people set their own rates. That is what bottom up is about.

The top down problem is here for a long time.

People adjust behaviour towards what works for them. Governments try to adjust reality to match their beliefs and they have resources to try to do it. Nonetheless, Belief Derived Reality fails and we pay the price.

Best to avoid participating when you can.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. 

In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. don@moneyfyi.com  866-285-7772

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