Interest Rates, 3% or 15%?

March 24th, 2010

Percent Character rates

Everybody likes to offer an opinion on where the stock market is headed next, or where interest rates are headed, among many other things. So I’ll jump into the fray and offer my opinion as well. I think that interest rates are going to go higher, much higher. Or maybe even “much” lower. I know, having an opinion that covers both directions that something can move in is not an opinion, it is a severe case of CYA! Let me explain…

I really don’t want to predict, I want to educate and prompt people to think.

Most of the people that think rates are headed higher think that rates will go from around an average of 5% (see: to around 5.50% to maybe even 6%. That is the kind of baseless “play it safe” projection that does not mean much. It does not even sound like there was any analysis done to come up with those #’s and any analysis/research is certainly never referenced. I think its all baseless guesswork. You may as well say that the stock market is going to correct “a little bit”.

It seems whenever people talk numbers, they can never bring themselves to project more than just a “little bit”. It is hard for humans to digest that numbers can change A LOT. Who would have believed that the stock market would fall from over 14,000 on the DOW to almost 6,000. NO ONE! At 14,000 all the geniuses thought that the stock market “may” correct some and that the DOW “may” fall 5%, 10% at most. Then at 12,000, when the 5-10% was exceeded, the thought was it was ready to turn back up…it kept going down. Then at 10,000 people thought, “wow, this is a bad economy, maybe we’ll go a little lower”, but it went MUCH lower.

Humans simply are not wired to believe that BIG changes can happen.

Who would have guessed that some states would see real estate losses of 50% from peak to trough, no one! Who would have guessed that during that after that same real estate bloodbath was in progress and finally visible for all to see, that some states and cities would see real estate prices that stayed stable or went up slightly? No one.

So the average interest rate is “only going to go up by a half percent, maybe a bit more,” says the consensus. And the consensus also says that because the deficit is a bit unmanageable, and because we may not be able to count on the Chinese to buy our debt forever, rates “may” likely go up by .5% to .75%.

If rates are going up .5% they are going up 3%, I hate to tell you folks! If this deficit is merely unmanageable, then I am the President of these United States!

This deficit is not only unmanageable, it is un-repayable! Literally!

We will never, ever repay the money that we owe all the people in the world, that is a guarantee. It cannot be done. When you factor in the off the books entitlements of Medicare and Social Security, our deficit is $50-$60 trillion. Our annual GDP is only $14 trillion, and that is suffering thanks to the severe recession we are in. So our GDP may decline while the debt stays fixed. If we stopped spending money on EVERYTHING the government spends money on, it would take a decade or two to payoff our debt (with interest). And we all know government is not going to stop spending, they can’t even cut .001% off the budget, let alone STOP ENTIRELY!

When someone that matters (China) figures this out as well and has reason (war or politics) to slow down or stop buying our debt, rates will shoot up like a firecracker. Going up just .5% is not even in the cards.

However, can rates go down?

How?! How can I even ask that when I was just making a case for rates to skyrocket!?

Look at Japan. For almost the last 2 decades Japan has been deficit spending, bailing out companies and industries (sound familiar?), abusing their currency and suffering from massive deflation. And interest rates there have been low, as they typically are in a severe recession/deflation/depression.

Does China matter?

So even if China stops buying our debt, will the world _____ (fill in the blank with whatever word you feel is appropriate: depression, recession, deflation) stop rates from rising because there will be absolutely no demand for money? The only demand for money in a depression comes from government, but that did not drive up rates in the 1930’s Great Depression and it has not driven up rates in modern day Japan. Rates actually fell in the 1930’s, and no amount of government stimulus could make the economy move again. Some say it was the war that kick started the economy, some simply say the Depression just petered out and it was time for a recovery. But it was NOT government spending that made us recover and eventually made rates rise.

And maybe the U.S. will find itself at war with China, and won’t pay the debt we owe them back? It won’t be called a default, because not paying money back to someone you are at war with is not a “default” (yes it is), so that would delete the need for a lot of government demand for money.

The bottom line

The bottom line of this whole exercise was not to predict rates, clearly, it was more to get people to think “big” and to realize that anything (stocks, rates) is capable of much bigger moves than we can apparently dream of.

I have no idea what is next for interest rates, but people that think small usually think wrong.

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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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