Why Interest Rates May Rise, Regardless of What the Fed Does

http://www.oftwominds.com/blog.html



How the U.S. Could End Up with High Interest Rates

January 16, 2008

Everywhere you turn, the pundits' predictions are unanimously for "much lower interest rates." Aren't you a little skeptical of any "received wisdom" on which the pundits all agree? I certainly am, as history has time and again thumbed its nose at collective certainty by swerving in the exact opposite direction of what was unanimously predicted as a "sure bet."

Low interest rates are supposed to calm the recessionary waters by invigorating the sagging housing market. Sure, lower rates make everything from corporate debt to new auto loans cheaper to service--but the real impact, we're told, will be on housing.

Why? Two reasons. First, the family house is the bedrock of 2/3 of the nation's families' wealth--and the key metric in their perception of overall family wealth (up, down, neutral). Second, the last seven years of "prosperity" have been ones of equity expansion (rising stock market and home equity) and equity extraction (re-financing/equity lines of credit). If lower rates can re-ignite housing sales, the hope is that home prices will at least stabilize or perhaps even start rising again.

Please read the whole article at the link - It's very interesting.

For one thing, oil is never going back to 45/bl never mind 30/bl.

Int'l oil demand is not going to contract at all. Quite the contrary. What will change is that the US share of the int'l economy will shrink.

The high prices we're seeing are a product of high demand for oil in Asian exporting nations. Production is at an all-time high, and prices were at $30/bl as recently as 2003.

So if prolonged low exports to the US due to the recession reduces industrial activity to 2003 or 2004 levels, such a price drop is anything but impossible, especially if markets sense that the new democrat president in 2008 will keep a lid on tensions in the middle east, unlike the present administration, which has done everything it can to keep tensions high...

oil is priced in dollars, (for now anyway) and the value of the dollar is obviously shrinking and has been doing so since Shithead took office, more or less.

The other possible scenario for 30/bl oil would be if we can get enough current load diverted to renewably generated electricity. I hold a good hope it will happen, but not any time in the next couple of years, more's the pity.

Anyway, 45/bl ain't gonna happen baby, sad but true.

I do agree that $30/bl is probably a stretch. Do you think prices would have to drop that low for this interest rate scenario to play out?

even assuming you're right, and the consequences that follow in your chart. But that's just me.

It's Charles Hugh Smith's chart and blog - I posted them as food for thought, but I don't think they're necessarily true, but looking back on history one does notice that whenever people say things like "this ship is unsinkable" or "It's a new economy - there will never be another recession again" or "real estate always goes up", there seems to always eventually come a time when variables that everybody (except those who were called doomsayers shortly beforehand) failed to anticipate kick in and the whole house of cards falls in.


I also know this - the thousands of foreign investors who pumped trillions of dollars into our economy over the last decade did so because they were told they were buying into solid asset-secured portfolios. Now they're finding out that their money went into deceptively bundled credit schemes that loaned money to working-class shmoes to buy McMansions they could barely afford the interest on, much less the payments, to people financing a nouveau-riche lifestyle with money borrowed against illusory equity created by speculation-inflated real estate values.

Why do you think these investors should be eager to invest in our country again, without something a bit more enticing, like higher interest rates?

I ask that question sincerely, because I honestly don't know the answer. I know if I was a foreign investor, I'd be very wary of the US financial services sector.

I'm not an economist either, and it's an interesting question, but his chart just makes zero sense to me.
I just don't see things that way. International demand for oil is going to more than offset any US decline in consumption, unfortunately for the climate, and will be impacted less by declines in US spending than this model argues.

Definitely free money is going to tighten up. But from my point of view, I think the assumption that our economy needs to keep growing the way it has for so long is flawed anyway. We have major resource issues that require creative flexible rethinking and that are fundamental limitors, like water in Georgia.

Everything is going to change. As big as the problems are, that's just how big the opportunities are.

If you are interested in food for thought, as I am too, here's a nifty website with a lot of astonishing info. I love Hans Rosling's and Amory Lovhttp://www.ted.com/speakers/view/id/47in's presentations. http://www.ted.com/index.php/talks/view/id/92
Lovins, "We must win the oil endgame"
Aloha.

The scenario here is a recession. Wouldn't borrowing decrease? Isn't the loop broken here?

IE countries like China that are cash-flushed at present would no longer be, and their businesses would need to borrow more to stay afloat - so there is the rising demand for borrowing. So with the rising demand for borrowing would come a concomitant rise in interest rates (?)

Hopefully someone with a better undertanding than myself will chime in on how this works, because I'll be damned if I know.