Why Are Interest Rates So Low?

 

Why Are Interest Rates So Low During a Booming Economy Dollars

 

Has anyone wondered why we get so little interest on bank accounts for interest rates anymore? My local banks are paying something like a fraction of a percent and if you go online you can get the big bucks of maybe 1.5% or close to 2%. Do you remember when you would get more than 5% on a money market account and hear stories about savings accounts that used to routinely be 4.50% to 5.00%?

So I understand in 2008 the financial market nearly melted down. It looks like we were staring over the precipice of a financial collapse. And because of this I understand you needed rates low. Simultaneously, savers help provide the money for needed liquidity to the financial system when it needed it most.

But haven’t we been hearing the economy is booming? Every day the politicians for the President have been on TV and radio or magazine articles saying this. Unemployment is down to historic lows. People, some at least, according to them are getting larger paychecks and basically are rolling in dough as they continually boast to the media.

Money is like any other product. Yet, as we all know our money has a price. Its price is the interest rate. The Federal Reserve influences these rates by buying and selling government debt. They set certain rates for banks too. For years they used Quantitative Easing to flood the financial system with low-cost money. Nevertheless, we’re still being asked to lend our money for next to nothing. And if the economy is so fabulous do you wonder why? I surely do!

Now during these “good times” you would expect the interest rates to go up not down. But the politicians demand them low. Is the economy not as strong as our political leaders say it is? This gets scary when you look a little deeper.

Remember, during the mortgage crisis people were buying houses they shouldn’t have because they really lacked the income to back up the loan. In those days house prices were soaring for the stratosphere and over inflated, but people still kept buying. Then the musical chairs of the mortgage market stopped and it all came down in a crash.

So what’s been happening? Did you notice corporate debt rising? Savers are chasing a return and have been buying corporate debt. Yet, some of that debt might not be as stellar as they thought. This could be the next bubble.

Now is the time to start looking at what you are investing in. Think about capital preservation when you are chasing a yield that is maybe only a point or two higher than something safer. Likewise, never assume that some company that’s been here for 100 years will be around another 20 years! You can’t assume anything anymore.

Look at the demand for lower and even negative interest rates and then ask yourself a question is this a sign of a strong economy? If the economy needs this kind of help 12 years after the Great Recession, then maybe the economy is a lot more weaker than we thought.

You also might want to read another helpful post on the best ways to save money during uncertain times.

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