Rising Interest Rates Are a Return to Normalcy

Photo Courtesy of Pexels – Karolina Grabowska

We are dealing with an economy impacted by inflation in the midst of a pandemic and now interest rates are going up. But we have to remember that we have essentially been coasting on 0.00 % interest for years. Ok, so a bank was paying some people interest of a fraction of a percent. But this is an era of essentially free money we have been living and it isn’t normal. Go ask your parents or grandparents. They will mention when a Savings and Loan would pay you 5.25 % for a savings account. And it wasn’t a CD, but it was just an account!

After the financial crisis when we teetered on the edge of an actual depression, the Federal Reserve loosened money up to keep the economy humming. And it did help when you could go to a car dealership and get that 0.00 % interest on that nice new car.

Remember “Quantitative Easing” where the Fed bought up debt in huge quantities, which literally poured billions into the economy. That really helped a lot.

At some point financial reality has to come back. We can’t expect seniors socking money away for years and needing a return on the money so they don’t have to eat cat food to get decent returns on their money. People expected the free money to go on for decades and it actually has done that.

Remember those seniors socking away money for their retirement then had to look at other investment vehicles, they needed higher returns.

So they invested in the stock market. And what happened? Supply and demand met and caused stock prices to rise. Stocks are commodities too. Usually stock prices are calculated by the market by the price of the stock over its earnings. So tax cuts and lower rates caused stock prices to soar. Sure they dropped now, wars, pandemics, and inflation impact the profitability of the business. Seniors though were taking greater risks to chase a larger return with stocks where they should have been more focused on bonds.

The free money days may be over since it NEVER should have lasted this long. People complaining about higher rates should ask themselves would THEY work for free. I bet most say no. But they expect strangers to keep lending banks for a 0.00 % rate?

The raising of interest rates is just getting us back to normal.

Follow:

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.