Monday, May 11, 2015

What High Interest Rates Mean

From the Wiki definition of "interest rates":

Economy: Interest rates can fluctuate according to the status of the economy. It will generally be found that if the economy is strong then the interest rates will be high, if the economy is weak the interest rates will be low.

All I have heard for months if not years now is how the economy, and most certainly the stock market will crash if the U.S. Federal reserve raises, or allows interest rates to rise. The are said to have a mandate to optimize employment and to ensure stable prices. (Here)

If the economy is strong enough to let the Fed finally act after these years of low interest rates and lack of growth it will be past time.

And furthermore interest rates will not be raised, but allowed to seek a more natural level. If interest rates go up it will be because the economy is strong and that means there is more demand for money and debt, and less demand for the safe haven of U.S. Treasury Bills.

More demand for money.

Need I repeat that.

More demand for money.

More dollars will come into circulation and the velocity will increase.

There will of course be some fluctuation in stocks since there are many still dependent in their minds on the Fed and "cheap" money. But the fact that interest rates rise is proof of demand.

Sell those bonds. Buy stuff that is real or does real things.


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