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Election and Interest Rates

November 6th, 2012 4:58 PM by Gregg Mower

Election Day what does it mean for interest rates? Good Question and the answer is that interest rates will go up and go down. Vague, I know but now days it really doesn’t matter what party runs the country with regards to rates, as inflation drives interest rates. That’s right if there is any signs of inflation on the horizon interest rates will tend to rise in anticipation of the Federal Reserve raising the key interest rates. So to say that a Democrat or Republican will have a positive or negative effect on interest rates is just crazy. WE have broken this down before and I will until the market changes.

Currently the interest rates have risen and fallen in anticipation of inflation or deflation. Inflation is where goods and services start to cost more over a quicker period of time. So if you were to go to the store today and buy a loaf a bread for $2.00 and next week you go to the same store to buy that same loaf of bread and it now costs $3.00 that is inflation. Many things cause inflation and traditionally inflation has been caused by people simply buying more stuff. This is called demand. So when demand for goods and services increase generally prices go up to offset production. Put simply if there are more people wanting to buy a good or service than there is availability of that good or service then prices will rise to cool demand. There are broad inflations numbers that are reported on a monthly basis and those numbers are what the Federal Reserve and Wall Street tend to follow. So it is not tied to one good or service but a sampling of all goods and services is how the numbers are computed.

To analyze the how inflation happens you have to start with why people are in demand of more goods and services. Generally if people have more disposable income they tend to spend more and conversely if people have less disposable income they tend to spend less. So inflation is a sign of a healthy economy to a point and I will cover the point in a minute. It is actually a fine line of a good amount of inflation and too much inflation. Too much inflation and the Federal Reserve will raise interest rates to slow the demand for money. Their philosophy is to raise interest rates to slow inflation and lower interest rates if we have deflation or a slowing economy. So, if people are employed and have good jobs and good income people will tend to spend more. The Federal Reserve and Wall Street watch these numbers and set interest rates according to what they believe inflation is going to be.

An election will have no long term effect on interest rates unless by some stretch of the imagination good secure jobs are developed by a particular administration right after they are inaugurated. History has shown that no President ever had an immediate long term effect on interest rates. This is set to hold true in this election as well. Now back to saying inflation is good. This statement is not so true if we have too much inflation and income cannot keep up with inflation, at his point things start to go really bad. There has to be a balance of a healthy inflation rate (whatever that is), interest rates Jobs, and consumer confidence. The Federal Reserve acts to stabilize the economy by using interest in the hopes to stimulate and slow the economy. This idea was used in the late 70’s and early 80’s to slow the economy when interest rates were as high as 20% on home loans. During that time there was high inflation and high income growth. In the mid 80’s things slowed down in the economy and interest rates had to come down to keep the economy in balance. We have seen interest rates drop over the last 5-6 years as our economy slowed and today we are at some of the lowest rates in history as our economy is not healthy and people are not confident with their jobs or their savings.  So interest are low currently in an attempt to stimulate business borrowing so they can grow and employ more people. The lower rates are also designed to allow individuals the ability lower their monthly debt to compensate for generally lower incomes and lower consumer confidence. So will the election change anything with interest rates? No, we are going to have to let the business cycles go through the motions no matter how hard it is or how hard the government tries to stimulate the private sector or what political party in in power. We need to let the markets be free and uninterrupted by government intervention and let those companies that make poor business decisions go out of business no matter how big they are, another company will fill those shoes. So if you have to choose a leader I would hope that America chooses a leader that will allow for free markets to happen. Personally I don’t believe either party is capable of doing this and when the American people wake up realize that elections are not horse races pulling for your guy or gal to win then and only then can we get real change. Elections should be to put in power those that can make those hard decisions of allowing a General Motors to fail or an AIG or Bank of America. Americans will learn from their mistakes and no rule, law or regulation will change the fact that we are human and make mistakes, we learn and we move on and others will fill the loss of a bad business and end up doing it right. Americans will vote with their dollars and not even realize they are doing so, if GM has a terrible product and the other Automakers be it foreign or domestic make a better product and people would rather buy those then GM then they should be gone why keep them around???? Freedom has costs just talk to anyone in the Military (Thank you).

Give your opinion if you feel strongly let me know.

Posted in:General
Posted by Gregg Mower on November 6th, 2012 4:58 PM

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