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Renting Money

December 6, 2018

The payment for renting money is called interest. People usually rent, or borrow, money when they need it or think they can get a greater return than the cost.

When a lot a people at the same time want to rent money the cost, or interest, increases. When there is a reduced demand the interest rate decreases. When there is ambivalence the rate usually gets stuck with little movement.

Money serves purposes, some of which have short term and some long term uses. The rates for the short term users are being driven right now by the Federal Reserve that took actions to cause the short term 3 month Treasury rate to grow this year from 1.4% to 2.4%. The beginning of 2018 rate was up from the .46% at the beginning of 2017, so we see great increases here. The Fed’s increases were based on its perception of the strength of the economy and is an attempt to fine tune it so that inflation is curbed. I don’t really understand the thinking here but neither do most other people, including probably the Fed governors. However, that is not what I want to talk about now.

The 10-year rate was 2.89% on Tuesday which is up from 2.41% at the beginning of the year which was pretty flat for 2017 that began at 2.45%. This to me is significant. Long term borrowing as reflected in the 10-year rate indicates, to me, little demand for money. This means that businesses, and many governments, are not borrowing for long term capital projects which further indicates that growth or a reasonable ROI (return on investment) is not expected. This is somewhat frightening when considering the low interest rates, low energy costs and what seems to be full employment without accelerated wage increases creating conditions where businesses should be looking toward the future for growth. The long term rate is not controlled by the Fed’s actions, but more so by the market, and the market is not driving the rates up. And without this demand I don’t understand how there can be nascent inflation that the Fed is “fighting.”

Obviously there are exceptions such as the massive new offices, but in the aggregate, I do not see the volume of infrastructure building that would be manifested by higher long term interest rates, and that would buoy the economy in the near future.

These are my own opinions and while I can write a lot more, and previously have, on this topic, my purpose is not to be a political pundit, but to present ideas and information that my readers could hopefully learn a little more about some of the real confusing issues of the day. Growth and interest rates are related and are concerns of those that manage businesses, investors and to many others and I wanted to use today’s blog to point out some concerns I have in a way that I don’t see too often.

Ed Mendlowitz

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