Interest Rates 2011

In respect to to health of the real estate markets, it's always important to keep an eye on interest rates and while we can't predict with much accuracy what they will be in future, if we at least get the direction correct we can plan. Last year had many economists convinced that we had to increase to choke off inflation that must surely come with the printing of money in the U.S.  This year there seems to be the same sort of flavour to the predictions but far less certainty having gotten it wrong last year. What I believe is confusing some economists is the relationship of the developed world economies to the fast growing developing economies and with that the continued relative strength of the U.S. economy when so many continue to write and talk about it's decline. Some forecasters see it differently, below are a few excerpts from a recent CNN article titled "Egypt and the growing problem of global inflation"   by  "Keith R McCullough, Hedgeye". It isn't pretty, but it appears to be what is happening.

It's time to recognize what America's debauchery of the US Dollar is doing to global inflation. If US monetary policy makers are still in the camp of the willfully blind and want to believe there's no real-world inflation out there because Ben Bernanke's conflicted and compromised calculation of CPI says so, Godspeed having the world agree with them on that.

 And for all of those who are still out there cheering this on because it's good for the inflation in our portfolios, here's some global starvation math we can't hide from – immediate-term inverse correlations between the US Dollar Index and three major global food prices:

1. Corn = -0.91

2. Rice = -0.90

3. Wheat = -0.85

 Those are extremely high (and alarming) correlations. So the next time someone tells you that the US Dollar and the policy that backs it doesn't matter to the price of the Number One food staple for 3 billion of the world's people (rice), forward them the math. Risk managers like me wouldn't be perpetuating higher food prices by trading them with a bullish bias if we didn't fully expect American policy makers to let its currency burn.

The article goes on further to explain how this inflation affects the citizenry of developing countries and the destabilising affect it can and will likely have in some parts of the world. The following excerpt from the same article provides a glimpse into what is presently happening in Egypt from and economic view.

The Egyptian government has been telling its people that inflation is currently running around +12%. The people of Egypt obviously don't believe that -- and they shouldn't. However, they do believe that the country is running double-digit unemployment. They don't have jobs.

 Captains of Keynesian economics don't use the word 'stagflation' very much for a reason. The last time these bubble-makers plugged the world with stagflation was in the mid-to-late 1970s. That's when US Federal Reserve Chairman Arthur Burns was attempting to monetize America's debt as President Jimmy Carter bet that it would not create any globally interconnected risk. Sound familiar?

 We call it stagflation when real-world inflation readings are growing faster than economic growth. Even if we were lemmings enough to believe the Egyptian government on a +12% inflation number, that would be plenty enough to justify calling this situation for what it is. Egyptian GDP is only running +5% at this stage of what the thinkers in Davos, Switzerland last week would have you believe is an "emerging market boom." It's sad.

As I mentioned earlier, the U.S. economy continues to have a monumental impact on the rest of the world. Their current situation leaves them little opportunity, save monetizing their debt as the article suggests, to do much to avoid the risk of the Egypt scenario in their own country.

If the information in this article is relatively accurate, and it seems to put the puzzle peices in the right places, the U.S. will need to jack interest rates hard at some point to avoid a catastophy at home.  But for now it looks like we will see more of the same in low interest rates, with the resulting rise in commodity and stock prices, along with hopes in the U.S., that at some point the economy will start growing again at a pace that will allow the future interest rates to rise and cap inflation.

Just my opinion, based on what I read and observe. Always do your own due dilligence before investing.


There are no comments

Thank you! Your comment has been submitted and is awaiting approval.

Tom Herlick

Tom Herlick

CENTURY 21 Pinnacle Realty Ltd., Brokerage*
Contact Me