What to Do About These High Interest Rates
Overview
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- Fancy Magazine | Classic Blog
Sep 4, 2023
123 comments
Introduction
Whoa, have you seen what just happened to interest rates!?
Suddenly, after at least fourteen years of our financial world being mostly the same, somebody flipped over the table, and now things are quite different. Interest rates, which have been gliding along at close to zero since before the Dawn of Mustachianism in 2011, have suddenly shot back up to 20-year highs.
This brings up several important questions:
- Is the stock market (and index funds) still the right place for my money?
- What if I want to buy a house?
- Should I hang onto my current house with its solid-gold 3% mortgage?
- Will interest rates keep going up? And will they ever go back down?
These are common concerns on everyone’s mind, and I’ve been pondering them as well. While financial newspapers have reported on each interest rate increase, they often miss the mark on addressing what to do about it. So, let’s delve into the strategy behind these changes.
Why Is This Happening?
Interest rates are like a giant gas pedal that revs the engine of our economy, with the polished black dress shoe of Federal Reserve Chairman Jerome Powell pressed upon it.
For most of the past two decades, Jerome’s team and their predecessors have kept the pedal to the metal, firing a highly combustible stream of easy money into the system in the form of near-zero rates. This made mortgages more affordable, encouraging everyone to stretch to buy houses, driving demand for both new and existing homes.
Similarly, cheap borrowing and venture capital spurred entrepreneurs to lend money and start new companies. These companies then rented offices, built factories, and hired employees, who in turn spent money on houses, cars, fridges, iPhones, and other luxuries.
This led to:
- Two decades of prosperity and economic growth.
- Raising our children and inventing new things.
- All the other positive aspects of a successful, rich country economy.
However, this party went on for too long, leading to:
- Too much money chasing too few goods, especially houses.
- Unacceptably fast inflation, as discussed in a recent article.
- Housing market distortions.
Recent Changes
Eventually, Jay-P (a reference to Jerome Powell) eased his foot back off the Easy Money Gas Pedal. When interest rates increase, nearly everything else in the economy slows down.
Currently, mortgages are much more expensive, causing people to postpone house purchases. Companies are scaling back their plans for new factories and cutting hiring due to high borrowing costs. Examples include Facebook laying off 10,000 people and Amazon shedding 27,000.
We also experienced a miniature banking crisis where some significant mid-sized banks failed, sparking fears of a larger domino effect.
Different Perspectives
These changes sound bad, and media outlets are abuzz with debates:
- Leftists, Right-wingers, and anarchists all have their takes:
- It’s the President’s fault for printing all that money and running up the debt! We should have Fiscal Discipline!
- No, it’s the opposite! The Fed is ruining the economy with these rate rises, we need to drop them back down!