Boston Condos

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Boston Globe: Are declining long-term interest rates in our best interest?

The Boston Globe has an article in this Sunday’s business section about why long-term interest rates have stayed low for so long.  The article is written by Charles Stein.

His theories on why long-term interest rates have stayed low:

1) Influx of foreign money.  Most importantly: The Chinese government keeps buying US government bonds.  As long as they do, we can basically print as much as we want (to pay for wars, seniors’ medical bills, etc.).  This means rates could stay low for, well, as long as the Chinese stay interested in buying our bonds.  And, why do the Chinese buy our debt?  Because that way their exports stay low in price (which Americans end up buying back in America, of course).  Whether or not that’s good for the American worker, who loses his/her job to foreigners, is another question, of course.  (Foreign money is also rushing in because of a flush of cash in oil-producing nations.  They have nowhere else to park their money except America.)

2) Lack of competition in the bond market.  US public companies haven’t been issuing debt (because they have so much cash on hand), so investors looking for a decent return have no choice but to invest in US bonds.  Because of this demand, the US government doesn’t to pay a lot in interest rates.

3) There is still a perception that the economy is weak.  Therefore, investors want park their cash in a sure thing like US bonds.  Again, because there is more demand than supply, this case results in lower government bond interest rates.

4) Inflation is under control.  Companies can keep their prices low (because they aren’t facing shortages of supplies and because they haven’t raised their workers’ wages); therefore, interest rates remain steady.  Okay, I have to think about this one, since I’m not an economist, so forgive me if I’m wrong, but here’s the rationale behind that – if inflation takes off, interest rates have to increase, as well, because investors will only buy bonds if they beat the rate of inflation (if they park their money in bonds that are BELOW the rate of inflation, they’d end up losing money, just by having it sit there).  So, if inflation is in check, interest rates stay low.

I believe that the most logical reason for low long-term interest rates is #1, although Charles Stein thinks it’s reason #4.

Which is more likely to continue?  I think #4 – inflation seems under control (although, of course, gasoline prices have skyrocketed, as has the cost of some commodities such as steel & building materials, and that could have an affect).  But, maybe the Chinese will keep buying our debt.  The question is, is that a good thing?

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