The Real Reason Interest Rates Are Not Falling
Wednesday, April 18th, 2007
By Michael Lombardi, MBA for Profit Confidential
Yesterday, it was reported that U.K. inflation jumped 3.1% in March, cementing an interest rate increase for the Bank of England next month. This is bad news for Americans who were hoping the Fed would cut interest rates in the U.S.
A country’s interest rate and the value of its currency are closely intertwined. Below is a list of the prime lending rates of industrialized countries:
U.S. 8.25% Australia 6.25% U.K. 5.25% Canada 6.00% Switzerland 4.08% European Community 3.75% Japan 1.88%
Scanning the above, you’ll quickly notice the U.S. has the highest prime lending rate in the industrialized world. Economics 101: One would think such high interest rates in the U.S. (compared to other industrialized countries) would result in the U.S. experiencing a relatively high currency value. But this is not the case.
As I noted Monday, the greenback is now at a two-year low against the euro. With its ever increasing debt, America needs foreigners to buy the bonds it issues to finance its debt. Foreigners, who have become such big buyers of U.S. bonds, aware of America’s debt, might be reluctant to buy bonds of a country whose currency is devaluing too rapidly.
Given that interest rates are high in the U.S. compared to the remainder of the world, if the U.S. cuts its interest rates, the greenback could plummet in value, causing problems attracting foreigners to buy our government issued bonds.
The real reason U.S. interest rates are not falling: Despite the help over-financed Americans would get if interest rates fell in the U.S., declining U.S. interest rates would plunge the value of the U.S. dollar on world markets. Ultimately, I believe a lower valued U.S. dollar would be good for the United States. But it needs to happen very slowly… and that means interest rates here in the U.S. may not fall as quickly as most expect.
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Tags: euro, interest rates, U.S. dollar
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
