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By: Adrian Mastracci
North Shore News
Business Section, “Loose Change”
Sunday, July 27, 2003
I can breathe much easier now than the US Fed
has continued the interest rate cuts. And it has
nothing to do with slowly getting rid of the cold
bug I caught earlier.
The cuts have a feeling of walking down the stairs
to the basement. However, 13 cuts have been made
and we are not there yet.
I do expect at least one more cut before we feel
bottom -- only to turn around and go back up the
staircase.
In Japan, the rate has just gone slightly negative.
Now there is a new chapter for the school of modern
economics.
A little perspective on the economy; the US Fed
is still cutting interest rates because the data
on the economy continues to sputter. It hopes
that lower rates will spur more activity and assist
the economic recovery for all consumers, investors
and companies.
Now picture this: you are the CEO of your favourite
business. Is the latest US Fed funds rate lower
by ¼% sufficient for you to spend that
loan from your lenders?
I suggest that the better reason to borrow is
when you can see daylight on selling more goods
and services. Perhaps, heavens forbid, at a higher
price.
On the other hand, consumers look at the lower
rates as a blessing. However, here comes the rub
of the interest double edge sword.
The economy will pay for the accumulated consumer
debts when interest rates begin to turn up. More
personal bankruptcies to look forward to will
be one of the telling tales.
The other group that is feeling a huge pinch
from interest cuts is the retired and nearly retired
crowd. A retiree requires a dependable cash flow
from financial assets to sustain the standard
of living.
It becomes a vicious circle. Retirees need income;
they seek higher returns; take more risks and
increase the chances of incurring losses that
chip away at the retirement nest egg.
Certainly, some retirement plans have been put
on hold. Others are being rethought.
Back to the US Fed. One relevant question is
whether the cuts are having the desired effects.
I am not convinced that they are. Thankfully,
we do not have far to go before we reach zero.
Hopefully, we will have no need to test that bottom.
Well, what can one do to make the journey less
painful? These may assist:
- Reflect on your progress. Scrutinize what
you are doing. Examine whether yesterday’s
plan will perform in the future.
- Keep borrowings in check. The overuse of
debt is one of the biggest impediments to achieving
financial security.
- Retirees should revisit the retirement assumptions
and what the portfolio is expected to provide.
- Business owners can assess the future prospects,
analyze the present business plan and adopt
the necessary changes to survive.
We are still producing reasonable economic activity
under the circumstances. However, we have accumulated
consumer debts and teetering retirement plans
to deal with soon.
Sustainable economic activity will begin to return
when business capital spending starts to rise
again. Until then, the pain of volatility will
linger on.
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