IN FOCUS: Trending – Interest rates and debt are two sides of the same coin

Posted on May 1, 2015 :: Features
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Posted by , Insight on Business Staff Writer

How often do people think about the national debt or interest rates? Other than seeing the occasional snippets in the evening news, most people probably don’t spend any time at all thinking about rates or debt. So why should they care?

Well, for a couple of reasons, especially since low rates and high debt are increasingly affecting everyone. Savers are currently earning next to nothing in their bank accounts because of the current low-rate environment. Although this isn’t anything new, most investors do not understand the loss of potential growth on their investments. For example, if an investment of $10,000 grew annually at 1 percent over 30 years, it would grow to $13,487. If the Federal Reserve increased rates so savers could earn 6 percent, the same investment grows to $57,434. That’s a huge increase! So, why isn’t the Federal Reserve increasing rates to help savers?

There are multiple answers to this question, but a significant answer could point to the $18 trillion of national debt. Let’s say the Fed raises rates to 6 percent, meaning all future money the government wants to borrow must be paid back at the higher 6 percent interest rate. It would then cost the government billions of dollars more per year to borrow, which they then add to the $18 trillion national debt balance. That’s billions of dollars more that each American citizen must eventually pay back. So the very same increase in interest rates that savers so badly need could simultaneously send the national debt spiraling upwards out of control. Ultimately, this relationship between rates and debt create an unsettling conflict of interest for the government.

clearTREND research produced by our firm in Appleton indicates upward trends in most U.S. stocks as well as most U.S. sectors. U.S. energy has been trending downward.  Our U.S. Economic Health Index shows that 61 percent of U.S. sectors are expanding while 17 percent are contracting. “Despite the expectation of rate increases later in 2015, U.S equities are still trending upward,” says Alexander Hunt, advisor to private clients and retirement plans. “If and when the Fed raises rates this year, it will be interesting to see how markets react.”

Click here to view this month’s economic data in our digital issue.