What price matters the most to you? Gasoline? Milk, which has almost doubled in 6 months? I-Tunes? The most important price in the American economy is not the price of oil, computer chips, wheat or cars. It’s the price of money: interest rates. When rates move, they ultimately affect the price of almost everything else. Which poses some intriguing questions. Is the era of low interest rates ending? If so, what’s next? The answers will hover over the 2008 election. The economic expansion, both in America and the rest of the world, has rested on a foundation of abundant credit. Low interest rates drove the housing boom. In the 1980’s, mortgage interest rates averaged 10.9 percent; after inflation, the “real” rate was a hefty 7.2 percent. During the decade, home prices rose a meager 1 percent beyond overall inflation. Since then, mortgage rates have dropped sharply. From 2000 to 2006, they averaged 6.5 percent, and after inflation only 4.2 percent. Lower rates meant people could afford to pay more. The result: Existing-home prices rose 29 percent more than overall inflation from 2000 to 2006. It’s not just real estate. Low interest rates have fueled the private equity bonanza. Private equity refers to investment funds that, borrowing massive amounts, buy all the stock of publicly traded companies. Similarly, low rates enabled governments and companies in developing countries to borrow huge amounts. From 2005 to 2007, borrowing will total about $900 billion, reckons the Institute of International Finance. Russia, Turkey and South Korea are all big borrowers. But now rates are edging up. There are two ways that credit tightens — that is, the price of money rises — and we’re seeing both. The first is that government central banks, such as the Federal Reserve in the United States, deliberately try to restrict the amount of new credit. The second is that private investors and lenders (collectively known as the market) become more stingy and risk-averse. They demand higher rates on bank loans, bonds and mortgages.
Housing starts decreased 2.1% to 1.474 million units in May. Housing permits increased 3.0% during the month. The housing market shows little strength and is not expected to bottom out till late this year. U.S. Treasuries were little changed after a government report showed home construction declined to a four-month low in May, while building permits increased. “The housing arena is not going anywhere,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley’s individual-investor clients. “It continues to remain the soft underbelly of the economy. It’s debatable whether we’ve reached a bottom.” Evidence that a slowdown in housing will restrain the economy may bolster demand for U.S. government debt. Treasuries completed their first two-day gain in a month yesterday as an industry report showed confidence among homebuilders dropped to the lowest since 1991. The yield on the benchmark 10-year note was little changed at 5.13 percent at 8:47 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/2 percent security due in May 2017 rose 1/32, or 31
cents per $1,000 face amount, to 95 4/32. Bond yields move inversely to prices. The 10-year Treasury will probably trade between 5 percent and 5.35 percent through the end of the year. Flanagan said.
One afternoon a lawyer was riding in his limousine when he saw two men along the roadside eating grass. Disturbed, he ordered his driver to stop and he got out to investigate. He asked one man, “Why are you eating grass?” “We don’t have any money for food,” the poor man replied. “We have to eat grass.” “Well, then, you can come with me to my house and I’ll feed you,” the lawyer said. “But sir, I have a wife and two children with me. They are over there, under that tree.” “Bring them along,” the lawyer replied. Turning to the other poor man he stated, “You come with us, too.” The second man, in a pitiful voice, then said, “But sir, I also have a wife and SIX children with me!” “Bring them all, as well,” the lawyer answered. They all entered the car, which was no easy task, even for a car as large as the limousine was. Once underway, one of the poor fellows turned to the lawyer and said, “Sir, you are too kind. Thank you for taking all of us with you.” The lawyer replied, “Glad to do it. You’ll really love my place. The grass is almost a foot high.”
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